Can We Cut CEO Pay Down to Size?
In 2009, the American economy’s worst year since the Great Depression, CEO compensation at our 50 biggest corporations was more than twice as high as it was back in the 1990s, and that’s after adjusting for inflation.
The farther back you go, as my colleagues and I detail in a new Institute for Policy Studies study [pdf] out this week, the more stunning the contrast. CEO pay last year more than quadrupled CEO pay in the 1980s—and outpaced 1970s pay by almost eight times. How long can this cascade of wealth into America’s executive suites continue?
Actually, many prominent critics of ballooning corporate pay believe that an end to excess may be on its way.
A Say for Shareholders
These critics of excessive CEO pay have long called for shareholder empowerment: If shareholders had more clout in the way corporations are governed, these reformers have argued, CEOs would suddenly become accountable—to a much wider universe than the gangs of their cronies who currently populate corporate boards.
In July, these critics scored a landmark victory. The newly enacted federal financial reform legislation makes their showcase proposal—called shareholder “say on pay”—the law of the land, not just for financial companies, but for all publicly traded U.S. corporations.
Under the new law, corporate boards have to let shareholders take advisory votes on executive pay. And if corporate directors ignore this shareholder advice, shareholders will soon be able, through new regulations, to get their own director candidates on ballots for corporate boards.
Not the Right Watchdog
So can we now cross “executive pay reform” off our progressive to-do list? Not quite yet.
The new shareholder rules will certainly create more opportunities to raise hell about CEO pay outrages. But don’t expect these opportunities to translate into smaller CEO paychecks. They haven’t elsewhere.
The British, for instance, have had shareholder “say on pay” since 2002. Yet UK executive pay continues to soar, up 20 percent last year alone—“even as leading companies have been implementing massive job cuts,” one news report recently noted.
One reason? Shareholders regularly benefit from the kinds of shell games that CEOs and other top executives use to inflate profits, at least in the short term. But the rest of us don’t.
CEOs in Britain and the United States often aren’t cutting jobs to help corporations survive hard economic times. They’re whacking away at jobs—and training and R&D and environmental responsibility—to artificially pump up corporate profits.
Corporate mergers that create market monopolies and hike consumer prices serve the same purpose. So do accounting maneuvers that funnel corporate dollars into offshore tax havens. None of these moves make corporations more effective as enterprises. They simply jack up short-term share prices—and the executive “performance” rewards that corporate boards so generously link to this “shareholder value.”
In fact, my colleagues and I discovered that the 50 U.S. companies that cut the most jobs also paid their CEOs the most: 42 percent more than the average S&P 500 firm between November 2008 and April 2010.
We can’t expect shareholders to put a stop to these shell games. But the rest of us have good reason to. As employees, as consumers, as residents of communities where corporations do business, we get the short stick whenever outrageously high rewards give executives an incentive to behave outrageously.
Promoting Pay Equity
What options do we have? Even without shareholder votes, we do control something every major corporation craves: tax dollars.
The government has an enormous ability to influence business behavior. A quarter of Americans work for firms that have contracts with the federal government. Many more Americans work for companies with contracts from states and localities. Still more private enterprises pocket public tax dollars, by the billions, in tax breaks and subsidies.
A New Deal for Local Economies
Local, durable economies are already taking root. How can we help them along?
These realities create openings. By leveraging our public purse—by denying tax dollars to companies that behave poorly—our governments can deter dysfunctional business behavior. In some areas, we’re already leveraging our power. To encourage racial and gender equity, for instance, our statutes deny government contracts to companies that discriminate.
We could make the same connection to encourage economic equity—by denying federal contracts, subsidies, or tax breaks to corporations that pay their top execs hundreds of times more than they pay their workers.
Pay-ratio mandates along these lines would quickly unleash a host of ennobling marketplace dynamics. Small businesses would have a better shot at gaining government contracts, since pay gaps at small firms seldom approach those at America’s corporate giants. And pay ratio caps would also give large enterprises an incentive to raise wages. The higher wages at the bottom, the higher the allowable pay at the top.
Congress already has legislation pending that leans in this pay ratio direction. Rep. Jan Schakowsky’s Patriot Corporations Act would give preference for federal contracts to firms that pay their executives less than 100 times what their workers pocket. Big-time U.S. CEOs currently take home nearly 300 times time average U.S. worker pay.
Schakowsky’s bill isn’t currently moving. But that could change, thanks to an obscure provision that New Jersey Senator Robert Menendez slipped into the financial reform legislation.
This provision will soon force U.S. corporations to annually report the ratio between what they pay their CEOs and what they pay their average workers. We will have, in effect, an official yardstick for measuring corporate greed and grasping, enterprise by enterprise.
Think average Americans have had enough with overpaid CEOs? Wait ‘til next year!
Sam Pizzigati wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. An Institute for Policy Studies associate fellow, Sam edits Too Much, the Institute’s online weekly on excess and inequality.
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