Executive pay is an out-of-control racket
Congressional Budget Office
Executive pay in public U.S. corporations has evolved into an out-of-control racket. Left unchecked, the resulting huge and growing income gap between the elites and the shrinking middle class will soon resemble typical third-world patterns.
According to a widely referenced Congressional Budget Office statistic, since 1979 the income of the top 1 percent grew 275 percent, while that of the middle 60 percent grew only 40 percent. The U.S. owns the highest gap in the developed world, according to New Republic.
The trend is continuing unabated. In 2011 the top 500 CEOs of publicly traded companies received 16 percent increases in compensation, while the average American worker received 3 percent, according to Forbes Magazine.
The historical income gap charts show an arc from 1915 (the peak of the Gilded Age just prior to U.S. entry into World War I) to present, as shown here and here. In 1915, the top 1 percent’s share of income was over 18 percent, while today it is over 20 percent. The 1950s, 60s and 70s represent the bottom of the arc, during which the top 1 percent’s share of national income was approximately 10 percent.
History has shown that great countries, and empires, derive strength from a broad middle class, and fail over time when wealth is concentrated at the top 1 percent. But often the cures prescribed are worse than the disease.
Indeed, Lenin’s post-World War I-income-gap solution in the Russian Empire had some bad side effects, to put it mildly. And the U.S. solution from the 1950s through the 1970s were based on draconian top-bracket tax rates. From 1950 to 1963, income above $400,000 was taxed at rates over 90 percent. From 1965 through 1980, the top bracket was lowered to $200,000, and taxed at rates above 70 percent. These statistics are a good reminder of where the term “Reagan Revolution” came from.
Before prescribing a cure to today’s runaway income gap, it’s necessary to understand the main cause.
The situation is simpler than one might expect. Executives of publicly traded companies by and large make up the top 1 percent of income earners. The executive compensation in these companies is paid by shareholders.
However, the executive compensation level is not set by shareholders. Instead it’s set by corporate boards. These boards of course are made up of fellow corporate executives belonging to the same top 1 percent of income earners.
In other words, the top 1 percent of income earners is a closed club where members assign astronomical income packages to each other, which the common shareholders then have to pay.
For example Jamie Dimon, the CEO of JP Morgan Chase Bank, ranks No. 19 on the 2011 Associated Press Survey of Highest Paid S&P 500 CEOs. JP Morgan’s Board has 11 members. With one exception, all the members are or were chairmen, CEOs or presidents of other S&P 500 companies.
The head of the compensation committee, a board member since 1987, is Lee Raymond, the recently retired CEO of ExxonMobil. Another board member (since 2005) is William Weldon, who as chairman & CEO of Johnson & Johnson is ranked No. 18 on the Associated Press highest-paid list.
Yet another JP Morgan board member is David Cote, whose day job is chairman and CEO of Honeywell Corp. He’s No. 6 on the highest-paid list.
Apple’s Tim Cook enjoyed $378 million total compensation in 2011, widely considered a record. That’s 7,560 times more than the average household income in America.
Clearly the shareholders of Apple grossly overpaid Mr. Cook. If Apple had paid him only 5 percent of this amount — $18.9 million – would he have worked less hours, or have been less creative, or delivered lower-quality work? Of course not.
Would he have been more prone to quit his job? Only if some other company’s board acted more irresponsibly with shareholder capital and offered him tens of millions of dollars more. That’s the fear-mongering technique the One Percent Club uses to justify the spiraling compensation packages they award each other.
Executive compensation in publicly traded companies does not conform to democratic principles, as the shareholders have no real input on how their money is spent for compensation. Nor does it confirm to free-market capitalist principals, because in a truly open market, qualified people would gladly provide executive services for a fraction of the current compensation packages. It’s a racket that’s at the heart of the spiraling income gap.
This problem can be solved by introducing a regulation for publicly traded companies that requires an absolute shareholder majority approval for each executive pay package that exceeds a certain threshold. The threshold should be a multiple of the average employee compensation within that company. Setting the multiplier to 100 seems reasonable.
For example, if the average employee at Apple earns $100,000 annually, then the board could set Cook’s compensation as high as $10 million at its discretion. If it wishes to offer him a higher compensation, then Apple’s board would be required to attain more than 50 percent of shareholder votes in favor of the compensation package. Or the board could increase average employee compensation.
Almost certainly, other major economic blocs would follow the U.S.’s lead in implementing such a scheme. By and large, the rest of the world in general is vexed by out-of-control executive compensation in U.S. corporations.
It’s time to bring capitalist and democratic representation principles to executive compensation governance. Government must empower shareholders to solve this problem.
January 9, 2013 - 6:00 AM
Yup. Let’s legislate the “private” out of “private” business. Let’s make them all just as “well-run” as the government that will regulate them.
