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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.

Excessive 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 CEO pay.

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.

The tide 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 taxes.

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."

 

 
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