Earlier this year, after two 737 MAX crashes killed 346 souls and led to a worldwide grounding of the important airplane, Boeing disclosed that Chief Executive Dennis Muilenburg had in 2018 been awarded annual compensation of $23.4 million, up from $18.5 million a year earlier.
As my colleague Dominic Gates reported, the securities filing showed that when exercises of stock options granted in previous years were factored in, Muilenburg actually received $30 million, up from $24 million a year earlier.
The causes of the MAX crashes are still being investigated, but the work of Gates and others indicates that Boeing will have a very hard time eliding over the blunders that contributed to this crisis.
In any event, what if Muilenburg would have given back the annual compensation?
It would have been the right thing to do. No matter what Boeing’s lawyers and PR people might have cautioned about the “optics” or seeming to admit guilt, refusing the pay would have been mere decency. Given the extraordinary rise in executive pay over the past four decades, it would have been a revolutionary act.
But this isn’t how executive comp works in the United States.
Muilenburg (not listed in the Times compensation report because Boeing is no longer headquartered in Seattle) and his peers are rewarded based on increasing revenue, profit and, especially, stock performance. Until the Ethiopian Airlines crash in March, Boeing shares had tripled in value since he was named CEO in 2015.
This is the result of the “shareholder value” movement, which began in conservative academia in the 1970s and became business orthodoxy in the 1980s. Maximizing shareholder value is the primary goal of publicly held corporations. Everything else is secondary, or doesn’t happen at all.
The idea that these companies also have responsibilities to “stakeholders” such as employees, vendors, communities and the public good — a good fight waged by Harvard’s Rosabeth Moss Kanter in the ’80s — seems quaint today. To be fair, a few companies think this way — it was once the Seattle way — but they are rare.
Additionally, these all-important shareholders are mostly not individuals who take their ownership seriously and are in for the long haul. They are institutions demanding a quick buck.
A 2013 Washington Post story explained the consequences well: “Together with new competition overseas, the pressure to respond to the short-term demands of Wall Street has paved the way for an economy in which companies are increasingly disconnected from the state of the nation, laying off workers in huge waves, keeping average wages low and threatening to move operations abroad in the face of regulations and taxes.”
A long expansion that has brought unemployment down doesn’t change the heart of the argument. Maintaining this status quo requires looting corporate treasuries, destroying the collective wealth and innovations it took a century to create, and aggravating inequality.
The imperial CEO is essential to maximizing shareholder value — this was shown by the brutal tactics of Jack Welch at General Electric and followed by waves of Welch proteges and copycats since. He (or occasionally she) is rewarded lavishly for delivering. Stock options are intended to yoke the bosses’ compensation to the company’s performance.
With a bull market, the raises that S&P 500 chief executives received last year meant many were making $1 million a month.
This alignment of CEO to shareholder value, with handsome rewards for top executives, is how the theory is supposed to work.
In reality, executive compensation is often laughably disconnected from financial and stock performance. At its worst, the pay model has encouraged heedless risk-taking, accounting fraud and volatility.
This happens especially because of weak corporate governance, despite efforts to improve it. Even with nominally independent directors, the board and CEO are part of the same “club,” in world view, life path, outlook and extreme wealth.
Often the titles of board chairman (supposedly there to look after the interests of shareholders) and chief executive (the hired management help) are held by the same individual, an inherent conflict of interest.
As a result, executive pay is rigged to rise ever higher, with few exceptions.
This is very different from highly paid professional athletes and Hollywood stars, who operate in a market where talent is up for bid.
The executive-comp racket is so ingrained that many people assume it was always so.
It wasn’t. In 1965, the average CEO made 20 times the average worker. It was about 30-to-1 in 1978. By 2017, chief executives made almost 312 times more than the average worker, based on data analyzed by the Economic Policy Institute.
The AFL-CIO’s invaluable Executive Pay Watch shows that the average S&P 500 company CEO-to-worker pay ratio last year was 281-to-1. The ratio at T-Mobile was 1,116-to-1, highest in the Northwest. Starbucks was not far behind at 1,049-to-1.
Perhaps not surprisingly, President Donald Trump criticized soaring executive pay when campaigning but did nothing to address it once in office.
Democratic presidential candidate Elizabeth Warren has proposed policies that would directly address the problem and roll back the fetish on shareholder value. Bernie Sanders regularly criticizes overpaid CEOs. Inequality is a consistent Democratic issue. But could runaway executive compensation be potent with voters?
The evidence isn’t clear.
A March Gallup poll found that 47% of respondents favored government action to limit executive pay. That’s down from 59% just after the Great Recession.
Even a progressive president would be stymied in, say, raising taxes on the rich without commanding majorities in Congress, with the Senate being an especially heavy lift (Wyoming, with a population less than Seattle, has two Republican senators).
Also, the Clinton years offer a cautionary tale. A Democratic Congress passed and President Bill Clinton signed a bill intended to cap executive salaries. But an investigation by ProPublica and the Washington Post showed that it backfired because it was “stuffed with loopholes.”
Society has changed since the early 1950s (when America was “great” in the eyes of some). Back then, Charlie Wilson, head of General Motors, the largest company in the nation, was paid the equivalent of $5.8 million a year in today’s dollars. Last year, his successor Mary Barra pulled down $21.9 million.
Doing the right thing, the decent thing, having a sense of shame. Not anymore. Not among the imperial executive class. F. Scott was right about the rich being different.