in public policy could put a lid on executives’ excessive pay packages
Business Section, Seattle Times
June 26, 2015
Business Section, Seattle Times
Most commentary about exorbitant executive
compensation tends to fit accepted niches.
We read a little history, some technical explanations, the latest insufficient regulatory efforts, attempts to conflate CEO pay with that of pro athletes and, recently, a few economists rightly tying the phenomenon in with rising inequality.
In most of this is a tone of resignation. A Gallic shrug and the French phrase that is appropriate to so many of our dilemmas today, tant pis. Rough translation: The situation is regrettable, but nothing can be done.
To write otherwise is to step outside the boundaries of good manners in our neoliberal “consensus.”
Which I will now proceed to do.
Three overarching factors caused the
CEO-to-worker compensation ratio of 20-to-1 in 1965 and 30-to-1 in 1978 to
skyrocket to 296-to-1 in 2013.
First is cultural change. Top executives in the mid-20th century would have considered it unseemly to take so much from the corporate treasury and shareholders, to be so publicly elevated from their employees.
The (much smaller) 1 percent of that era had progressed far from J.P. Morgan’s 1901 sentiment, “I owe the public nothing.” By 1950, most believed they owed the public interest a great deal.
A Misused Quote
Their ethos was epitomized by General Motors President Charlie Wilson’s oft-misused quote when he was being confirmed as President-elect Dwight Eisenhower’s Defense Secretary, “What’s good for General Motors is good for the country.”
What he actually said was, “For years I thought what was good for our country was good for General Motors and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.”
Wall Street, where some of the worst of today’s out-of-control compensation occurs, was a boring place until the late 1970s, presided over by executives who eschewed risk.
Being a shareholder was a serious, long-term proposition, where most money was made through dividends rather than a rising stock price.
So the next time you lament people on the
street acting like ”thugs” and mourn the death of appropriate behavior in our society,
include the deportment of a large segment of the executive class, as well.
Second is the federal tax system. In the
1950s, the top marginal tax rate was more than 90 percent. In 1980, it was 70
percent. The system was more progressive and, to critics, “redistribution of
Well, yes. This is how we paid for much of the infrastructure, science and anti-poverty programs of the era. How we paid for the wars, too, without massive deficits.
These rates on the highest-earners discouraged excessive compensation. With so much of it going to Uncle Sam anyway, better to let the company reinvest it.
This changed with much lower top marginal rates that began with the Reagan revolution. They failed to increase tax revenues, the myth notwithstanding. But they allowed top earners to keep much more of their compensation.
Lower taxes on the richest Americans, along with cuts to capital gains taxes, supercharged the so-called shareholder rights movement. CEOs no longer saw their company’s health as synonymous with that of the country. They were paid based on short-term gains to the share price, no matter the damage done to communities, workers or long-term competitiveness.
Third, the checks and balances that helped
create the highly productive economy and thriving middle class of the era were
eroded, eliminated or corrupted.
Robust antitrust and fair-trade policies went away, allowing for anti-competitive mergers and highly consolidated industries. Chief executives who performed mergers were richly rewarded.
Regulators were compromised by the industries they nominally kept watch over. “Deregulation” was actually changing regulations to favor gigantic corporations over smaller, local companies. This, too, opened the flood gates for top executives to pay themselves more.
For example, bank leaders were highly compensated for taking on excessive risk to gain short-term profits and higher stock prices, no matter the danger to the long-term health of their institution or the danger to the taxpayers.
Think Kerry Killinger and
Also, workers lost bargaining power with the decline of unions, anti-union National Labor Relations Boards and a raft of anti-worker laws passed at the state level.
Until the mid-1970s, worker salaries had risen steadily, even while top executives did well, too. After that, the trend diverged and for decades many Americans have seen their wages stagnate or decline. With few unions, they lack the means to push back against rising executive compensation.
This was no coincidence. The new 1 percent and many of the biggest corporations used their money to take control of Congress and the courts, passing laws that favored them. Today’s regulators go through a revolving door to lucrative jobs in the companies they “regulated.”
One is that nibbling at the margins, such as rules allowing advisory shareholder votes on compensation or detailing the spread between average employees and the C-suite won’t work.
But two, the process is reversible. If the moguls won’t restrain themselves from looting their companies, public policy will go a long way.
Tax rates on the top earners should be raised back to the 70-percent neighborhood. Capital-gains taxes should be tailored to reward long-term ownership. Regulation should become independent again. Unionization should be made easier. Banks backed by the taxpayers should be prohibited from their compensation practices.
Finally, the analogy between chief executives and great athletes or entertainers is fatally flawed. The latter compete in a real marketplace that rewards the best talent through market forces.
Most CEOs operate in a crony world. At the worst, they pick their own compensation committee. Even independent boards are clubby and in thrall of all the justifications for unjustified and ever-rising compensation.
What’s good for the 1 percent CEOs is bad for