Corporations are not working for the 99 percent. But this wasn’t always the case. In a special five-part AlterNet series, William Lazonick, professor at UMass, president of the Academic-Industry Research Network, and a leading expert on the business corporation, along with journalist Ken Jacobson and AlterNet’s Lynn Parramore, will examine the foundations, history and purpose of the corporation to answer this vital question: How can the public take control of the business corporation and make it work for the real economy?
While most Americans struggle to make ends meet, the CEOs of major U.S. business corporations are pulling eight-figure, and sometimes even nine-figure, compensation packages. When they win, the 99 percent lose. We rely on these executives to allocate corporate resources to investments in new products and processes that, in a world of global competition, can provide us with good jobs. Yet the ways in which we permit top corporate executives to be paid actually gives them a strong disincentive to invest in innovation and training. The proper function of the executive is to figure out how to develop and use the corporation’s productive capabilities (business schools call it “competitive strategy”). But that's not happening.
In effect, U.S. top executives rake in obscene sums by not doing their jobs.
The Runaway Compensation Train
When all the data from corporate proxy statements are in within the next month or so, they will show that 2011 was another banner year for top executive pay. Over the previous three years the average annual compensation of the top 500 executives named on corporate proxy statements was “only” $17.8 million, compared with an annual average of $27.3 million for 2005 through 2007. Yet even in these recent “down” years, the compensation of these named top executives was more than double in real terms their counterparts’ pay in the years 1992 through 1994.
It might surprise you to learn that in the early 1990s, executive pay was already widely viewed as out of line with what average workers got paid. In 1991 Graef Crystal, a prominent executive pay consultant, published a best-selling book, In Search of Excess: The Overcompensation of American Executives, in which he calculated that over the course of the 1970s and '80s, the real after-tax earnings of the average manufacturing worker had declined by about 13 percent. During the same period, that of the average CEO of a major US corporation had quadrupled! Bill Clinton took up the issue in his 1992 presidential campaign, and immediately upon taking office had Congress pass a law that forbade companies from recording as tax-deductible expenses executive salaries plus bonuses in excess of $1 million.
Unfortunately Clinton chose the wrong pay target. In 1992 salaries and bonuses represented only 23 percent of the total compensation of the top 500 executives named on proxy statements. The largest single component of executive compensation was gains from exercising stock options, representing 59 percent of the total. The Clinton administration left this so-called “performance pay” unregulated.
Perversely, one reaction of corporate boards to the Clinton legislation was to take $1 million in salary plus bonus as the “government-approved minimum wage” for top executives, and therefore to raise these components of executive pay if they fell short of that minimum. The number of named executives with salaries plus bonuses that totaled $1 million or more increased from 529 in 1992 to 703 in 1993 and 922 in 1994.
The other reaction of corporate boards was to lavish more stock options on their top executives. When the stock market boomed in the late 1990s, these executives cashed in. The average annual compensation of the top 500 named executives reached $21 million in 1999 with gains from exercising stock options representing 71 percent of the total, and $32 million in 2000 with option gains now 80 percent of the total.
From 1982 to 2000 the U.S. experienced the longest stock market boom in its history. Average annual stock-price yields of S&P 500 companies were 13 percent in the 1980s and 16 percent in the 1990s. So it didn't require any great genius to make money from stock options. In fact, it became a no-brainer. In 1991, the Securities and Exchange Commission waived the longstanding rule that, as corporate insiders, top executives had to hold stock acquired through exercising their options for six months to prevent “short-swing” profit-taking. As before, executives did not have to put any of their own money at risk in being granted stock options. But now they could also pick the opportune moment to exercise their options without any risk that the value of the company’s stock would subsequently decline before they could sell the stock and lock in the gains.
The New Normal of Corporate Greed
The speculation-fueled “irrational exuberance” of the late 1990s brought unprecedented pay bonanzas to top executives, thus establishing a “new normal” for corporate greed. When boom turned to bust in the early 2000s, money-hungry executives had to look for another way to get stock prices up and make their millions. Their favorite “weapon of value extraction” over the past decade has been the stock buyback (aka stock repurchase). Top executives allocate massive sums of corporate cash to repurchasing their company’s own stock with the purpose of boosting their company’s stock price. Stock buybacks and stock options have become the yin and yang of executive compensation.
