Extravagant CEO Salaries and Ballooning Income Inequality in the U.S.

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Sat Dec-12-09 10:30 PM
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Extravagant CEO Salaries and Ballooning Income Inequality in the U.S.

Grossly excessive CEO salaries in the United States have in recent years generated much wonderment and displeasure. With the coming of the severe recession or depression of 2008/2009, that displeasure has turned to outrage in many quarters. 77% of Americans believe that that CEOs are paid too much money, whereas only 11% of Americans admire �those who run� America's "largest companies" either "a great deal" or "quite a bit�.

In 2008, the average annual pay for a CEO of a Standard & Poor�s 500 company was $10.9 million. Those at the top, our nation�s financial elite, make hundreds of millions of dollars in a year. In 2004, the average CEO pay in the U.S. was 431 times that of the average production worker. That compares with a ratio of only 42 to 1 in 1982.

Congressional hearings into this issue in recent years reflect the public outrage, though Congressional Republicans are not comfortable about digging too deep:

The questioning mainly fell along party lines, with Republicans apologizing for hauling such distinguished corporate officials before the panel, and Democrats questioning everything� Many Republicans on the committee fought the very premise of the hearing. �This is a hearing in search of bad guys,� said Darrell E. Issa, Republican of California. �Are there bad guys in front of me? I�m not seeing it.�

Many Congressional Democrats have expressed a very different view. I think Henry Waxman nailed it with this statement:

There seem to be two economic realities operating in our country today. Most Americans live in a world where economic security is precarious and there are real economic consequences for failure. But our nation�s top executives seem to live by a different set of rules.

Yes, two economic realities. One reality for� some people, and another reality for other people. One reality for those who face long prison sentences for possession of a small amount of marijuana and another reality for those who commit treason with impunity.

An article by Gabriel Thompson titled �Meet the Wealth Gap� summarizes the roots of these different realities:

It�s about the vast political power conferred by wealth, which can be deployed to support institutions pushing policies that, in turn, magnify the wealth divide. (These institutions) subsidize senior fellows who � see something sinister in a living-wage movement that �seeks to force urban firms to pay up to double the minimum wage.�� (They) call the movement a �sneaky way of bringing socialist economics to America�s cities�.

THE CONSEQUENCES OF SEVERE INCOME DISPARITY

I have often heard the opinion expressed that those (liberals) who complain about the excessive salaries of others do so out of nothing more than jealousy � jealousy of the hard work and well-earned success of others.

But what if the multi-million dollar salaries of America�s CEOs have little to do with hard work or what we usually think of as �success�. What if their astronomical salaries are the result of other, more sinister causes? Is it really plausible that the work of the average CEO is 431 times more valuable than the work of the average production worker in the CEO�s company? Is it plausible that a defense industry CEO warrants a salary of $11.6 million, while a military general with over 20 years� experience warrants only $169 thousand? If it is true, as many believe, that CEOs rarely deserve their multi-million dollar pay, then what does that mean for our well-being as a nation?

Common sense tells us that unjustified astronomical salaries for some mean that there will be less for others. Commonsense also tells us that if CEOs are guaranteed multi-million dollar salaries regardless of whether their performance generates anything of value � regardless of the effects of their activities on other people � then they will have little motivation to consider the value of their activities with respect to the people who are affected by them. But let�s not rely on common sense. Let�s just consider some of the consequences of huge income disparities in general, as those increases have largely paralleled the increases in income disparity between CEOs and their workers:

Depression

Inside of Gabriel Thompson�s article is a graph titled �Plutocracy Reborn � Re-creating the Gap that Gave us the Great Depression�. Here it is:

This chart plots income inequality, measured as the ratio between the average income of the top 0.01% of U.S. families, compared to the bottom 90% (that would be most of us at DU). Note that preceding the great stock market crash of 1929, which plunged us into depression, the ratio rose from about 250 at the start of the 1920s to a peak of about 900 by 1929. The ratio then plunged, and by the start of WW II it had declined to about 200, where it remained with some relatively minor ups and downs until the beginning of Ronald Reagan�s Presidency. It then began another precipitous climb, with a sharp decline beginning during the last year of Clinton�s Presidency, but then another sharp increase beginning at about the time that the Bush tax cuts for the wealthy first went into effect, so that by the end of 2006 we�ve exceeded even the peak ratio of 1929 that preceded the Great Depression. The three green bars in the chart represent the stock market crash of 1929, the last pre-Reagan year, and two years preceding our current recession/depression.

