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Missed Opportunity

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Executive compensation in the United States has risen dramatically in the last 30 years. The difference between the lowest-paid employees in major corporations and top executives has gone from approximately 100 to 1 to over 500 to 1. As a result, executive compensation has gone from having no noticeable effect on corporate profits to having a significant impact. More significant is the social and economic distance it has created in our society. Simply stated, the rich have gotten much richer.

The arguments justifying high levels of executive compensation usually cite pay for performance and scarcity of talent. The credibility of the pay for performance argument actually increased when the recession began in 2008. As it should, executive pay, particularly CEO pay, dropped dramatically when the stock market and economy collapsed in 2008.

In addition to providing a credibility boost, the 2008 drop in executive compensation provided an opportunity for corporate boards to orchestrate a long-term reduction in executive compensation. It is very difficult to reduce someone's compensation when there is no performance decrease to justify it. Simply saying that because executives are paid too much they will receive a reduction in pay is a hard thing for boards to do.

In 2008, the recession reduced pay, so "all" corporations had to do to reduce executive compensation was to have plans that did not provide the lavish pay and benefits that their past ones did. Of course doing this required that they do something they have been willing to do for decades -- not be driven by their CEO's demands for higher and higher compensation.

In the case of many corporations, not changing their pre-2008 executive compensation programs was an option that "at best" was likely to lead to a slow return of executive compensation amounts to the prerecession level. Only by creating new plans with lower performance goals could they quickly return executive pay to its pre-2008 levels.

Rather than taking advantage of a rare opportunity to reduce executive pay, most boards decided to create new plans with less demanding performance targets. It is now clear that because of these new plans, executive compensation has returned to its pre-recession levels and is headed higher. However, the economy and the market value of most U.S. corporations has not recovered from the 2008 recession, nor has the compensation of the American worker.

Household income in the United States has dropped almost 10% since the beginning of the recession and shows no sign of trending upward. This is creating the worst possible social dynamic. Most members of society are seeing lower income levels, while executives are enjoying record levels of compensation. It is bad enough for executives to have a compensation level that is growing faster than that of a typical worker; it is much worse to have the compensation amounts of workers and executives going in opposite directions.

To add insult to injury, there are a number of CEOs who have been fired recently and have gotten extremely large severance packages. For example, Carol Bartz at Yahoo! got an estimated $10 million package, and Leo Apotheker at Hewlett Packard got a $13 million package after working for HP for less than a year. It is hardly surprising that there is rising social discontent with how wealth is acquired in the U.S. -- witness the widespread "occupy" demonstrations.

Crossposted from forbes.com