he most fundamental and singular result of
corporate policies of the past 25 years has been a massive shift
in relative income from the roughly 105 million workers to the wealthiest
10 percent non-working class households in the U.S. This enormous
income transfer grew in scope and magnitude annually throughout
the 1980s and Reagan years, continued to expand steadily during
the Clinton years, accelerated during the first term of George W.
Bush, and now promises to exceed more than $1 trillion per year
during the rest of Bush’s second term.
Few groups within the ranks of the U.S. corporate elite have gained
more from this historic income shift than the CEOs and senior managers
of corporate America. In 1978, according to the
Wall Street Journal
typical U.S. CEOs earned approximately 35 times the pay of the average
paid worker in their company. In recent years CEO total compensation
has risen to more than 500 times the average worker’s pay,
according to the conservative global business source, Reuters.
Defining Executive Pay
he typical worker in the
U.S. receives about 90 percent of their earned income from their
paycheck whether earned as an hourly wage or weekly salary. Not
so for the typical CEO and senior manager. Historically only 7-10
percent of their income is earned from a salary as such. Focusing
only on CEO salaries, therefore, totally misses the point and statistics
quoting CEO salaries as the sole indication of executive pay levels
should be especially suspect. At times the term “direct compensation”
is used as an alternative measurement of executive pay. But that
too underestimates such pay, as it excludes hidden indirect forms
A slightly better term is “total compensation.” It includes
direct and indirect forms of executive pay. CEO total compensation
may include salaries, bonuses (cash or other forms), stock options,
stock grants and awards, long term incentive pay, deferred pay of
various kinds, regular and supplemental management pensions, below
market rate mortgage loans to managers by the company, write offs
of personal loans by corporate boards, innumerable forms of perks
with direct dollar value, prepaid charitable donations, lifetime
use of corporate jets, company payment of CEO tax obligations (called
“gross up” compensation), and so on in a long list of
forms of creative and hidden pay. These and other non-salary forms
of executive pay account for 90 percent or more of CEO and senior
managers’ total compensation.
But even “total compensation” is an inadequate indicator
of executive pay. With hearings on executive pay by the U.S. Securities
and Exchange Commission (SEC) to begin this spring, it is clear
that many other forms of executive compensation remain hidden by
opaque corporate accounting and reporting practices, are not counted
as part of “total compensation,” and are never communicated
to the IRS.
During the Reagan years average CEO pay rose from just over $1 million
a year to roughly $2.5 million by 1989. By 1992, at the close of
the George Bush senior administration, it nearly doubled again to
$4.5 million—despite the recession of 1990-91 and falling corporate
profit performance. It more than doubled again under Clinton to
$11.1 million by 2000, for a 342 percent gain over two decades.
Some estimates placed the pay of the average U.S. CEO as high as
$14.4 million by 2001.
According to a just released study by professors Lucian Bebchuk
of Harvard Law School and Yaniv Grinstein of Cornell University,
based on interviews of CEOs and top managers at the 1,500 largest
publicly traded corporations in the U.S., the group of 5 top managers
at the corporations received collectively $122 billion in compensation
between 1999-2003 compared to $68 billion for the same group during
1993-1997. On top of these 1999-2003 gains, the Harvard-Cornell
study estimates another 39 percent increase in average executive
compensation in 2004 for the surveyed group of the largest corporations.
But even the Harvard-Cornell figures are underestimations as they
exclude the lucrative and fast-growing supplemental pensions for
executives, called Supplemental Executive Retirement Plans (SERPS).
Some sources estimate SERPs constitute as much as an additional
one-third of total executive compensation. Were SERPS and other
supplemental retirement plans included in the Harvard-Cornell study
estimates, the nearly doubling of executive pay that was estimated
between 1999-2003 would have been even higher.
As corporations over the past decade have been busy reducing pension
benefits for workers, under-funding and even abandoning their pension
plans for workers, SERPs were being added across the board by corporations
in the U.S. Changes in the tax laws in 1994 provided a strong incentive
for creating SERPs for senior executives as a way to shelter more
of their total compensation from taxation. Less than half of senior
executives had supplemental pension plans prior to 1995; today more
than 90 percent have such plans. Thus billions more have been squirreled
away for CEOs and senior managers of the largest public companies
over the past decade.
For CEOs of the largest corporations that means at least another
$60 billion in addition to the $122 billion of the Harvard-Cornell
study. But that additional $60 billion still does not include the
rest of the 90 percent of corporations—apart from the 1,522
surveyed by Harvard-Cornell—that have also established SERPs
today for CEOs and senior managers.
One of the great scandals at Enron when it went bankrupt was that
Enron executives froze workers’ pensions and did not allow
them to take their money out as the company began to default, while
those same executives were cashing out their pensions in a separate,
supplemental management pension plan.