Poverty

Consider the graph on page 11 of the U.S. Census Bureau publication, �Income Poverty and Health Insurance Coverage in the United States: 2006�. That graph shows that beginning with President Lyndon Johnson�s much maligned �War on Poverty� in the early �60s, poverty in the United States declined precipitously, from about 22% to 12%, before leveling off beginning around 1970. Then, with the onset of the �Reagan Revolution� starting in 1981, poverty began to rise again, reaching a maximum of about 15% twelve years later, just prior to the Clinton Presidency. The poverty rate then began a slow steady decline, to about 11% by the end of Clinton�s presidency, followed by another rise with the onset of the Bush II administration, to 12.3% by mid-year 2006. It then climbed to 12.5% in 2007 and 13.2% in 2008. However, that is not the end of the story, by any means. The current recession/depression will in all likelihood (and it�s probably already started) send another 5-10 million Americans into poverty, thus raising the poverty rate in our country another 1-4%.

These statistics are no accident. They are the result of federal legislation and policies meant either to help the poor or to help the wealthy. President Johnson�s �War on Poverty� reduced poverty substantially in our country. The only rises in poverty rate we�ve seen in our country since FDR�s New Deal (which decreased poverty) began with the Reagan and Bush II administrations, which are the only two presidential administrations since that time to substantially lower the top marginal tax rate, along with other fiscal policies that favor the wealthy at the expense of the poor and the working and middle class.

Pricing the rest of us out of the market

Severe income inequality means that everything that rich people want will be priced to reflect the amount of money that they�re willing to spend on in it. Barbara Ehrenreich, in an article titled �This Land Is Their Land� discusses what severe income inequality means to the rest of us in practical terms. First, she notes a recent vacation of hers that was going pretty well until she found out that even with a 60% discount she couldn�t find a sleeveless cotton shirt for less than $100. That experience made her recall the first rule of today�s income inequality, which is �If a place is truly beautiful, you can�t afford to be there�. For example, on the subject of Key West, Florida, for which that rule did not apply as of 1986, Ehrenreich notes:

Then, at some point in the �90s, the rich started pouring in�. They drove house prices into the seven-figure range. They encouraged restaurants to charge upward of $30 for an entr�e. They tore down working-class tiki bars to make room for their waterfront �condotels.�� As for Key West�s characters � with the traditional little conch houses once favored by shrimpers flipped into million-dollar second homes, these human sources of local color have to be prepared to sleep with the scorpions under the highway overpass�

Once they�ve made (or inherited) their fortunes, the rich can bid up the price of goods that ordinary people also need � housing, for example� dispersing the urban poor into overcrowded ranch houses, while billionaires� horse farms displace rural Americans into trailer homes. Similarly, the rich can easily fork over annual tuitions of $50,000 and up, which has helped make college education a privilege of the upper classes�. Going out to a ballgame has become prohibitively expensive� Superrich collectors have driven up the price of artworks, leading museums to charge ever rising prices for admission� The more expensive a resort town gets, the farther its workers have to commute to keep it functioning.

THE ROOTS OF GROSSLY OUTRAGEOUS CEO SALARIES

Though the good majority of Americans believe that most CEOs in their country are overpaid for what they do, there is much debate on the reasons why corporate executives are rewarded so lavishly today, even when they fail at their job. As noted above, astronomical CEO salaries are reflective of our society�s priorities in general, as manifested by legislation and policies that influence the distribution of wealth in society.

