Over-Compensation: Why We Must Rein In Executive Largess

According to statistics from the website Salary.com and the Federal Government’s Bureau of Labor Statistics, and reported by the AFL-CIO’s Executive Paywatch site, the average American chief executive officer of a firm ranked in the Standard & Poor’s 500 Index of top companies (CEO) earned 354 times the average wages of their employees. [1] Not only is this an obvious disparity, but it also dwarfs the pay of similarly sized organizations in other major world economies. For comparison, Japanese CEOs earn on average 67 times the wages of their workers, German CEOs 147 times higher, and U.K. bosses 84 times the rate of employees. 

Public anger over the gap in pay too often is simply described as jealousy, or passed off as fomenting “class warfare”. Many defenders of the current system argue that since top executives in today’s world manage complex organizations that may have hundreds or thousands of employees spread throughout the world while navigating different business lines and divisions, the deserve big pay for a big job. The question before us though is not whether CEOs have a difficult job which should pay well, but whether the compensation they receive is excessively high and is creating a vast gulf between themselves and their workers. 

According to the Economic Policy Institute’s “State of Working America”, top executives in 1965 earned an exponentially lower figure of 20 to 1 ratio than their workers. However from the period covering 1978 – 2011 CEO compensation rose an astounding 725% as opposed to a nearly stagnant period for workers of just 5.7 %. The financial sector of the economy—particularly the leading executives of that industry—is responsible for the major expansion of the income share of the top 1% of Americans in that same three decade period. [2] One of the outcomes of this trend is that income is being sent into capital rather than towards wages and more traditional forms of compensation. So as capital accumulates in some hands towards fixed assets and investments (like stocks), income gaps have widened. Over time this gap has led to our current plight in which the wealthiest 1% of Americans now collect more than 19% of all household income in the nation. This is an all-time record, at least since records began being kept a century ago. [3]  

The 1990s saw the first attempt to rein in rising salaries of executives when the Bill Clinton administration enacted a $1,000,000 cap on tax deductions companies could claim for executive compensation. Unfortunately, the cap set boards of directors—many of which are staffed by former business executives themselves and often selected to serve in their capacity by the CEOs—to padding their leaders’ salaries with an array of bonuses and stocks instead, which raised compensation ever higher.

How should faith-based citizens view the situation? Are CEOs simply the “all-stars” of their industries like the similarly handsomely paid professional athletes and performing artists? Does the free market really set the bar for rewarding the outcomes we value most? Much of the problem in the galloping growth of CEO compensation has been the distribution of stock options as part of compensation. Growth of a company’s profits, or at least the illusion of them, can dramatically raise a CEO’s portfolio. If an executive moves on he may often pocket a short-term gain, even if the company’s future performance doesn’t match a couple of rosy quarters. Even if a top executive is not retained, or is replaced due to a new strategy, boards have increasingly offered “golden parachutes” of severance packages as a lure in the hiring process so that the executives head to the door while retaining stocks, prior bonuses, or other pay and benefits. These types of compensatory vehicles can lead CEOs to engage in reckless conduct while in their positions, because short term results can be valued more highly than long term security, and even failure can bring rewards. This is a system that can encourage greedy and short-sighted behavior. 

As mind-boggling as the widening rate of income inequality is the fact that CEO pay has continued to sky-rocket despite the poor performance of these supposedly skilled leaders of industry during the Great Recession. The Institute for Policy Studies issued a report that found that nearly two-fifths of the top executives on the highest paid lists were, in their words, “bailed out, booted, or busted”. Twenty-two percent of the biggest earners presided over firms that were bailed out by taxpayers or went out of business after the 2008 financial crisis. Another 8% were shown the door by their companies although they were consoled by an average payout of $48 million each. Yet another 8% led companies that were required to pay major fines to the Securities and Exchange Commission. [4]  
There is some good news in the battle to bring down executive excess as part of an overall goal to reduce income inequality and expand wealth and ownership to as many citizens as possible. 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act, although slow and halting in its implementation, offers some promising reforms. Shareholders of companies may now vote on executive pay and can reject the infamous “golden parachutes” for dismissed CEOs and other top officials. Companies are also now required to post the difference in CEO versus average worker pay. Some businesses will no doubt look for ways to dilute the effect of this legislation. (Unfortunately, boards have considered subsequent shareholder votes on compensation to be “advisory” rather than binding since the enactment of Dodd-Frank.) Public Citizen recommends withholding bonuses for 5 years to ensure profitability targets were sustainable. [5] Perhaps the best proposal to bring all loopholes in line with fairness and the common good was advanced a decade ago by Edward M. Welch. Writing in the Jesuit publication America, Edward J. Welch suggested that total executive compensation should not result in more than a 100 to 1 ratio with the average worker.  [6]

Income inequality in the U.S. is currently the 4th worst in the world. [7] It will continue to be an area of prime concern for those who want to protect and aid the most vulnerable members of society.      

Kirk G. Morrison

Kirk G. Morrison is Chairman of the National Committee for the American Solidarity Party.