Other measures of growth in executive compensation corroborate the
above trends and figures for executive pay. The non-partisan research
group the Corporate Library recently surveyed “median”
as opposed to average CEO pay. It estimated that median CEO compensation
for 2003 rose 15 percent in 2003, followed by another increase in
median executive compensation of 30 percent in 2004. No doubt results
for 2005 will show a continuing accelerating trend.
Trading Jobs for Executive Pay
EOs who have been doing especially
well under George W. Bush are those companies that have been involved
in aggressive offshoring of jobs. Approximately eight million quality,
high paying jobs have been lost due to “free” trade policies
and offshoring since the 1980s and the number continues to rise
rapidly. Free trade policies and offshoring reflect the radical
restructuring of trade relations and foreign direct investment strategies
implemented by corporate America since Ronald Reagan. More than
a million jobs have been lost due to NAFTA in the last decade alone
and another 2.5 million have resulted from the granting of special
terms of trade with China in 2000.
For dismantling of a good part of the U.S. manufacturing base, CEOs
and senior managers of U.S. corporations involved in offshoring
of jobs have been generously compensated compared to their already
well-paid corporate peers. For example, a
in 2003 of CEOs at the 50 largest U.S. companies that outsource
the most showed that their CEOs enjoyed an average increase in compensation
of 46 percent between 2001-03, earning as a group a reported $2.2
billion while sending an estimated 200,000 jobs offshore.
CEOs and managers are now compensated at record levels, not for
their contribution to the corporate bottom line anymore, but for
selling off the company, for leaving quietly, or for gross performance
failure. Thus Carly Fiorina, ex-CEO of Hewlett-Packard, departed
last year with a package of more than $40 million. David Pottruck
of Schwab left with around $50 million, and Craig Conway of Peoplesoft
exited with a total package of more than $60 million. Among the
biggest winners of CEO departees, however, were Phillip Purcell
of the investment bank, Morgan Stanley, who left with a reported
$113 million, and James Kilts of Gillette who walked out the corporate
door with $165 million. Even more amazing was Steven Crawford, recent
co-president of Morgan Stanley, who left after only three months
of employment with $32 million—or a rate of pay of more than
$10 million a month. Crawford’s gain was more than matched
in terms of the bizarre, though, by Daniel Carp, still CEO of Blockbuster
Video Corp., who in 2004 received more than $50 million in compensation
even though the company recorded a loss of $1.25 billion that year.
s previously noted, executive
pay between 1980 and 2000 climbed an astounding 342 percent, outpacing
the rate of inflation over the period by at least 4 to 1. In contrast,
the average hourly wage for more than 100 million workers, when
measured in 2003 dollars, rose from $14.86 at the start of 1980
to only $14.95 at the end of 2000. That’s a 9 cents an hour
gain after 20 years.
Furthermore, the average hourly wage today for 105 million workers
after adjustment for inflation is exactly the same at year end 2005
as it was in 2001, according to the U.S. Department of Labor’s
statistics. In 2004-2005 it has fallen steadily as inflation has
begun to accelerate. For the 60 million at the medium wage level
or below, inflation the past two years has been rising at twice
the rate of their hourly wage.
To compensate for stagnant and declining real hourly wages and earnings,
U.S. workers have had to resort to alternative means to try to maintain
income levels and spending. These alternatives to wage gains fall
into three categories.
First, more U.S. families have been having other family members
enter the workforce to supplement family incomes and/or have had
to take on second part time jobs in addition to their normal job.
U.S. families have increased the number of hours worked by more
than 500 a year since 1980. Americans now work by far the greatest
number of hours per year than workers in any of the other industrialized
countries—approximately 1,970 hours each per year out of 2,040,
based on a normal 40 hour work week. The next closest is Canada
where workers average about 1,800 hours. Workers in industrialized
economies of Europe average fewer hours worked, 1,600-1,800 hours
Second, they have had to take on record levels of consumer and installment
debt, levels that have doubled from $4 trillion to more than $9
trillion since Bush II took office.
Third, workers fortunate enough to own their homes have been refinancing
those homes and using the proceeds as discretionary income to pay
for major purchases such as medical expenses, education, and large
ticket items—in effect living off their assets.
All three solutions to the stagnation and decline of real wages
over the past quarter century, however, have their finite limits
and cannot continue long term as safety valve alternatives to declining
real wages, earnings, and incomes for the 105 million.
