Another Gangbuster Year for CEO Pay

Sam Pizzigati

Don’t be fooled by all the poor-mouthing around the latest annual executive pay surveys. With Washington dithering on CEO pay reform, chief execs still have plenty of reason to celebrate.

The media heavy hitters have once again begun their annual spring deluge of executive compensation surveys. The Wall Street Journal released its numbers on 2009 top executive pay last Thursday, with the New York Times following suit on Sunday. In the days and weeks to come, USA Today, Forbes, and the Associated Press will be filling out the 2009 CEO pay story.

And what will be the basic storyline be? CEOs, says the Wall Street Journal, are feeling the recession pain. The median pay of the top 200 CEOs the Journal tracks dropped 0.9 percent last year, the first time big-time CEO take-home has dropped two years in a row since the Journal started keeping score back in 1989.

But this emerging my-how-the-mighty-have-fallen take on CEO compensation — Even CEOs hit hard in ’09, headlined the New York Daily News last week — hardly tells the whole story. One reason: The Wall Street Journal stats only cover CEO compensation at the 200 top companies that filed required executive pay figures before the Journal’s pay survey deadline. Many more companies have yet to file.

The slight tail-off in typical big-time CEO pay the Journal has calculated for 2009 could, by the time all companies have filed, end up showing an overall CEO pay increase. Kodak, for instance, didn’t announce CEO pay figures for 2009 until last Wednesday, after the Journal deadline. Kodak CEO Antonio Perez over doubled his pay last year, from $4.4 million to $10.2 million.

A second reason to be skeptical about the CEOs-are-feeling-our-pain narrative: Top executive pay, even after treading water in 2009, remains at stratospheric levels that far overshadow what top executives took home a generation ago.

signupWay back in 1970, as the Stanford Center for the Study of Poverty and Inequality neatly charts, the nation’s top 100 CEOs took home just 39 times more pay than average workers. By 1995, top 100 CEO pay was outpacing average worker pay by 343 times. By 2000, at the height of the dot-com bubble, the nation’s 100 best-paid CEOs were pocketing an incredible 1,039 times average worker pay.

That gap did drop after the dot-com bubble burst. But top CEOs have since gained back a good bit of the ground they lost. We won’t have an exact read on the 2009 pay gap between top CEOs and average workers until later this year. Top 100 CEO pay may end up multiplying worker pay by 900 times over.

Is such a wide gap just? Or fair? Or reasonable? Legally speaking, only the last question really matters. Current federal law frowns on executive pay that does not rate as “reasonable.” The tax code, for instance, only lets corporations deduct “reasonable” executive pay off their taxes.

But at what point does executive pay turn “unreasonable”?  Last week the justices of the U.S. Supreme Court had an opportunity to settle this muddled area of the law. Instead they punted.

The case before the court involved mutual fund executives who had been, according to angry fund investors, overpaying the fund investment adviser. A federal appeals panel had thrown out the angry investor lawsuit, essentially ruling that the marketplace, all by itself, can keep executive pay rates honest.

One jurist, the libertarian-leaning Richard Posner, dissented from that ruling.

“Executive compensation in large publicly traded firms often is excessive,” Posner argued, and he would go to call the assumption that the market can prevent executive pay excess “ripe for reexamination.”

The Supreme Court last week totally dodged the challenge that Posner raised. Any action against executive pay excess, Supreme Court justice Samuel Alito noted, would have to be “a matter for Congress, not the courts” to decide.

Congress, meanwhile, remains stuck on the notion that corporate shareholders, if suitably empowered, can restore some common sense across the corporate pay landscape. The House, toward that end, has passed legislation that gives shareholders a “say on pay.” Under the legislation, shareholders would have the right to take advisory votes on top executive pay pacts.

Corporate boards, the theory goes, would start restraining executive compensation if they faced the public embarrassment of losing a shareholder vote, even just an advisory one. But Britain has had “say on pay” on the books since 2002, and that “say” hasn’t stopped UK executive pay from rising.

More to the point, we don’t expect shareholders to protect the public interest from corporations that pollute the environment. We have federal laws against corporate environmental misbehavior.  Why, then, should we rely on shareholders alone to protect the public interest from corporations that offer excessive rewards to their executives?

Those excessive rewards endanger the public interest as surely as toxic dumping. Outrageously high rewards give executives an incentive to behave outrageously. To win those rewards, they’ll do whatever they need to do. They’ll even, as Wall Street’s subprime recklessness so clearly demonstrated, crash the economy.

The White House, for its part, has handed the CEO pay ball to Kenneth Feinberg, the Treasury Department “pay czar.” Feinberg only has authority over executive pay at bailed-out enterprises that haven’t yet paid back their TARP program tax dollars. But Feinberg does have a bully pulpit, and he has been pounding that pulpit to push his pet solution to executive pay excess.

Companies, advises Feinberg, need to shift their executive pay from cash to stock awards that executives have to wait several years before cashing out. This sort of shifting, Feinberg’s critics charge, only moves executive pay from one pocket to another. At the end of the day, under the Feinberg formulation, top 100 CEOs could still be taking in 1,000 times more pay than their workers.

Researchers who study what makes enterprises truly effective find that prospect chilling. Effective enterprises, these researchers understand, share rewards among everyone who contributes to enterprise success. They don’t lavish those rewards at the top of the corporate pyramid.

Peter Drucker, the founder of management science, regularly advocated for corporate pay gaps no wider than 25-to-1, and Congress does have pending some legislation that would move us in that direction. But the bills have no shot at passage anytime soon.

One of these bills would deny corporations tax deductions on any executive pay that runs over 25 times worker pay. Another would give a preference in the federal contract bidding process to companies whose top execs make less than 100 times what their workers make.

Most Americans would find these proposals “reasonable.” Why can’t Congress?

Sam Pizzigati edits Too Much, the online newsletter on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Too Much appears weekly. Read the current issue or sign up to receive Too Much in your email inbox.

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