In 1965, a high-water mark of the middle class, the average CEO made 20 times the average worker’s pay. Since then, the gap has grown 17-fold to more than 340 times the average worker’s pay.
If Seattle’s “Tax the Rich!” City Council ruled more than the city’s 84 square miles, we might not have the perennial issue of scandalously high compensation for top executives of big corporations.
Backed by their shouting “activists,” the worthies at City Hall could pass a progressive income tax with a top rate of 70 percent for high earners. Capital-gains taxes would be jacked back up, loopholes closed. Corporate tax avoidance would be punished. Surcharges on such gimmicks as stock grants for CEOs would make that scratch go away, or pay its “fair share.”
One could expect all this after the unanimous vote to place a 2.25 percent tax on total income above $250,000 for individuals and above $500,000 for married couples filing jointly, right? Or was this symbolism to keep the left-wing base ginned up? For the council’s writ doesn’t even reach the nearby enclaves where most Seattle-area CEOs actually reside.
No matter. A funny thing happened on the way to the progressive promised land. Donald Trump won the presidency and the GOP added to its control of the 3.6 million square miles of the republic, along with virtually all the tax and regulatory power.
The stock market took off, and one doesn’t even have to subscribe to the dark prediction of commentator Sarah Kendzior, that Trump wants to “strip the country for parts,” to see why.
A Trump administration would mean less regulation, less antitrust oversight, big tax cuts for the wealthy, keeping unions down, and preservation of the imperial status of big-corporation CEOs. This created a feedback loop as stock prices rose, increasing a key metric of CEO performance, raising CEO compensation packages.
Sure enough, the House has already quietly passed a bill that would make it much more difficult for shareholders to claw back the pay of misbehaving top executives, as happened with Wells Fargo. More goodies for the top 0.1 percent — of which corporate chieftains are a big part — are on the way.
According to the AFL-CIO’s Executive Pay Watch, the ratio of pay last year between CEOs of S&P 500 companies and production or nonsupervisory workers was 347 to 1. In 2015, the bosses averaged 335 times more than the average nonsupervisory worker.
It’s always worth reminding people that the ratio once was much, much lower. In 1965, not coincidentally a high-water mark of the middle class, the average CEO made 20 times the average worker’s pay.
In 2008, Carola Frydman, then of MIT, and Raven E. Saks of the Federal Reserve published a paper that looked at executive compensation in large public firms from 1936 to 2005.
They wrote, “The median real value of compensation was remarkably flat from the end of World War II to the mid-1970s, even during times of rapid economic expansion and aggregate firm growth.”
What changed is well chronicled in a couple of new books, “The End of Loyalty” by Rick Wartzman and “The CEO Pay Machine: by Steven Clifford.
“Corporate America implicitly fears that if CEOs are only paid a salary, they will neglect their responsibility to shareholders,” writes Clifford, himself the former chief executive at Seattle’s King Broadcasting. “Therefore a bonus system is necessary … In crude terms, the board holds that the CEO will make the shareholders more money only if he pockets his share of the loot. To get him to do the right thing, the board must bribe him.”
Whatever the fad of the moment, from stock options to independent audit committees to stock grants, the promise is always based on performance. Yet the performance expectation is always the same: short-term returns to shareholders.
Whatever the fluctuations up or down depending on the market and the business cycle, outrageous compensation has become normalized. This isn’t merely a change to corporate governance or increased business influence in national policy, although both have been vast. It’s more than globalization, for all its influence. Our culture has become degraded.
Most CEOs in 1965 would have been ashamed to take 347 times the average worker. But then they lived closer to those workers, and might run into them at the grocery, while company goals were more aligned with many stakeholders, including employees, unions and communities.
Today’s shift, including high CEO pay, is bad for the economy. It too often shortchanges research spending, and holds down employment and wages, while increasing inequality. Of course, honorable exceptions exist, but too few.
Many robber barons of the Gilded Age actually built useful things and provided jobs for millions. Too many big-company chief executives today are rewarded for meeting financial metrics only aimed at enriching wealthy investors. Useful things and jobs? Bah! Note how a stock often rises when people are laid off or a competitor is merged out of existence.
Now, as in the 1980s when the Trumpistas thought America was great, the cycle of financialization and corporate looting is set to repeat, likely with worse consequences. Except for the wealthy, the lucky techies and the corporate elite.
Was this the “populism” that Trump’s white working-class voters sought? Or were they simply voting their brand of identity politics cloaked in economic issues?
Maybe even they don’t know. But it’s an odd populism when Wall Street rejoices and chief executives cash in millions while so many average working Americans live with stagnant wages or tiny raises.