Viewpoint: Leo Hindery Jr.
November 4, 2008, 11:34AM EST
Why We Need to Limit Executive
The cancer of
excessive CEO pay is at the core of America's economic woes, and it demands
Confronted with the daunting array of economic failures confronting the
nation, it may seem improbable for me to say that excessive executive
compensation is one of the issues needing the early attention of the next
President and next Congress. Yes this particular cancer—which has been
growing exponentially for almost two decades—is at the core of many of our
nation's economic ills.
And it is a cancer that the
average worker finally understands. During the worst days of the recent
stock-market, bank, and credit-market upheaval, a raw nerve was struck on
Main Street when workers generally became aware, many for the first time, of
the huge salaries being earned on Wall Street and on other streets far
removed from Main Street.
Wherever earned, excessive
executive and CEO compensation, simply by being "excessive," belies the
principles of a meritocracy, which is what corporations should be. Managers
rise to something akin to royalty when their compensation is at unjustified
levels and when the rewards of employment are not more commonly and fairly
shared with the general employee base.
Primacy of Profits
Way back on Sept. 13, 1970,
just as I was starting my second year at Stanford Business School, Milton
Friedman authored his seminal opinion piece in The New York Times
entitled "The Social Responsibility of Business is to Increase Its Profits."
But unlike many of Friedman's other writings, this particular opinion piece
was only modestly embraced, and was embraced by almost no one credible.
In fact, from the end of
World War II until the mid 1990s, prominent public and private company CEOs
almost universally viewed their responsibilities as being equally split
among shareholders, employees, customers, and the nation. This broad sense
of corporate responsibility was actually so widely and comfortably held that
in 1981, the Business Roundtable, which is the key public policy arm of the
nation's largest public companies and their CEOs, officially endorsed a
policy that said that shareholder returns had to be balanced against other
However, just as the
Business Roundtable was making its policy statement, the deregulation and
laissez-faire era that was born in the Reagan Administration was starting to
chip away at the statement's core contention. And by 2004—even after many of
the myriad scandals and outright thefts that have hallmarked the last decade
of American business had already come to light—the Roundtable amended its
position. It said, just as Friedman did in 1970, that the job of business is
only to maximize the wealth of shareholders. And at that point, because of
the prevalence of stock option and restricted stock grants, shareholders
included many if not most senior managers at a large number of publicly
And this narrow
single-mindedness has taken Corporate America down a very bad path that has
resulted in executive compensation that is truly excessive.
For most of the past
century, CEOs earned roughly 20 times as much as the average employee,
according to the Economic Policy Institute, as quoted in The New York
Times on Dec. 18, 2005, and again on Jan. 1, 2006. And also for much
of the past century, there was nothing like the excesses within the
financial industry that we see today, which enable its managers to earn
almost obscene levels of compensation—and then get favorable income tax
treatment to boot.
Today, however, average
public company CEO compensation is 400 times that of the average employee.
And thousands of senior managers in addition to CEOs are drinking at the
same frothy trough, especially, as we have all just seen, senior managers in
the financial services industry. (By contrast, the ratio of CEO pay to that
of the average employee has remained around 22 in Britain, 20 in Canada, and
11 in Japan.) And with such U.S. exalted compensation, management has so
elevated itself above average employees as to have become, in my opinion, a
constituency unto itself—and one that, to compound the inequity, largely
sets its own compensation.
(Incidentally, in 1971 my
first boss out of business school, who was then easily one of the nation's
top half-dozen public company CEOs, made 10 times my starting salary of
$15,600 and about 15 times the salary of our average employee. And
throughout the remainder of his exceptional career, I don't think that ratio
ever exceeded 20 times, which was a great example to me as I started my own
career. Although I have started several companies and engineered several
major mergers that have rewarded me generously, my own compensation since I
started my career has, with the exception of two and a half years when I
received share-price increase-based bonuses, always stayed in that same
The disparity in
compensation today is an ethical embarrassment to our country, and it is
certainly an affront to workers and to shareholders. When polled, 90% of
institutional investors said they thought corporate executives were
dramatically overpaid, and 85% of them said the prevalent executive
compensation system hurts Corporate America's image, according to a Watson
Wyatt Survey published on June 20, 2006.
With the ills of our broken
executive compensation system rippling through so many of the critical
economy-related issues that the next President and Congress need to address,
Congress should step forward early in 2009 to play a proactive role in
fixing the system and reestablishing its fairness.
First, Congress should
immediately grant public shareholders the rights, on their own, to call a
shareholders' meeting to vote out the current board and to render an
advisory vote on executive compensation—rights that they don't currently
have. Much better than any other similar measures contemplated or previously
adopted, these three rights, which are already in place and working well in
Britain, would align shareholder and management interests as to both
governance and executive compensation.
Second, Congress should
establish a ceiling for individual executive compensation as a reasonable
multiple of average employee compensation, and penalize through the
corporate income tax code and/or otherwise those companies that elect to pay
in excess of that multiple.
Third, Congress should close
the loopholes that currently allow the wealthiest Americans to use offshore
tax schemes that cost our Treasury $70 billion in taxes each year, and it
should aggressively step up tax enforcement to capture the 30% or so of
earnings from selling investments that currently goes unreported each year.
Fourth, Congress should tax
the "carried interest" now being earned by private equity and hedge fund
managers at the ordinary-income tax rate of around 35%, rather than at the
much lower capital gains tax rate of 15%. Carried interest is just a form of
performance fee, and like every other performance fee or bonus it should be
taxed as ordinary income—otherwise it is just another example of excessive
and unfair executive compensation.
And fifth, Congress should
continue to oversee the compensation practices of any entity that has or
relies on federal government guarantees. To this point, particular
compliments should go already to those in Congress and to the New York State
Attorney General for their efforts to recover the excess compensation that
recently went or is still scheduled to go to AIG (AIG)
If Congress enacts these
five measures, then many of the oppressive breakdowns in our economy will be
mitigated—from the grossly un-progressive tax outcomes to the insensitive
employee practices to the larger than necessary trade and federal deficits.
And the fairer and more balanced sense of corporate responsibility which so
honorably distinguished our country for most of the 20th century will be
Leo Hindery Jr. chairs the Smart
Globalization Initiative at the New America Foundation and is managing
partner of a New York media industry private equity fund. Previously, he was
CEO of AT&T Broadband and its predecessor, Tele-Communications (TCI). He is
the author of It Takes a CEO: It's Time to Lead With Integrity
(Free Press, 2005).
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