Earlier this year, President Barack Obama surveyed America’s economic wreckage and pledged to help create a new “post-bubble” economy. We need as a nation, he stressed, to “go back to fundamentals.” Our bubble days, he added, “are over.”
Not quite. One driving bubble in the U.S. economy has not yet popped. The “assets” in this bubble remain staggeringly overvalued. And this bubble, if left inflated, will frustrate and defeat any move that President Obama - or anyone else - can take to create a new and healthier economy.
This bubble, this massive obstacle to our economic health, is executive pay. A generation ago, in the “pre-bubble” United States, top corporate executives seldom earned much more than 30 to 40 times the pay of average American workers. In 2008, amid an economic collapse that rivaled the early days of the Great Depression, top executives averaged 319 times more than average American workers. The architects of this collapse, America’s top 20 financial industry executives, took home even more. They averaged compensation that outpaced typical American worker pay by 436 times.
Worker Pay vs. Executive Pay
Corporate boards continued to hand out outrageously large pay packages last year, despite the country’s accelerating economic crisis.
Average total compensation for S&P 500 firm CEOs in 2008: $10,084,328
Decline in CEO compensation, compared to 2007: 4.4%
Decline in corporate profits, compared to 2007: 10.1%
Ratio between average CEO pay and average U.S. worker pay: 319-to-1
Ratio between average CEO pay and minimum wage: 740-to-1
Compensation packages for top executives, in short, remain at levels completely disconnected from any real underlying value that executives may offer.
Here at the Institute for Policy Studies, we have been tracking our nation’s astounding executive pay bubble since 1994. We began this annual Executive Excess series because we believe that excessive executive compensation has deeply troubling consequences, for both our economy and our polity.
To put the matter most simply: Outrageously large rewards for executives give executives an incentive to behave outrageously and engage in behaviors that put the rest of us at risk.
We have examined these behaviors in past editions of Executive Excess. We have documented, for instance, how CEOs who downsize, outsource, and cook their corporate books have consistently collected far greater paychecks than their executive colleagues.
Now looking back on our work, we plead guilty to a lack of imagination. We did not imagine, even in our most cynical moments, that America’s top executives - in their chase after fortune - would be reckless enough to melt down the entire global financial system.
That meltdown became evident to all Americans last September, a few weeks after the publication of last year’s edition of Executive Excess. Since then, all sorts of analysts and public officials have pinpointed executive excess right at the heart of the recklessness that brought the United States - and the world - to the brink of economic cataclysm.
Last November, for instance, former Federal Reserve chair Paul Volcker blamed “excessive pay packages” for our global financial breakdown. Two months later, a report on that breakdown from the Organization for Economic Co-operation and Development, the research center for the world’s top democracies, charged that executive “compensation schemes have often led to excessive risk taking.”
“It is the compensation system,” former Federal Home Loan Bank Board litigation director William Black would subsequently agree, “that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe.”
The White House appears to concur. In February, President Obama committed his administration to a “long-term effort” that would examine how executive pay patterns “have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system.”
Unfortunately, despite this new and broad consensus over the dangers inherent in excessive executive remuneration, the denizens of our nation’s executive suites still go about their business with the same visions of compensation sugarplums that danced in their heads before last September.
The substantive executive pay restrictions put in place since last September affect only those firms that have collected bailout dollars from the federal government. And these restrictions apply only to a small number of personnel at these firms, and, even then, they do precious little to return pay at the top of the corporate ladder to levels considered perfectly appropriate a generation ago.
Beyond the large but limited universe of bailout recipients, the executive pay status quo remains securely in place. Lobbying armies from corporate and financial trade associations are energetically doing battle behind the scenes to keep even modest changes in pay rules off the legislative table.
We need more than modest changes. Much of the current debate in Washington over executive pay reform has revolved around questions of corporate governance, both procedural and structural, that impact the level of executive compensation. These questions do need to be explored. But unless we also address more fundamental questions - about the overall size of executive pay, about the gap between the rewards that executives and workers are receiving - the executive pay bubble will most likely continue to inflate.
Earlier this year, three members of Britain’s House of Lords introduced legislation that would require UK companies to print, at the front of their annual reports, the ratio between CEO pay and pay for the bottom 10 percent of their workers.10 The legislation, noted Lord Robert Gavron, had a straightforward goal: to “shame” corporate officials who countenance and enable executive excess.
Here in the United States, we have now had fairly tough executive pay public disclosure laws on the books for the better part of two decades. The resulting media scrutiny and angry shareholder resolutions have subjected many of the nation’s most prestigious executives to considerable shame. Yet executive pay patterns have not changed.
Shame can sometimes work wonders. But we can’t count on shame alone to fix executive pay. We need real legislative limits.
Public officials in Congress and the White House hold the pin that could deflate the executive pay bubble. They have so far failed to use it.
By: Sarah Anderson, John Cavanagh, Chuck Collins and Sam Pizzigati from the Institute for Policy Studies, 9/2009
1 Josh Gerstein, “Obama talks up ’post-bubble’ economy,” Politico, March 13, 2009.
2 Associated Press interactive compensation survey. Includes salary, bonuses, perks, above-market interest on deferred compensation and the value of stock and option awards. Stock and options awards were measured at their fair value on the day of the grant.
3 Bureau of Economic Analysis.
4 Based on U.S. Department of Labor, Bureau of Labor Statistics, Employment, Hours, and Earnings from the Current Employment Statistics Survey. Average hourly earnings of production workers ($18.08) x average weekly hours of production workers (33.6 hours) x 52 weeks = $31,589.
5 Based on the 2008 federal minimum wage rate of $6.55 per hour. (This rose to $7.25 on July 24, 2009.)
6 Larry Elliott, “Volcker: executive pay broke the financial system,” Sydney Morning Herald, November 19, 2008.
7 Gert Wehinger, “Lessons from the Financial Market Turmoil: Challenges ahead for the Financial Industry and Policy Makers,” Financial Market Trends. No. 95, Volume 2008/2. Organization for Economic Co-operation and Development (OECD). December 2008.
8 Thomas Frank, “Wall Street Bonuses Are an Outrage,” Wall Street Journal, February 4, 2009.
9 “President Obama’s Remarks on Executive Pay,” New York Times, February 4, 2009.
10 Martin Walker, “Peers seek spot-the-difference pay disclosures,” The Times, April 24, 2009.