Two state-level legislative bills seeking to reign in bloated executive pay have the effect of applying a band-aid to a broken leg, but whatever their effect should they become law, perhaps they might stimulate debate. The Rhode Island state Senate is considering a law that would provide an incentive for companies to adopt a maximum wage and a bill in the California state Senate would introduce variable corporate tax rates based on pay ratios.
Although corporate interests are likely to be successful in defeating these bills (both of which are in early stages of the legislative process), they represent at best a tentative attempt to bring about a small reform. But symbols can sometimes be important, and the symbolic value of these bills is what is likely to be distressing to the one percent.
The Rhode Island bill, S. 2796, is under consideration by the state Senate’s Finance Committee, which has recommended it be “held for further study.” Here is the official commentary explaining the bill, which is sponsored by 14 of the state Senate’s 38 members:
“This act would establish a preference in the awarding of contracts for any person or business doing business with the state whose highest paid executive receives compensation and/or a salary equal to or less than thirty-two (32) times the compensation and/or salary paid to its lowest paid full-time employee. This act would take effect on July 1, 2014.”
It would not be mandatory for a contractor doing business with the Rhode Island state government to have this pay ratio; it would merely give such a company an advantage when bidding.
The California bill, S.B. 1372, would replace that state’s current 8.8 percent corporate tax rate with a sliding scale of seven to thirteen percent based on a company’s pay ratio. The highest rate would be paid by corporations in which the chief executive officer makes 400 or more times than the average worker. The bill would also raise by 50 percent the tax rate of any corporation that moves more than 10 percent of its workforce offshore in a given year.
This bill, which has two sponsors, will be difficult to pass due to a California law requiring a two-thirds majority of both houses of the state Legislature to enact a change to the tax code. It is currently in the state Senate’s Appropriations Committee.
Executive pay rises into the stratosphere
There certainly is reason to reign in executive pay. The ratio of chief executive pay to that of an average worker in the U.S. rose from 42-to-1 in 1960 to 531-to-1 in 2000, when stock options were being cashed in at the height of the stock market bubble. Growing inequality is also demonstrated by these changes from 1990 to 2005, as calculated in a study by the Institute for Policy Studies and United for a Fair Economy:
- Chief executive officers’ pay increased 298 percent.
- Production workers pay increased 4.3 percent.
- The purchasing power of the federal minimum wage declined 9.3 percent, adjusted for inflation.
To bring these statistics further up to date, the U.S. labor federation AFL-CIO calculates that the chief executive-to-worker pay ratio was 331-to-1 in 2013, up from 50-to-1 in 1983 — a more than sixfold increase in three decades. The AFL-CIO also reports that in 2013 the companies comprising the S&P 500 stock-market index earned $41,249 in profits per employee. So, yes, they can afford to give employees a raise.
The standard argument given for bloated executive compensation is that the recipients “add shareholder value” — that is, they justifiably receive millions or tens of millions of dollars per year because their genius drives up the price of their companies’ stock, thereby creating wealth for stockholders. Although buying stock is, in theory, a bet on a company’s future earnings and therefore its price should rise and fall in concert with a corporation’s financial performance, bubbles fueled by speculation and larger macroeconomic conditions often account for how a stock does.
During the 1990s stock-market bubble, when valuations of publicly traded corporations were historically the most out of line in relation to actual profits, only unusually poorly managed corporations failed to have stock that significantly rose in price. More recently, the run-up in U.S. stock prices that has taken place over the past couple of years is a product of the Federal Reserve’s “quantitative easing” program, whereby it buys U.S. government debt and mortgage-backed securities in massive amounts. As of the end of December 2013, the Fed had spent a total of $3.7 trillion over five years on this program.
Therefore, it is no shock to discover that actual chief executive officer pay bears little or no relation to the financial results of their corporations. A 2013 report by the Institute for Policy Studies found that of the 241 chief executive officers who have been ranked among the 25 highest-paid U.S. chief executives at least once in the past 20 years, almost one-quarter of them headed corporations that either have ceased to exist or received taxpayer bailouts after the 2008 financial crash.
The Institute reports:
“[O]ur analysis reveals widespread poor performance within America’s elite CEO circles. Chief executives performing poorly — and blatantly so — have consistently populated the ranks of our nation’s top-paid CEOs over the last two decades. … In reality, [the] most highly paid executives over the past two decades have added remarkably little ‘value’ to anything except their own personal portfolios.”
And despite the one percent’s prevailing ideology that government only gets in their way, one of out eight of these highest-paid chief executive officers were among the biggest recipients of government contracts — a composite $255 billion in taxpayer-funded government largesse.
Hedge funders get billions for poor results
As the financial industry has swollen in relation to the rest of the economy, pay there is even more out of line with contribution. Speculation pays in fabulous ways: The 25 highest-paid hedge-fund managers of 2013 raked in a total of $21.15 billion. Yes, you read that correctly — almost $1 billion apiece in one year. Four hedge-fund managers made more than $2 billion each.
What magic do hedge funders perform that attracts such sums of money? Getting others to believe in their “magic,” it would seem. Bloomberg News reported that, as 2013 was drawing to a close, the composite gains of hedge funds for the year was 7.1 percent, as compared to the 29.1 percent gain of the S&P 500 stock index. In other words, they did worse than random chance. Nonetheless, hedge funds grabbed $50 billion in management fees for this below-average performance.
The Rhode Island legislative bill seeks to define a ratio of 32-to-1 as a “fair standard” for chief executive pay as compared to employee pay. But isn’t that still an absurdly high ratio by any reasonable standard? By contemporary capitalist standards, such a proposal seems dramatic and has an uphill, at best, chance of passing. But if we were to design an economy that works for everybody, would you propose something anywhere near that lopsided?
Radical activists have been known to summarize the demands of liberals as “longer chains, bigger cages.” Here we have a classic case of that. If you start by asking for crumbs, at best you’ll get small crumbs. Given the immensity of problems the world faces, including declining living standards, surely we deserve much more.