Worth What?!

In 2013, the AFL-CIO reported on its Website that “The CEOs of S&P 500 Index company made, on average, 354 times the average wages of rank-and-file U.S. workers in 2012. CEOs in the United States don’t just make a lot more money than their own employees. On average, U.S. CEOs also make far more than CEOs of comparably sized companies in other developed countries.” “The ratio is up from 120-to-1 in 2000, 42-to-1 in 1980 and 20-to-1 in 1950.” Huffington Post, April 30, 2013. But hey, we’ve moved executive pay to some sort of performance based metrics, right? They deserve what they get now… Tens of millions of dollars a year are pretty normal, so…

“The current system of executive compensation, with its emphasis on performance, can theoretically constrain pay, but in practice it has not stopped companies from paying their top executives more and more. The median compensation of a chief executive in 2013 was $13.9 million, up 9 percent from 2012, according the Equilar 100 C.E.O. Pay Study, conducted for The New York Times. The 100 C.E.O.s in the survey took home a combined $1.5 billion last year, a slight rise from 2012. And the pay-for-performance metrics — particularly the idea of paying executives with stock to align their interests with shareholders — may even have amplified that trend. In some ways, the corporate meritocrat has become a new class of aristocrat.

“Economists have long known that high executive pay has contributed to the widening gap between the very rich and everyone else. But the role of executive compensation may be far larger than previously realized.

“In ‘Capital in the 21st Century,’ (Belknap Press), a new best seller that is the talk of economics circles, Thomas Piketty of the Paris School of Economics makes a staggering observation. His numbers show that two-thirds of the increase in American income inequality over the last four decades can be attributed to a steep rise in wages among the highest earners in society. This, of course, means people like the C.E.O.s in the Equilar survey, but also includes a broader class of highly paid executives. Mr. Piketty calls them ‘supermanagers’ earning ‘supersalaries.’…‘The system is pretty much out of control in many ways,’ he said in an interview.” New York Times, April 12^th.

This doesn’t count the mega-compensation of fund managers, investment bankers, and others whose compensation is based directly on investment and trading income. And as we have seen, our Wall Street community – with flash trading and very little genuine oversight – they are playing a game that is completely rigged in their favor.

“But that’s the going rate,” you will hear all the time. The employment experts will tell you that they just cannot recruit top talent without such pay levels. The talent pool expect that. When you see a promotion to CEO in any major company, skipping over other highly-ambitious executives just shy of the top job, the recruiters pour in. Those second level players are often lured with multiple offers to leave “where you’re not appreciated” to go where a CEO spot just opened up. The issue, obviously, is that boards of directors are obsessed with keeping their gigs, and taking a chance on a lesser-known name makes it too easy for shareholder groups to challenge their decision. If you hire a star and he or she fails, well, who knew?  Put someone in you think would do a great job who is unknown and they don’t, well…. Guess what?

The shift in compensation to metric based on performance hasn’t reduced executive pay across the board. “It is dismaying that companies using total shareholder return as a performance metric tended to underperform, given its rising popularity in pay practices. Among the 195 companies in the study, just over half — 53 percent — used total shareholder return as a metric. Those companies’ shares had an average loss of 0.18 percent, annualized, over the five-year period. That compares with an average gain of 1.15 percent among all 195 stocks, regardless of the benchmark they used… Even more striking, stocks of companies that did not use total shareholder return as a measure gained an annualized average of 2.67 percent.” NY Times.

Still, looking those CEO/average worker ratios is a bit shocking. “In 2010, as part of the Dodd-Frank Act, Congress passed a rule that requires public companies to disclose the ratio of the C.E.O.’s pay to the median compensation at the firm. The main objective was to give shareholders a yardstick for comparing pay practices across companies, said Senator Robert Menendez, Democrat of New Jersey, who sponsored the provision…

“The ratio has plenty of opponents in corporate America, who argue that it will be expensive to calculate and won’t provide useful insight into how companies are really paying workers. Even some people who are skeptical about the status quo don’t like it, including Ms. Stout at Cornell. She suggested an alternative ratio that would compare the chief executive’s pay to the federal minimum wage, a number that would not cost companies anything to calculate. It could also serve another function: She proposes eliminating any tax deductibility for executive compensation that is more than 100 times the minimum wage. ‘It is simple and sweet,’ she said.

“Mr. Piketty favors a measure that has a bit more tang…He supports a substantially higher tax rate for top earners. And while he acknowledges that this is an imperfect tool, he rejects the argument that such a tax could dent the morale of executives and cause their companies to underperform… ‘It is possible to find hard-working managers who are willing to be paid 20 times the average wage at their company rather than 100 to 200 times,’ he said.” NY Times.

What changes are you likely to see in the near term? NOTHING. Passing a financial responsibility bill, killing tax deductions to companies for overpaying executives and taxing the ultra-high bracket CEOs and financial managers has about as much chance of getting through a GOP-controlled house as I do becoming the next Tsar of Russia.

You hear profoundly discredited theories about protecting this CEOs as “job creators” (the same folks who send jobs overseas, shelter profits overseas are “job creators”? – give me a break) and trickle-down economics (a theory that was advanced in the 1980s but fizzled out when there was little or no evidence that remotely worked). But we are a nation where slogans and mythology trump hard facts and indisputable statistics. So we trundle on, the ratio gets worse, and earning power for average Americans continues to decline in real spending power, year-after-year without interruption for over a decade.

I’m Peter Dekom, and we clear are moving into a new definition of a “banana republic” where we have a large lower class, a contracting middle class and a tiny slice of mega-wealth at the top.