Corporate tyranny prior to the Great Depression of the 1930s

Our current economic plight is the worst since the Great Depression of the 1930s. Because of President Hoover�s ideological inflexibility, he was unable to make any progress in fighting that depression, which led to FDR�s landslide victory in the election of 1932. FDR�s New Deal resulted in a reversal of the steep slide in GDP and the largest rate of job creation (5.3%) in any presidential term in recorded U.S. history to this day.

In his 1936 address to the Democratic National Convention, FDR explained the role of corporate tyranny, with the never-ending striving for greater corporate profits, as the major cause of our nation�s economic plight. He called them �Economic Royalists�.

Out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital, the whole structure of modern life was impressed into this royal service�

Throughout the Nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise�

For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor-other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

Against economic tyranny such as this, the American citizen could appeal only to the organized power of Government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people's mandate to end it. Under that mandate it is being ended.

And indeed it was ended. But then in the 1980s it began again, as a new Republican president re-sold our nation on the virtues of small government and corporate �freedom� to do whatever they want, with massive government assistance. Thom Hartmann discusses this in his book, �Threshold � The Crisis of Western Civilization�:

During the �greed is good� era of the 1980s, something changed. CEO salaries began to explode at the same time that the behavior of multinational corporations began to change. When Reagan stopped enforcing the Sherman Antitrust Act, a mergers-and-acquisitions mania filled the air� The result was a series of waves of layoffs, as entire communities were decimated, divorce and suicide rates exploded�

It was the same old philosophy that a succession of three conservative Republican presidents and a Republican Congress operated on during the 1920s, leading up to the Stock Market Crash of 1929, followed by the Great Depression. We shouldn�t be surprised that we�re seeing similar events unfolding today. .

Incestuous methods for determining CEO salaries

Thus it is that today the salaries for corporate CEOs are determined by a corporate Board of Directors, with little oversight. A principle method that these boards use to determine executive pay is to tie it to the average pay for executives in similar companies, which are referred to as �peers�. But research has shown that for the purpose of determining executive compensation, peers at the high end of the income scale are typically identified, resulting in an over-estimation of CEO pay of several hundred thousand dollars, with a corresponding overpayment of the CEO in question. This generates a positive feedback loop, wherein executive pay is continuously raised by comparing it to salaries that have been previously raised by the same process.

Why do the boards routinely overpay the executives whose pay they are charged with determining? There are many related reasons, all centering on the fact that they and the CEOs are part of the same club and there is little oversight. One problem is that many CEOs sit on each other�s boards. If that doesn�t represent a conflict of interest, then what does?

There are many different kinds of interrelationships between the CEOs and the boards that determine their compensation. The end result is:

Flawed compensation arrangements have been widespread, persistent, and systemic, and they have stemmed from defects in the underlying governance structure that enable executives to exert considerable influence over their boards�

For example, a Home Depot compensation board awarded $245 million to its CEO over five years, despite the fact that its stock slid 12% during that time:

To its critics, the Home Depot Compensation Board exemplifies the close personal and professional ties among board members and executives at many companies � ties that can make it harder for a board to restrain executive pay. They say this can occur even though all of a board's compensation committee members technically meet the legal definition of independent, as is the case at Home Depot� When you have a situation like this where it is so incestuous, it creates uncertainty whether pay is a reflection of these relationships or performance.

Yeah, that�s one of the biggest understatements I�ve ever read.

What is so valuable about today�s corporate executives?

Thom Hartmann explains in his book that there is one �special skill� that many of today�s most highly paid CEOs have that could partially explain their extravagant salaries:

One of the questions often asked when the subject of CEO pay comes up is �What could a (CEO) possibly do to justify a $1.7 billion paycheck�� It�s an interesting question. If there is a �free market� of labor for CEOs, then you�d think there would be a lot of competition for the jobs�

Only one rational answer presents itself: CEOs in America make as much money as they do because there really is a shortage of people with their skill set� What part of being a CEO could be so difficult� that there are only a few hundred individuals in the United States capable of performing it? In my humble opinion, it�s the sociopath part.

