Poisonous Million Dollar Pay Packages

Leo Gerard
Poisonous Million Dollar Pay Packages

Pope Francis has the antidote for what ails the United States. He gave the Catholic Church’s 1.2 billion followers a dose last week when he suspended the Bishop of Bling.

The German bishop, Franz-Peter Tebartz-van Elst, bought himself a $20,000 bathtub while spending $42 million renovating his residence. It’s an echo of John Thain, the Merrill Lynch chief executive who bought a $35,000 toilet while spending $1.2 million on office renovations just months before confessing to $56 billion in losses.

Unlike Elst and Thain, Pope Francis is beloved for his asceticism. He lives in Spartan rooms and drives a 1984 Renault. He runs an organization as big as any American corporation. Yet he doesn’t demand millions in pay and perks. American CEOs, by contrast, place themselves on $35,000 thrones bought with the sweat of struggling minimum wage workers. The income inequality they’ve caused over the past half century is corrosive to the American ideal of an egalitarian society free of grotesquely wealthy royalty. It’s poisoning the cherished concept that any American who works hard and follows the rules can make it.

The Catholic Church is not without sin. Sex abuse scandals and cover-ups have rocked the faith of the devout. But Pope Francis seems to be uplifting the church, returning it spiritually to the days when its leader ministered to the poor, healed lepers and expelled money changers from the temple. Pope Francis sets the example, wearing plain loafers instead of the handmade red leather slippers of his predecessor and taking the name of the medieval saint known in Italy as the poverello or little poor man. Suspending the Bishop of Bling suggests Pope Francis won’t tolerate imperial behavior by subordinates either.

American CEOs and boards of directors should take note. The income inequality they’ve fostered with outsized CEO pay packages and paltry wages for workers is creating an American royal class served by serfs. Instead of fixing that problem as Pope Francis is, they’re trying to conceal it.

The numbers are staggering. Bloomberg calculates the average CEO of a Standard & Poor’s 500 Index corporation gets 204 times what the typical worker receives. In other words, if the median worker earns $30,000, the CEO is pulling down $6,120,000 – yeah, more than $6 million.

Some of the disparities are way worse. Take Ronald Johnson’s pay package, for example. The former CEO of JC Penney Co. got $53.3 million last year. The average JC Penney worker got $29,688, Bloomberg figured using government averages for department store wages.

That’s a ratio of 1,795 to 1. It means the JC Penney board of directors decided that Johnson was worth 1,795 times the average Penney’s worker. Or, to put it another way, the JC Penney board determined that it would take 1,795 Penney’s workers to equal the talent of one Ronald Johnson, a guy whose leadership resulted in a disastrous, money-losing 25 percent drop in sales. The board booted their $53 million man within 18 months.

Johnson’s super-paid poor performance is typical. The Institute for Policy Studies reviewed the accomplishments of 241 corporate chief executives who ranked among America’s 25 top-paid CEOS in one or more of the past 20 years and found nearly 40 percent were bailed out by taxpayers, busted for fraud or booted like Johnson of Penney’s and Thain, of over-priced toilet fame.

CEO compensation continues to skyrocket while rank-and-file worker pay stagnates. Bloomberg determined that the ratio between CEO and worker wages rose 20 percent since 2009, meaning the guy at the top kept getting more while workers’ pay went nowhere. This has been the pattern for half a century in the United States, where these ratios are much higher than they are in Europe. In Norway, for example, it’s 58-to-1. In the 1950s, academics put the U.S. figure at 20-to-1. It rose rapidly since then, meaning executives got more and more in relationship to workers: increasing to 42-to-1 in 1980, then up to 120-to-1 in 2000.

The excessive pay and stock bonuses that executives get don’t necessarily translate to good decisions for shareholders, workers or communities as CEOs strive to personally benefit from short-term gains instead of long-term investments. British economist Andrew Smithers figures that in the 1970s, American companies devoted to investments 15 times as much capital as they distributed to shareholders. Now it’s less than 2 to 1. Today, CEOs suck out companies’ value rather than building for the future.

Federal law has long required corporations to reveal CEO pay, but it did not mandate that corporations determine the wages of their typical workers and publish that too. The Dodd-Frank Wall Street Reform and Consumer Protection Act is supposed to change that. It requires public companies to report the ratio between the CEO’s package and the pay of the median worker.

Finally, after a three-year delay, the Securities and Exchange Commission last month proposed regulations for disclose of this information. CEOs and their lobbyists immediately redoubled their efforts to scuttle this requirement.

They realize it’s demoralizing for workers to discover that their corporation’s CEO took $96 million out of the company, as Oracle’s Lawrence Ellison did last year. But they know it’s worse, it’s actually demeaning to employees when the board of directors awards the CEO 1,287 times what it pays the typical worker for his labor and devotion to the company. That 1,287-to-1 figure is Bloomberg’s estimate for the CEO-to-worker pay ratio at Oracle.

CEOs and board members don’t want workers to get that pay ratio information. They don’t want workers to feel degraded, and thus a little less devoted. And they don’t want to be humiliated by shocking ratios at companies like JC Penney where the CEO’s decisions damaged the corporation.

But a little mortification can get good results – like removal of the Bishop of Bling. The SEC should ignore corporate protests about the pay reporting requirements.

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