It’s what former talk show host Randi Rhodes used to describe as “failing upward.” As if the obscene and growing gap between CEO compensation and worker pay weren’t bad enough, it turns out that these CEOs are actually rewarded for failure.
Those who benefit from the system would have you believe that top executive talent rightly deserves such lavish rewards, because the companies these executives run have been so profitable over the past several years. They’re basically giving credit for external economic trends to those who sit in their plush, windowed offices on the top floor, spending most of their days in meetings, luncheons and the golf course.
The fact is, major corporations have enjoyed the largest profits in the history of capitalism in recent decades – but not because of anything their top executives have done. The reasons include lower taxes, fewer regulations, government bailouts, a legal system rigged in favor of Big Business, so-called “free trade” agreements and technological innovations that have raised productivity – but which very few CEOs had anything to do with in terms of research, creation and development.
According to a paper published late last year by a trio of researchers from academic institutions across the country, CEO pay actually has an inverse relationship to company performance for up to three years from the time a chief executive is hired. The researchers found that:
Firm that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%.The effect is stronger for CEOs who receive higher incentive pay relative to their peers and stronger for CEOs with greater tenure. Our results appear to be driven by high-pay related CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.
It begs the question of why shareholders tolerate it. Why should the CEO of a company be rewarded at their expense? Part of it lies in transparency, which recent SEC rules are attempting to address. However, a large part of the problem lies in US business and corporate law, which is rigged in favor of those in control. Under current statutes, shareholders can vote – but wield very little power when it comes to actual decision making. Because the CEO is in control of the board of directors, he (or she) can virtually do anything s/he likes – and there is little that company shareholders can do in response, beyond selling off their shares in the company. In other countries, shareholders have the right to call for elections in order to vote out a CEO, or even the entire board. As a result, CEO-to-worker pay gaps in those countries are lower, and CEO pay is actually tied to company performance.
Beyond the recent SEC rules (which don’t take effect until 2017, and contain a number of loopholes), some efforts are being made at the state level to address the problem. A recent bill introduced in the California state legislature would have provided incentives to corporations for reducing the CEO-to-worker pay gap by dramatically raising taxes on excess CEO compensation. Although SB 1372 won a majority of votes in the state senate, California law requires that tax-related legislation pass by a two-thirds majority, so the bill died on the floor. Part of the bill’s failure to pass was due to propaganda from the California Chamber of Commerce, which called the bill a “job killer.” California Republicans and corporatist Democrats believed it.
Of course, where have we heard that BS before? Apparently, there are too many lawmakers still buying into the long-discredited idea of “supply-side” economics. They cannot (or more likely, will not) grasp the fact that economic growth is driven by consumer demand, not corporate expansion – and sure as hell not by bloated, undeserved CEO pay and benefits packages.
Before his death in 2005 at age 95, late management expert Peter F. Drucker, whose ideas laid the foundations of modern corporate structure, expressed serious concerns over inflated CEO pay. Describing it as a “serious disaster,” Drucker believed such obscenely high CEO compensation to be detrimental both to business and society as a whole.
Economic events and recent history of the past few decades have shown Drucker to be correct.