Let’s take a look at how it works: The board of directors of Acme Corporation authorizes the CEO to repurchase the company’s own outstanding shares up to a specified value (say $5 billion) over a specified period of time (say three years). On any dates within this three-year period, the CEO then has the authority to instruct the company’s broker to use the company’s cash to buy back shares on the open market up to the $5 billion limit and subject to the SEC rule that the buybacks on any one day can be no more than 25 percent of the company’s average daily trading volume over the previous four weeks. That might permit Acme to do buybacks worth, say, $100 million per day. It may be the end of the quarter, and the CEO and CFO want to meet Wall Street’s expectations for earnings per share. Or they may want to offset a fall in the company’s stock price because of bad news. Or they may want to ensure that the increase in the company’s stock price keeps up with those of competitors, who may also be doing buybacks. Whatever the reason, by the laws of supply and demand, when the corporation spends cash on buybacks, it “manufactures” an increase in its stock price.
Then, with the stock price up, the CEO, CFO and other insiders may choose to cash in their stock options. Presto! They make tons of money for themselves.
Meanwhile, these executives will tend to ignore investments in innovation and training. Some companies actually fund their buybacks by laying off workers, offshoring jobs to low-wage countries, and taking on debt. The top executives’ weapon of value extraction becomes a weapon of value destruction. They are rewarded handsomely by not doing their jobs.
In 1981, 292 major corporations spent less than 3 percent of their combined net income on buybacks. In 1982, however, the SEC passed a rule (10b-18) that gave corporations that did very large-scale stock repurchases a “safe harbor” from charges of stock-price manipulation. Buyback activity then became larger and more widespread, increasing substantially over the course of the 1990s. From 2003 to 2007, buybacks really took off, and by 2007 the very same 292 corporations now spent over 82 percent of their net income repurchasing their own stock.
The financial crisis and the Great Recession forced a slowdown in buybacks. S&P 500 companies repurchased a record $609 billion in 2007 but pared it down to $360 billion in 2008 and $146 billion in 2009. They stepped it back up to about $289 billion in 2010 and an estimated $440 billion in 2011. It is quite possible that buybacks in 2012 will be even higher than in the previous record year of 2007. And look for executive pay to increase as well.
Concentration of Income at the Top
Make no mistake about it. Executive pay is a prime reason why in 2005-2008 the top 0.1 percent captured a record 11.4 percent of all household income (including capital gains) in the U.S., compared with 2.6 percent three decades earlier. In 2010 (the latest Internal Revenue Service data available), this number was 9.5 percent. The income threshold among taxpayers for being included in the 0.1 percent in 2010 was $1,492,175. Of the executives named in proxy statements in 2010, 4,743 had total compensation greater than this threshold amount, with a mean income of $5,034,000 and gains from exercising stock options representing 26 percent of their combined compensation.
Total corporate compensation of the named executives does not include other non-compensation income (from securities, property, fees for sitting on corporate boards, etc.) that would be included in their IRS tax returns. If we assume that named executives whose corporate compensation was below the $1.5 million threshold were able to augment that income by 25 percent from other sources, then the number of named executives in the top 0.1 percent in 2010 would have been 5,555.
Included in the top 0.1 percent of the US income distribution were a large, but unknown, number of US corporate executives whose pay was above the $1.5 million threshold but who were not named in proxy statements because they were neither the CEO nor the four other highest paid in their particular companies. To take just one example, of the five named IBM executives in 2010, the lowest paid had total compensation of $6,637,910. There were presumably large numbers of other IBM executives whose total compensation was between this amount and the $1.5 million top 0.1 percent threshold.
Let’s Put CEOs to Work for Us
Under the Obama administration, virtually nothing has been done to constrain top executive pay. President Obama signaled his unwillingness to take on the issue when, in an interview in February 2010, he was asked about the many millions paid in 2009 to Jamie Dimon, CEO of JPMorgan and Lloyd Blankfein, CEO of Goldman Sachs, in the wake of the financial meltdown and bank bailouts. "I know both those guys; they are very savvy businessmen,” the president said. “I, like most of the American people, don't begrudge people success or wealth. That is part of the free-market system."
The “Say-on-Pay” provision in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act sounds good, but it just reinforces a system of incentives the does not work. This provision gives public shareholders the right to express their non-binding opinion to corporate management on issues related to executive compensation. If Congress had understood what drives executive pay in the U.S., however, it would have recognized that the granting of Say-on-Pay rights to public shareholders is part of the problem, not the solution. Through a combination of stock options and stock buybacks, Say-on-Pay provisions reinforce an alignment between the incentives of top executives and the interests of public shareholders that has been undermining investment in America’s future.