Just maybe if Americans used their buying power judiciously, they could force change. But, that calls for some personal responsibility.
Oh, also, let’s not forget class warfare and jealousy. Where would Obama be if private companies followed your suggestions?
Thats what you get when the fox is there to guard the chicken coop.
What does George Soros get paid? (crickets, crickets)
How much of the pay is salary rather than stock options? (crickets, crickets)
How much does the CEO of Landmark get paid?
I never hear anyone asking “How much is ‘enough’ wealth?” Is there a top limit?
Executives are America’s de facto royalty. They set themselves apart from the rest of us, surround themselves with sycophants, and they are infallible, at least in their own minds. In a country that equates wealth with virtue, what else would you expect?
oh so you think that controlling one’s pay is a government responsibility? More obama regs to come over pay? Oh brother, another rt marxist…sick
Mr Dimon is part of too big to fail.The bank should have gone down the tubes but was saved by the government.He is a major player in MF Global demize.No one gone to jail over that! Trillion dollars into thin air.
On middle class pay,look at the government employees pay and benifits and you can see some of the same things as the corporate generals compensation.
Executive pay is an out-of-control racket
What is the use in being an executive if you can’t be
paid like one?
Excellent article Mark. First we separated church and state. Now we need to separate business and state.
Your best article to date, in my opinion. We Americans are equally as vexed by the blantant greed demonstrated by corporate hierarchy. The discussion around your proposed solution – which is very reasonable – should be quite interesting. Once again, thank you for a thought provoking piece.
According to a widely referenced Congressional Budget Office statistic, since 1979 the income of the top 1 percent grew 275 percent, while that of the middle 60 percent grew only 40 percent. The U.S. owns the highest gap in the developed world, according to New Republic.
How does the income gap hurt you or anyone else, Mark? How does it hurt anyone if Bill Gates has $80 billion instead of 40? If anything, a rich upper class pumps more money into the economy, helping everyone.
Liberals in here have said wealth is a zero-sum game. That’s crazy Communist talk. I’ve asked this question repeatedly, and have yet to receive a real answer: If Bill Gates were to retire to Roanoke and bring his fortune with him, would his $40 billion or whatever add jobs or take away jobs?
The income gaps in Banana Republics are bad only because the poor are deathly poor and the rich leftist dictators steal everything in sight. That’s not the case in the United States. When the rich get richer here, the poor do better. When the rich get screwed, the poor are worse off than ever. That only stands to reason, what with a declining tax base and reduced charitable giving. Does anyone but a moron think the poor will be better off because the super-earners had their taxes jacked up?
Once they started taking taxpayer money to bail their sorry selves out, they ceased to be “private”.
Considering what’s gone on under Dimon’s watch, that he gets paid at all is hilarious.
I wish there was a separation of business and state because that results in Crony Capitalism, which is government picking winners and losers. Companies like Google and GE pay almost no taxes while at the same time they push regulations on their smaller competition that only they can pay for which drives the smaller companies out of business. It’s easy for the big dogs like Exxon Mobil to stay on top when they get subsidies from the government instead of other small businesses.
Saint Reagan, decreed that “Greed is good” in his best Gordon Gekko imitation and this nation never looked back. Labor lost the bet. Wages, benefits and jobs all had to give way to more profit, bigger shares and vast wealth creation for a few and we will never catch up now. Just looking at the chart proves the problem. And yet they will defend it, even as they are harmed by it. Sounds like a damn cult!
Pamela#6 – You miss the point completely. All capitalist systems require a stable and fair legal structure. I am for restoring capitalist principals in a part of our economy where it currently lacks.
Shareholders are the ownders of companies. For all practical matters, today shareholders have no say in how much the executives are paid, even though the executives are there to increase shareholder value.
I do not want government setting executive pay in public corporations. Nor do I want the One Percent Club setting executive pay in public corporations. I want the owners – the shareholders – to be able to have a real input on setting executive pay.
Is it your contention that shareholders (owners) do not have that power now? Who is it that hires a CEO?
Folks, the rallying cry in our war of independence was “no taxation without representation”. The British argued that the King spent our tax money with our interest in mind. But we did not buy into it and revolted.
This great American principal must apply to the modern public corporation. The money spent on these outragous compensation packages is shareholders money. Yet this spending is decided by boards which collectively have no more accountability to shareholders than the 18th century British king had to the colonists.
There is clearly a problem here. For those that don’t agree with my solution to impower the owners (shareholders), I would like to hear them propose a better solution.
Obviously the shareholders, the big ones, which are the only one who will ever matter, are not dissatisfied with this arrangement, for whatever reason. I am not clear on why they do not already have the power to change this situation if they wanted to. I don’t think they want to. After all, who are the largest shareholders in the companies you mentioned?
