How long will politicians look the
other way on CEO pay?
Inequity between top
executives and average workers remains at jaw-dropping levels.
David R. Francis
from the August 25, 2008 edition
Some 77 percent of
Americans polled last year felt that corporate executives "earn too much."
Most corporate boards apparently disagree. Last year, although the nation's
economy was already in trouble, they gave the chief executive officers of
the Standard & Poor's 500 largest companies on average a 2.6 percent pay
hike to $10,544,470.
Relative to past
raises, this is not a big income jump. Nonetheless, that sum is still 344
times the pay of typical American workers, says Sarah Anderson, an analyst
at the Institute for Policy Studies (IPS), a liberal think tank in
On the presidential
campaign trail, both Sens. Barack Obama and John McCain attack the high
levels of pay for corporate bosses, but are mostly fuzzy on remedies.
Several bills before Congress would attempt to tame runaway executive pay.
But none have passed both houses.
"looking out" to protect the campaign contributions they receive from
corporate executives, says Ms. Anderson. And it's an election year.
For 15 years,
Anderson has worked with colleagues at the IPS and others from another
liberal research group, Boston-based United for a Fair Economy, to turn out
an annual study of executive excess. Their work has likely fueled a rising
unhappiness with today's CEO pay packages that 30 years ago averaged only 30
to 40 times the average American worker paycheck.
Anderson hopes that
a new research finding in this year's report, along with a new president in
the White House and a possible swing toward more Democrats in Congress, will
bring about some legislative action on executive pay.
What the 2008
report finds is that five tax and accounting loopholes encourage excessive
pay by allowing CEOs to avoid "their fair shares of taxes." In effect,
ordinary US taxpayers are subsidizing the earnings of executives by at least
"Outrageous … it's
a real cost to society," says Anderson. That's a big enough amount to
subsidize 130,000 affordable housing units, she figures.
For that matter, it
would pay for the Iraq war for about a month and a half.
One tax loophole
gives preferential treatment to "carried interest" at a cost of $2.66
billion to Uncle Sam, according to the Joint Committee on Taxation.
To explain, in a
publicly traded corporation, a CEO pay package typically includes salary,
bonus, perks, and stock awards of various sorts. At private investment funds
and hedge funds, managers get paid by taking an annual management fee,
usually 2 percent of the capital they oversee, and by taking a larger chunk,
usually 20 percent, of profits realized when they sell fund assets. The
latter is termed "carried interest."
In good times on
Wall Street, the sums can be huge. The top 50 highest-paid managers of these
private investment firms made $558 million on average last year, the
business trade journal Alpha reported. That's 19,000 times the average
worker's pay. Yet the managers pay taxes on the "carried interest" at a
capital gains rate of 15 percent, not the 35 percent for ordinary income in
the highest tax bracket.
Critics see no big
difference between a person managing other people's money with other
professionals such as a doctor or lawyer whose earnings are taxed at
ordinary income tax rates.
no-brainer," says Anderson. So when a bill closing the carried interest
loophole passed the House but was blocked in the Senate by "an aggressive
lobbying campaign by deep-pocketed investment fund industry movers and
shakers," Anderson says, it "sent a chill down my spine."
include unlimited deferred compensation, offshore deferred compensation,
unlimited tax deductibility of executive pay, and special accounting
treatment of stock options.
become somewhat more aware of the cost of high executive pay. A study by
Harvard University professors Lucian Bebchuk and Yaniv Grinstein found that
the pay and benefits given to the top five executives in a large group of
big corporations in the years 2001 to 2003 amounted to 10 percent of the
total earnings of these firms. So executive pay is no longer an
insubstantial matter to shareholders.
Senators Obama and
McCain approve of proposals giving shareholders a "say on pay," giving them
an annual, nonbinding vote on the compensation of executives. But Anderson
is "a bit skeptical" that a legislated "say on pay" rule would make much
shareholders are not too keen to meddle with executive pay. Recent proxy
proposals at four major Wall Street firms to require "say on pay" votes
received an average of just 37 percent approval from their shareholders.
So are CEOs worth
their fancy pay, as they usually argue?
A new study by
economists Ulrike Malmendier at the University of California, Berkeley, and
Geoffrey Tate at the UCLA Anderson School of Management, Los Angeles, cast
some doubt for some "CEO superstars." After gaining fame and prestigious
awards from business magazines and others for their corporate performance,
they are rewarded with even more pay. But in the next three years their
firms underperform by 15 to 20 percent compared with firms of
Ms. Malmendier suspects the CEOs are too busy
writing books, sitting on other company boards, taking prestigious public
service jobs, and improving their golf handicaps.
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