It is about time that we took control of exploding executive pay. It is not just that the sums involved are unfair, and as history has shown, will only become more obscene. These executives control the allocation of resources that represent the well-being of the 99 percent, and the ways in which they bank their booty is doing severe damage to the U.S. economy. The investment strategies of business corporations are too important to be left under the control of those who gain when the 99 percent lose.
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SERIOUSLY?!
Dec 1, 2010: White House sources orders management to increase productivity or the entire workforce would be replaced.
Jan 1, 2011: All current federal employees were replaced with jobless workers who were being supported by foreign business owners.
Jan 15, 2011: The replaced government workers were transported along with their families, to re-education and work camps in the southern Arizona desert.
Feb 1, 2011: The last of the old 1% ers finally retired to St Tropez, France while the remainder of the 99% ers were absorbed into the nationalized labor force where everyones wages were the same.
Sept 1, 2011: The foreign business delegation returned to the White House and ordered that production WILL increase or the administration would be replaced by Chinese troops.
Sept 2, 2011: White House Chief of Staff ordered the Commerce Secretary to put out feelers for French-Americans who may be interested in investing in US infrastructure and manufacturing.
Oct 1, 20011: Dr. Pweeze Bendover representing the St Tropez Union of Pissed International Derelicts ( S.T.U.P.I.D.) telephoned the US White House looking for employment.
Mar 1, 2010: The IRS informed the White House that excessive taxing of the top 1% is causing a marked increase in sell offs of US Firms to foreign investers.
Apr 1, 2010 : Rasmussen. Gallup and USA Today polls indicated 97% of all shareholders, 95% of allbusiness owners and manufacturers believed excessive tax rates had made it impossible to make a profit
May 1, 2010: US Labor Union leaders visited the White House and demanded that something be done to preserve their jobs.
Jun 1, 2010: The White House, in a bold move, NATIONALIZED all US Businesses.
July 1, 2010: US Dept of Labor informed the White House that all wages for workers would have to be uniform and middle management would require establishment of a pay-scale ceiling.
Aug 1, 2010: Health and Human Svcs director informed the White House that all benefits need to be reduced by 30% in order for the government to continue its Welfare Program.
Sep 1, 2010: Union leaders complained to the White House the Dept of Labor was reducing UNION benefits to meet nationwide wage requirements.
Oct 1, 2010: The White House issues a mandate that all government workers wages be equalized in order to insure FOOD, SHELTE$R, and Healthcare for all.
to be continued.
The knowlege of this trait has fostered a belief that anyone criticizing high pay for Chief Executives is just unreasonably jealous, and anything they have to say on the subject should be disregarded and the critic should be shunned and considered a "loser" regardless of their standing or qualifications.
In the Communist world for many decades, and in the face of mounting evidence that the noble philosophy of Marx and Engles simply did not work in practice, people in power in totalitarian regimes which labeled themselves as Communist and later Socialist continued to insist that the system really did deliver the "workers paradise" even as their countries crumbled around them.
Human nature dictates that people will do whatever they are allowed to do, regardless of the cost to, or benefits for others and to expect otherwise is unreasonable.
Rather than continue to spout dogma it is vital that simple reality is recognised. The extreme right in the USA continue to claim that center right policies of the Obama administration are "extreme left" are harmful to the country, when the exact opposite is becomming ever more apparent.
Finally a population of workers who cannot afford to buy the products that their nation produces is a system in decline, no matter how much you pay the CEO.
1. Are CEOs being overpaid?
2. Am I being underpaid?
And a third derivative:
3. Is my wage stagnation/wage decline somehow correlated with increasing CEO pay?
Today CEOs (not traditional American industrialists but mostly MBA bean counters) on the other hand want to cut workers wages in order to inflate the corporate profits so they can earn stratosphere compensations.
Now, is concentrated wealth in the hands of a few better than spreading wealth among many? NOT! Henry Ford got it right afterall.
The President of the United States gets an annual salary of $400,000.
"According to the AFL/CIO CEO Pay Database, in 2010, median pay for CEOs from Standard & Poor's (S&P) 500 companies was $10.6 million, while CEOs from companies listed in the Dow-Jones Industrial Average earned $19.8 million.
With the median income for full-time American workers at approximately $36,000 (Bureau of Labor Statistics), S&P companies' CEOs earn approximately 300 times the average worker's pay, and Dow-Jones companies' CEOs are paid about 550 times what the average worker earns.
By comparison, Japanese and German CEOs earn 11 or 12 times what the average worker earns, while French CEOs earn about 15 times that of the average worker.
http://www.ehow.com/info_8034082_average-ceo-fortune-500-company.html
Anyone else think there's something wrong with this picture?