Give CEO Pay the Pink Slip
Capping outsized salaries is the first step toward
creating responsible corporations.
By David Moberg
March 23, 2009
Nearly everyone is angry about excessive corporate
executive pay these days, from laid-off autoworkers and
foreclosed homeowners to former Federal Reserve
Chairman Paul Volcker.
At the seven biggest financial firms that have recently
failed, been sold or been bailed out, top executives
have received $464 million in "performance pay" since
2005. And these are the same people who helped create
the conditions that led to the worldwide crash. For
example, in December 2008, Merrill Lynch CEO John
Thain-paid $83 million in 2007-gave out $3.6 billion in
early executive bonuses before his firm was taken over
by Bank of America, which has received $45 billion in
federal bailout money.
In February, in discussing the $500,000 salary cap with
limitations on golden parachutes, Obama said, "What
gets people upset-and rightfully so-are executives
being rewarded for failure. Especially when those
rewards are subsidized by U.S. taxpayers."
In 1980, CEOs at Fortune 500 firms were paid 42 times
the average worker's salary. By 2007, they were being
paid on average 364 times as much.
During the most recent expansion from 2002 to 2006, for
example, the top 1 percent of taxpayers took three-
fourths of all income growth, according to University
of California-Berkeley economist Emmanuel Saez. And
much of it, he says, was due to "an explosion of top
wages and salaries."
Apologists for CEOs argue that companies bid up
salaries to get the best executives, who then boost
profits and stock value. The cult of the heroic
executive imagines that these Lone Rangers solely
determine how fast and profitably a firm grows, not the
thousands of workers-from secretaries to engineers-
doing their daily jobs.
But the differences in performance among executives are
tiny-merely 0.016 percent between the performance of
the top CEO and the 250th ranked, according to
economists Xavier Gabaix of the Massachusetts Institute
of Technology and Augustin Landier of New York University.
Gabaix and Landier claim the sixfold growth of CEO pay
from 1980 to 2003 tracks the growth of corporate stock
market value. But Princeton economist Uwe Reinhardt
argues that most of this growth simply reflected the
now-deflated general stock market boom, not the
uniquely valuable talents of highly paid CEOs.
Indeed, scads of CEOs, like Robert Nardelli of Home
Depot, reaped riches as their companies floundered. And
overseas, CEOs of large, successful companies typically
earn much less. From 2004-2006, top European CEOs
received less than half of the $13.3 million that their
American counterparts made, on average; top Japanese
CEOs received only $1.5 million.
The meltdown in the financial sector demonstrates that
these executives had a talent not for strengthening
their companies but for enriching themselves. And the
public bank bailout has given legitimacy to demands
that CEO pay be limited, as Obama modestly proposed for
executives of companies that get federal help in the future.
But the public has a legitimate interest in all
corporations and how much they pay executives, not just
those it bails out. Government created and granted
rights to corporations to serve the public interest,
and government regulates corporate behavior when it
affects the public, such as securities or environmental
regulation. Why not CEO pay?
Many corporations rely on government contracts or
financial assistance, and taxpayers provide $20 billion
a year in direct tax subsidies for excessive executive
pay, according to a 2008 study from the Institute for
Policy Studies (IPS) and United for a Fair Economy (UFFE).
"Average U.S. taxpayers subsidize excessive
compensation-by more than $20 billion per year," the
report says, "via a variety of tax and accounting
loopholes. That $20 billion for America's most powerful
is more than double what the federal government spent
last year on educating America's most vulnerable-
children with disabilities."
Supersized executive pay, especially in its typical
form, is also a costly burden that distorts the economy
away from the common good. It is a symptom of deeper
problems with the way corporations and the economy are
organized and regulated, argues AFL-CIO chief economist
The foul smell of excess
In theory, corporations pay CEOs the stock options and
other bonuses beyond their ample salaries to make sure
that they have incentives to maximize shareholder
value. But the system is rigged. Company managers
effectively control corporate boards and are in
collusion with the boards compensation advisers, says
Harvard Law professor Lucian Bebchuck.
Society pays a high price for high salaries.
High executive pay contributes to rising inequality.
The payouts for the top five executives at a typical
corporation consume about 10 percent of aggregate
corporate profits, according to Bebchuck. And at non-
union companies, where wages are depressed, the CEOs
make 20 percent more than at unionized companies,
according to a 2007 survey published in the Journal of
Inequality takes its toll in many ways. It pushed most
Americans deeper into debt as they tried to maintain
living standards with stagnant incomes, thus weakening
consumer demand as a prop for the economy. And it
encouraged the rich to speculate. Consumer markets
diverged to extremes: Wal-Marts with low-priced imports
and luxury boutiques.
Growing inequality in a society increases illness and
mortality among the less well off. It creates stress
for individuals and tensions for society, thus
undermining the ability of the nation to tackle major
social issues-especially when inequality increases the
political power of the wealthy.
And within a company, inequality undermines teamwork.
As a result, argues New York University economics
professor Edward Wolff, productivity is depressed, and
firms invest less in human capital, or education and
skills. That's why the late management theorist Peter
Drucker persistently argued that CEO pay should be no
more than 25 times the average worker's salary.
High executive compensation, especially stock options
and bonuses, lead CEOs to take a short-term
perspective, concludes Bebchuck. It gives them an
incentive to quickly boost stock prices through tactics
such as outsourcing, layoffs, research cutbacks,
shortsighted sales or acquisitions of assets, and
financial manipulation. At financial firms, executives
sought riskier, higher-yield investments.
"The current economic crisis is a direct outcome of the
compensation system," Wolff says.
The compensation system encourages executives to focus
on extracting wealth from the rest of the economy, not
creating social wealth for the long haul. It distorts
the economy, diverting talent from productive to
unproductive work: the mathematicians and physicists
lured into investment banking could have been working
more usefully on research, such as helping build a
sustainable energy economy.
As the late economist David Gordon argued, American
corporations are less competitive and less productive
than their European and Japanese counterparts due to
the burden of an oversized corporate bureaucracy. That
bureaucracy reflects a corporate strategy of treating
workers as costs to be controlled, not essential
contributors to corporate success.
Josh Bivens, an economist at the progressive Economic
Policy Institute, argues in a new study that unions and
blue-collar wages are not hurting U.S. manufacturing,
but high corporate salaries are (along with an
overvalued currency and dysfunctional healthcare
A new corporate contract
Giving shareholders more control of CEO pay would help,
but the public-not just shareholders-has a stake in
these decisions. Imposing pay caps-on all executives,
not only those at bailed-out firms-would be better.
Making the income tax much more progressive than Obama
would do with his modest, if welcome, tax reforms is
But as Blackwell argues, controlling salaries alone
will not fix the underlying problems with the corporate
system. We need, he says, to create a new legal and
regulatory system that aligns corporations with social
The new corporate accountability, Blackwell says,
should involve requiring boards of directors to include
major stakeholders - workers, government and
communities; instituting collective bargaining laws
that shift the balance of power between workers and
managers; and creating a public expectation of ethical
and socially responsible behavior.
The economic crisis, and the furor over executive pay
and behavior, provides us with an opportunity not just
to rein in ridiculous CEO compensation but also to re-
make the corporate system.
As Wolff says, beyond controlling pay, "a new kind of
corporation has to evolve."
[Editor's clarification: Thain's office notes that his
2007 income included $68 million in stock options,
which he was unable to exercise because the stock price
did not rise to levels designated in his compensation
agreement, but obviously fell instead.]