CEOs of community-based businesses are typically responsive to their communities and decent people. But the CEOs of the world�s largest corporations daily make decisions that destroy the lives of many other human beings. Only about 1 to 3 percent of us are sociopaths � people who don�t have normal human feelings and can easily go to sleep at night after having done horrific things. And of that 1 to 3 percent of sociopaths, there�s probably only a fraction of a percent with a college education. And of that tiny fraction there�s an even tinier fraction that understands how business works, particularly within any specific industry. Thus there is such a shortage of people who can run modern monopolistic, destructive corporations�

Today�s modern transnational corporate CEOs� are remnants from the times of kings, queens, and lords. They reflect the dysfunctional cultural belief that wealth is proof of goodness, and that goodness then justifies taking more wealth.

An example � Chevron�s quest for oil
A $6 billion lawsuit brought against Chevron in 2003 for their activities in Ecuador provides one example of the things that some corporations do when they accumulate too much power. Antonia Juhasz describes the events in her book, �The Bush Agenda � Invading the World One Economy at a Time�:

Indigenous communities were removed from their land to make way for the oil facilities, as were more than one million hectares of ancient rainforest. According to the suit, rather than install the standard environmental controls of the time�. Texaco (a co-defendant in the suit) dumped 18.5 billion gallons of toxic waste directly into the rainforest. The result is an exploding health crisis among the region�s indigenous and farmer communities�

CONCLUSION � THE FRUITS OF REAGANISM

Obscenely high salaries for corporate executives is perhaps the most ostentatious manifestation of the accelerating trend towards vast economic inequality in the United States today, not seen since the days preceding the Stock Market Crash of 1929 and the Great Depression. Both trends began in the early 1980s and have much the same root cause � the Ronald Reagan philosophy that advocates that government get out of the way so that corporations may have the �freedom� to do whatever they want.

We now live in a country where lower class �criminals� are imprisoned for possession of small amounts of drugs, contributing to the largest imprisonment rate of any country in the world, while barriers to swindling perpetrated by the rich and powerful have been removed one after another, facilitating their legal accumulation of vast riches. And even when they cross the line and break what legal barriers remain they are often pardoned or their crimes simply ignored � sometimes with the rationalization that we must look towards the future.

We are constantly told that the economic foundation of our country is the �free market�. But the �free market� is �free� only in the sense that corporations are given the �freedom� to do whatever they want, at the expense of everyone else, and ogten with massive government assistance.

William Kleinknecht, in his book, �The Man Who Sold the World � Ronald Reagan and the Betrayal of Main Street America�, comments on how Reagan�s deregulatory philosophy affected our country:

In the Reagan years, corporate leaders were crossing lines that a few years before would have been unthinkable. A 1984 article in the New York Times� captured the moral revulsion aroused by the budding era of greed: �a �me-first, grab-what-you-can� extravagance appears to be cropping up among the nation�s top executives. It shows itself in the disproportionate salaries and bonuses paid to so many corporate chiefs� the multi-million severance payments awarded even to CEOs who fail and drive their companies into the ground��

After the stock market bubble burst, these towers of speculation and accounting chicanery came tumbling down. The falling stock market revealed the inherent instability of huge companies hastily put together by mergers� Enron�s mind-boggling betrayal of employees and shareholders and its unseemly manipulation of power prices in the midst of California�s electricity crisis should in itself have been enough to forever repudiate Reaganism.

Where was the Securities and Exchange Commission while this free-for-all on Wall Street was reshaping the corporate map? Where were the Federal Energy Regulatory Commission, the Federal Trade Commission, the Justice Department Antitrust Division, and a host of other federal regulatory agencies whose job it is to protect citizens from corporate thievery? They were fulfilling the promise of Reagan and his Millionaire Backers. They were letting the market work its magic.