Bush on CEO Pay, and the Truth about CEO Pay
President Bush yesterday told corporations they should hold their CEOs more accountable by tying pay to performance. Good sound bite, but meaningless piffle. Pay-for-performance is what got us to CEO compensation that’s today 350 times that of the average worker.
The problem of CEO pay doesn’t really have anything to do with whether stockholders are getting their money’s worth. Stock prices of most big American companies have soared over the last twenty-five years – at just about the same rate as CEO pay. Between 1980 and 2003, the average value of America’s largest five hundred companies rose by a factor of six, adjusted for inflation. Average CEO pay in those companies also rose roughly sixfold.
Bill Clinton came to office vowing to put limits on excessive CEO pay (when the ratio of CEO pay to that of average workers was far lower). He said it was unfair that average workers were earning so little while CEOs were earning so much. What happened to Clinton’s proposal? It morphed into an innocuous Treasury Department requirement that, in order to deduct anything more than a million dollars of their CEO pay from their corporate taxes, companies had to tie CEO pay to performance. What happened then? An explosion in stock options.
Sure, there are CEOs who get lots of money even when their share prices drop, and lots of CEOs have earned princely sums simply because the stock market as a whole has risen regardless of whether their own firms beat the average increase. But the fact is, shareholders don’t really care. Investors are doing just fine, thank you. Barring outright fraud, investors can take care of themselves. They’ll bail out of companies that aren’t performing.
The real scandal of CEO pay is that it has become so far removed from the pay of average workers. And average workers aren’t doing so well. Median wages are still below where they were in 2000, adjusted for inflation. Every two weeks, Scott Lee, Jr., the CEO of Wal-Mart, rakes in roughly the same amount of money that his average employee earns in a lifetime.
We should stop worrying about linking CEO pay to company performance, and start worrying about linking CEO pay more closely to the pay of average workers. How? One simple starting place: Restore progressivity to the personal income tax.