“What does George Soros get paid? (crickets, crickets)
How much of the pay is salary rather than stock options? (crickets, crickets)”
Impossible to say, so your “crickets” are disingenuous — as usual. Soros is “retired” and pretty much all of the money in his hedge fund is his own. It certainly doesn’t come from good old boys voting him unearned pay raises. Soros has given away at least $8 BILLION to charitable causes.
Landmark is a private company. I doubt Dan knows what Frank Batten (Jr.) makes, but we do know part of his fortune came from investing in Redhat early on.
In theory, couldn’t a shareholder bring suit against a corporation to try to limit executive compensation. Using the arguement that excessive compensation violates the corporations fiduciary duty to it’s shareholders.
My Dear Sandi – The Board hires the CEO.
In theory, shareholders vote on the Board members. But in practice, shareholders have about as much input on selecting board members as citizens of the Soviet Unioin had in selecting Politburo members. Sure, there is a list presented by the Board and you can vote for it or against it.
In practice the system does not work. And it has not worked for a long time.
Sandi, most big corporations are now owned by various mutual funds and other corporations.
Top three shareholders at Apple, Inc:
Arthur D. Levinson is the chairman of Genentech and the chairman of Apple Inc. He owns 161,812 shares of APPLE.
Bertrand Serlet, born 1960, is a French researcher. PhD in Computer Science. He owns 111,309 shares of APPLE.
Robert L Mansfield is Senior Vice President at Apple, Inc.
He owns 12,548 shares of APPLE.
Do you see where I am going with this?
http://finance.yahoo.com/q/mh?s=aapl
in my opinion (not supported by any research that i’m aware of) the salaries of ceos have been driven upward at least in part by the rise and of mutual funds as the vehicles by which most folks own stocks….which are very, very, tiny slivers of stocks at that. therefore, folks like many of us have no direct bearing or impact on public companies’ boards. much more control is in the hands of the financial organizations which own the actual stocks.
and, those financial organizations and public companies’ ceos kinda join each other for lunch, ya know? and, they cross-contaminate their board rooms.
Sandi, now tell us what percent of the company these 3 folks own.
My Dear Mark, I do not disagree that “In practice the system does not work. And it has not worked for a long time.” I merely note that your solution is as fraught with failure as the system is now. It appears to be a relatively closed club on several levels.
There is power in the number of shares a stockholder has. Rigging the game is how they got there. And how they stay there. Hell, even “a dead hooker or a live boy” does’t matter here.
To add to what MarkJ said, Sandi, every year my alma mater sends out a list of previously approved board of trustees nominees. Theoretically I have a vote in who is elected. My choice is to vote for all or some of them or to write in a name. I can write in a name until I’m blue in the face, but unless I have the resources, contacts, time and influence to get thousands and thousands of alumni to write in the same name in place of one specific person, my write-in is useless. And even if I can accomplish that Herculean task, that’s just one board member (unless I’ve been able to recruit and promote a whole slate).
Sandi, that’s out of 900 million shares.
still cannot believe the jealousy over people with money…the deal is people, now pay attention..go to school, get a better job, simple as that…duh
“still cannot believe the jealousy over people with money…the deal is people, now pay attention..go to school, get a better job, simple as that…duh”
–Comment by pammala
In other words, you too can manage a 7-Eleven one day, so there is hope!
Henry seems to be mixing into this discussion private companies and private investors.
I personally have nothing against obscenely rich people making obscene amounts of money. If someone owns a private company they should be able to draw as much money from it as they want, as long as the company pays all its debts first. After all, they are the owner.
This essay is entirely focused on pay packages of executives in publically traded companies. This is where the current regulatory structure fails to give the owners (the shareholders) enough control for how their money is spent.
or you can OWN one like me…lol
its way better danny than being a 2nd rate ‘journalist’ for a 3rd rate paper
Oh, and the solution I am suggesting does not prohibit shareholders from paying executives of a publically traded company an obscene amount of money. I am only proposing that the shareholders be required to explicitely approve a package that exceeds a certain threshold – for example, 100 times the average employees’ package.
Under my proposed solution, if the owners (shareholders) want to pay an executive over $300 million in a year, like Cook got, then they can do it. I am not proposing any limits on what the owners (shareholders) can choose to pay an employee. And let’s not forget, corporate executives are employees.
#29 I’m stunned — pammala doesn’t get it.
Remember what happened to “Little Marie” in France.
My point is, the people voting, will not be the 100 shares Gdad, they will be the big boys and their big shares and that is an incestuous bunch too. I do not see the shareholder votes being the solution you seem to. What about the huge amounts of shares held by institutions and investment firms, who makes their vote? I take your point but they ALL have a vested interest in scratching each other’s backs, that is the secret handshake in the club. If some hedge fund guy is making Soros and Romney style money, how are these shareholders gonna “rein in” these CEO’s, often believed to be the “Golden Goose”? I am just not seeing the path you see.
pammala, think of this conversation as an argument between whether Paris or her sister get Mom and Dad’s money (that is as dumbed down as I can get it). This is not about us jealous folks wanting to tear down the rich, it is about how the rich split the spoils among themselves.
