September 14, 2007
Excessive CEO Compensation Hurting US Companies and Society
by Francesca Rheannon
A new report claims that excessive executive compensation in the US is taking a staggering economic
and social toll on American society, threatening leadership in the business, government, and
nonprofit sectors and creating instability in the economy.
Last year, the average American worker had to toil for an entire year to make what the majority of
Fortune 500 CEOs made in one day. Moreover, the gap between what the lowest and the highest paid
employees is widening.
This pay disparity is threatening the foundations of
American democracy, endangering leadership development, and creating the conditions for economic
and social instability, according to Executive
Excess 2007, the fourteenth annual survey of executive compensation from the Institute of Policy Studies , a liberal think tank, and United for a Fair Economy, a non-partisan
organization focused on income/wealth distribution issues.
The figures stand in stark
contrast: the CEO of a large company pulls down an average $10.8 million per year in salary and
bonuses. That doesn't count the value of perks and some stock options, whose value can run to many
millions more. But the average worker makes only $29,544 —only about 160% of the poverty level for
a family of four.
The report sounds the alarm that not only is executive pay going through
the roof, but it is also linked to the decline in the fortunes of workers. Far from the rising tide
of executive pay lifting all boats, wage costs are being pushed down to foot the bill for CEO
compensation and perks.
Despite an increase this year to $5.85 per hour, the real value of the
minimum wage has declined 7% over the past decade and real wages have risen only a little over the
same period. During this time, executive pay has soared by 450%.
High CEO pay is often
defended as the just reward for outstanding performance, but the report shows that this correlation
is a myth. One example much in the news recently is Angelo Mozilo of Countrywide Financial, "the
sixth highest paid CEO in 2006…with $42.9 million. In July 2007, the company's sub-prime mortgage
woes drove its foreclosure rates to the highest level in more than five years and contributed to a
global liquidity crisis."
Another common argument in favor of outsized compensation is
that it is necessary to attract good executive talent. But Executive Excess 2007 makes the case
that it actually erodes good leadership by giving the highest rewards to those who ignore long-term
stability in favor of short-term market gains. Employee relations may also suffer, leading to
negative impacts on company performance. Co-author Anderson says, "such extreme gaps between what
CEO's make and what workers make can contribute to problems with worker morale, and that can
translate into problems with productivity."
The report charges democracy is threatened by
huge disparities between CEO compensation and salaries in the government sector. For example, our
highest paid government employee—the President of the United States—makes $400,000 a year, while
the average compensation for public corporate CEO's is $10.8 million. Furthermore, the latter
figure is only likely to rise, pressured upward by the even more stratospheric pay of private
equity and hedge fund managers. The disparities "siphon off talent from public service and create
a nonstop revolving door between government and the business world that breeds conflict of interest
and corruption and distorts our democracy."
The nonprofit sector is also bled of talent.
The twenty highest paid executives at publicly traded companies took home thirty eight times the
income of the 20 top paid leaders from the nonprofit sector: $36 million vs. $965,000. That poses a
powerful pull for nonprofit leadership to defect to the private sector.
executive compensation hurts shareholders, the study's authors contend. "CEO pay levels have become
so huge that they cut into corporate earnings," co-author Sarah Anderson of the Institute of Policy
Studies told SocialFunds.com. "It also raises a red flag about how independent the corporate boards
are that they continue to approve of these ridiculously large pay packages." It's not surprising,
therefore, that the biggest increase in shareholder resolutions has been in the area of excessive
The report proposes six solutions to redress excessive executive compensation.
One would eliminate tax loopholes that allow corporations to deduct excessive pay packages as a
"business expense." Another would increase the top marginal tax rate on high incomes, currently at
an historic low of no more than 35%. A third would end the tax reporting loophole that allows
corporations to report lower stock option expenses to their shareholders than to the IRS, thus
enabling them to claim a higher deduction. The proposals seek to reduce incentives to unreasonably
boost CEO pay and help share the tax burden more equitably across income levels.
may be turning against excessive executive pay. In July, a Financial Times/Harris poll found that
77% of Americans think CEOs "earn too much" and almost two-thirds think the wealthy should pay more
While Americans have been concerned about the widening pay gap for years, what is
different now, Anderson says, is that this concern is beginning to impact lawmakers. Several bills
addressing executive pay are pending in the House and the issue is gaining the attention of some
high profile politicians, including Barak Obama and Hillary Clinton. Obama is the lead sponsor of a
Senate bill that would give shareholders the right every year to vote on executive pay packages.
Anderson told SocialFunds.com, "I feel that at least some of our leaders are catching up to where
the public is."