by Ted Wachtel
Disparity in CEO Compensation
Disparity in wealth is evident not only when comparing ordinary people with the billionaire founders and owners of large corporations, but also with the managers of those corporations. The Economic Policy Institute, in a recent research report, revealed that CEO compensation has grown 940% since 1978, while typical worker compensation has risen only 12% during that time.
Here are some excerpts from the report summary:
- Corporate boards running America’s largest public firms are giving top executives outsize compensation packages. The average pay of CEOs at the top 350 firms in 2018 was $17.2 million—or $14.0 million, using a more conservative measure. (Stock options make up a big part of CEO pay packages, and the conservative measure values the options when granted, versus when cashed in, or “realized.”)
- CEO compensation is very high relative to typical worker compensation (by a ratio of 278-to-1 or 221-to-1). In contrast, the CEO-to-typical worker compensation ratio (options realized) was 20-to-1 in 1965 and 58-to-1 in 1989.
Why it matters:
Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay, not because they are increasing productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers, and widening the gap between very high earners and the bottom 90%.
The economy would suffer no harm if CEOs were paid less (or taxed more).
Most of the proposed solutions in the report put the responsibility on government:
- reinstating higher marginal income tax rates at the very top
- setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation
- establishing a luxury tax on compensation such that for every dollar in compensation over a set cap, a firm must pay a dollar in taxes.
The two last solutions in the report, on the other hand, propose reforms in corporate governance to:
- give other stakeholders better tools to exercise countervailing power against CEOs’ pay demands
- allow greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.
Disparity in Corporate Board Compensation
Every so often my wife, Susan, and I receive a mailing from one of the charitable organizations we support, to choose board members. Each of the candidates is described in a paragraph and we are asked to make choices based on this limited information. Similarly, we receive mailings from stock corporations in which we own shares, asking us to support candidates and decisions recommended by the CEO and the board by giving them our proxy, allowing them to vote on our behalf. In either case, our participation in these decisions is about as meaningful as voting in a student council election, where decision-making is manipulated by the high school principal.
In the case of membership organizations and stock corporations, the real decision-making is often controlled by the CEO of those organizations. The membership ballots and shareholder proxies are created and managed by the CEO and his board.
The lack of true representation in charitable organizations is less consequential. Our real power as members of the public rests in our choice of whether to donate or not, or to belong or not — unlike the large national and global corporations, in which we may have invested much of our personal wealth.
In most of the large corporations in which many of us own stock, the CEO and the board of directors often serve their own interests, not necessarily those of the stockholders. The median annual pay for corporate board members in the U.S. is now a quarter of a million dollars per year, although board members work less than 5 hours per week, with many board members serving on multiple corporate boards.
One can reasonably assume that corporate boards routinely give top executives outsize compensation because the top executives routinely give outsize compensation to board members.
Clearly, stockholders’ needs are not being served. They lack true representation.
What if stockholders demanded a more meaningful role as delegates to an intermediate size decision-making assembly, which would be selected at random? (Selection by random lottery is a time-honored process, called sortition, which is still the method for choosing juries in the U.S.). Each shareholder’s chance of getting selected to the assembly would be proportionate to the number of shares of stock they hold.
The assembly meetings could be held in person, if affordable or practical, or by using virtual meeting technology. Assembly members could truly represent the interests of their fellow stockholders by reviewing the resumes of potential directors, interviewing them, and then choosing from among their favored candidates. They might be involved in choosing the CEO, perhaps affirming or rejecting the recommendation of the board that they selected. Or perhaps the assembly could generate a list of potential CEOs for the board of directors to interview.
Regardless of the specific methodology, what we propose is to curb is the practice of CEOs picking their own boards of directors—a dilemma that leads to both parties scratching each other’s backs—often resulting in absurdly generous remuneration for all concerned, even when the CEO fails to produce results for stockholders.
And if large, non-profit membership organizations are serious about authentically involving their members, they could similarly choose an assembly by sortition, to select boards and CEOs through deliberation and meaningful voting, and thereby achieve true representation in that setting as well.
Here at Building A New Reality, we believe it’s time to take a serious look at the way CEOs and corporate boards are selected, empowered and regulated. America—and, indeed, other democracies—cannot continue to grow and prosper under current inequitable, unsustainable economic models. Let’s build a new reality that encourages and allows everyone to participate in the success and abundance of a society that values fairness and true representation for all citizens in their own governance and enterprise.