Pammala, did they teach punctuation at that school place you are referring to? Becuase if they did you may have grounds for a lawsuit.
Suzie, says some rather nasty things about South American countries. I’ll best most haven’t heard of the president of Uruguay. There’s a good article in the NY Times about him and demonstrates one doesn’t need a lot of money to be a leader and conversely, being a leader doesn’t mean you should be rewarded with money.
Oh, and he’s one of those “crazy” communists.
http://www.nytimes.com/2013/01/05/world/americas/after-years-in-solitary-an-austere-life-as-uruguays-president.html?_r=0
… Visitors reach Mr. Mujica’s austere dwelling after driving down O’Higgins Road, past groves of lemon trees. His net worth upon taking office in 2010 amounted to about $1,800 — the value of the 1987 Volkswagen Beetle parked in his garage. He never wears a tie and donates about 90 percent of his salary, largely to a program for expanding housing for the poor.
His current brand of low-key radicalism — a marked shift from his days wielding weapons in an effort to overthrow the government — exemplifies Uruguay’s emergence as arguably Latin America’s most socially liberal country. ….
Mark and others, you can learn a lot about capitalism and alternative points of view by visit Harvard trained economist’s web site by Prof. Richard Wolff.
http://rdwolff.com/
Boards of directors are supposed to provide oversight and look out for shareholder interests. If they actually performed that function, CEO pay would be tied to performance, I think that is a fine arrangement. In practice, many boards of directors just rubber stamp what the CEO wants to do. The poster boy for this is Rick Wagoner, ex-CEO of GM. Red Ink Rick blew through 80 billion dollars of shareholders’ money in 5 years. Not only did he not get fired, he collected bonuses! Really.
Sandi#37 – Its not so hopeless. Some huge funds have been fighting this battle for several decades, but the current regulatory environment on public corporate governance is outdated in this area so the cards are stacked against them.
The most famous is CalPERS, the giant fund manager for California Public Employees. They have been at the vanguard of shareholder activism, and there is plenty of information out there about the good stuff the do. There are many huge funds railing against this problem.
The next step really is to modernize this aspect of the regulatory framework of our capitalist system. Please note, what I am proposing is pro-capitalist / pro-free market.
It is doable and many huge equity funds support reform and are share-holder activists that rail against the current executive compensation system.
pammalla telling anyone to go to school is beyond priceless.
MarkJ
Maybe they had it right in the 50′s. The way forward is to tax those ceo incomes at 70% and then put the money into deficit reduction and infrastructure improvements (ala the interstate highway system). If they don’t get to put 85% of that money in their pockets like the Jamie Dimons and Mitt Romneys do now, it might encourage them to give more of that money to the people who earn it for them,.
Wayne Goodman, I think the gov’t going after the overseas bank accounts, as they recently did with the Swiss bank, will have an effect on CEO’s too.
Admittedly I have not had the opportunity to read all the posts here, I will try tomorrow.
However from the title I wonder how all of those who believe that Obama is “different” from other politicians can square the fact that he is putting Lew up to lead the treasury dept. when he got 1 million “bonus” from wall street days before he became a cabinet member
I am trying to get my head around regulatory changes being “pro-capitalist / pro-free market”, when that is the exact opposite of what they beat me about the head and shoulders with daily. I don’t discard it as a good plan, I just think that it will not do anything for workers. Shareholders being screwed or CEO’s being squeezed might help one get more out of the other but I am not clear what it does for workers. You have way more faith in those shareholders than I do, but I can’t see what we have to lose since taxing such excess will never be voted in.
good point, mike o.
however, libs have no affinity for introspection, and have no ability to do any critical thinking concerning barack hussein obama. anything he wants, they say, “yes, go for more”!
the fact that the whole ows was an obama-fueled creation (which was, well, a joke), which targeted wall street and big banks in particular, of which citibank was the biggest, and….Holy Cow! THAT’s where LEW worked! and drew a salary of like a gazillion dollars, and received a $1,000,000 bonus at the time he joined the white house…to, ah, OH! Now I remember! He pushed through the stimulous/jobs package which benefitted….wait for it….closer….the …BANKS!
Naw, libs are cool with lew.
Scott M #40.
So a guy sits around in his underwear, legalizes weed and gives away the country’s treasury, and that somehow makes him a great leader? Is the economy out of the toilet yet? No mention of that in the leftwing NYT.
I believe our congress should be paid the median income of the districts they represent.That might inspire some to take care of their constitutents rather than special interests.