Reforming Executive Pay Abuse
rowing executive pay abuses
and excesses have in recent months provoked a response from several
quarters. Stockholder complaints that CEOs and executives have doubled
their take from roughly 5 percent to more than 10 percent of total
profits, have focused attention on the impact of accelerating levels
of executive pay on shareholder dividends and stock returns. Thus,
even some capitalists have now begun focusing on the issue and splits
and differences about what to do have arisen within their ranks.
As a result, several bills and legislative proposals have been entered
into Congress addressing executive pay.
This development has forced the Bush administration to issue a response
and proposals of its own. The SEC, this past January 2006, issued
preliminary draft rules for revising corporate executive pay practices
and reporting. These rules were open for a 60-day period in February-March
for public discussion and comment, following which the SEC would
issue final rules for revising executive pay to take effect in 2007.
However, in issuing initial draft proposals the SEC made it clear
that it would not impose limits on executive pay, as the objective
of the SEC is only to require more accurate reporting by corporations
of their pay to executives. The solution, according to the SEC,
is to let the market regulate the excesses and abuses in executive
pay practices—the same market that has been allowing those
abuses and excesses in the first place. As SEC chair Christopher
Cox put it this past January, “Our purpose here is to help
investors keep an eye on how much money is being paid to the top
execs.” Apparently this means allowing them to see better the
full scope and magnitude of the executive pay theft, even though
there will be little they can do about it once they know the full
extent of the abuse.
Executives are awarded their excessive compensation by their corporate
boards. By law board members cannot be removed by shareholders.
That’s how the system is set up. Furthermore, shareholders
have no power to veto or approve executives’ salaries pensions,
severance, personal loan subsidies, perks, and so forth. As one
of the authors of the Harvard-Cornell study put it, “Shareholders
have very limited power to do anything about it.”
The SEC’s tepid main proposal in its draft rules is to consolidate
the reporting of executive pay for the top five managers in a corporation
into a single figure in a corporate proxy statement. Currently,
elements of executive pay are distributed all over the proxy statement
and many are hidden in accounting rat holes in the document that
never see the light of day.
Elsewhere the SEC’s draft rules merely tweak the system. For
example, currently perks awarded to execs valued at less than $50,000
a year need not be reported. This limit would be reduced to $10,000.
On the other hand, the SEC’s draft rules say nothing about
closing some very large loopholes, such as requiring the valuation
of stock options given to executives and not just reporting the
number of shares of stock. Or requiring the reporting on dividends
paid to executives on restricted stock—which is currently not
required at all. Or allowing corporations to deduct executive pay
from their corporate taxes, which is also now permitted. Or backdating
stock strike prices for stock options, which allow executives to
reap huge stock windfalls.
In fact, the SEC is proposing to widen the reporting loophole for
personal transactions between executives and the corporation (i.e.,
personal loans, gross ups, etc.). The SEC has suggested the cut
off level for reporting such transactions be raised from $60,000
to $120,000, meaning that more compensation will actually be hidden
rather than revealed. The
Wall Street Journal
the SEC’s initial draft rules by declaring, “This is a
case of admirable regulatory restraint.” And as that business
source further noted, after all “who knows what is exorbitant
Despite the SEC’s cautious approach to reforming executive
pay now running rampant, business has criticized the SEC draft by
arguing that more transparent reporting is just the first step to
establishing limits on executive pay, that revealing more detail
about executive pay will lead to more competition for pay packages
between executives and thus higher pay, and that more transparency
will result in other creative ways to raise or defer executive pay.
In other words, don’t fix a broken system because you may break
it even more.
In the middle of the political spectrum, more liberal Democratic
elements in the House have called for legislation requiring shareholder
approval of additional executive compensation where the sale or
purchase of corporate assets are involved (e.g., mergers or acquisitions).
The AFL-CIO is calling for a law that provides for shareholder approval,
not just transparent reporting, of general changes in executive
But like so much on the U.S. political scene today, the debate is
conducted between various factions of the corporate elite. The 105
million workers in the U.S. and their direct interests in any debate
of economic significance or import are left out of the picture.
Thus little will likely come out of the SEC’s hearings or efforts
in Congress to rein in accelerating executive pay in the U.S. The
coming months of debate on the subject will provide much smoke,
little fire, and a lot of mirrors. Meanwhile, the real hourly pay
and earnings of more than 100 million workers will continue to stagnate
and decline as gas prices, medical costs, housing, and general inflation
rises—forcing tens of millions to work more hours, take on
extra jobs, assume an ever-rising burden of credit, and spend down
the assets in their homes in order to maintain consumption levels
and standards of living. Executive pay may be the ongoing obscenity;
but worker pay in the U.S. is the true continuing tragedy.
Rasmus is the author of
The War At Home: The
Corporate Offensive From Ronald Reagan To George W. Bush,
in independent bookstores and directly from the author (www.kyklosproductions.com).