By
Robert Reich
The Securities and Exchange Commission just ruled that large publicly held corporations must disclose the ratios of the pay of their top CEOs to the pay of their median workers.
About
time.
For
the last thirty years almost all incentives operating on American corporations
have resulted in lower pay for average workers and higher pay for CEOs and
other top executives.
Consider
that in 1965, CEOs of America’s largest corporations were paid, on average, 20
times the pay of average workers.
Now,
the ratio is over 300 to 1.
Not
only has CEO pay exploded, so has the pay of top executives just below
them.
The share of corporate income devoted to compensating the five highest-paid executives of large corporations ballooned from an average of 5 percent in 1993 to more than 15 percent by 2005 (the latest data available).
Corporations
might otherwise have devoted this sizable sum to research and development,
additional jobs, higher wages for average workers, or dividends to shareholders
– who, not incidentally, are supposed to be the owners of the firm.
Corporate
apologists say CEOs and other top executives are worth these amounts because
their corporations have performed so well over the last three decades that CEOs
are like star baseball players or movie stars.
Baloney.
Most CEOs haven’t done anything special. The entire stock market surged
over this time.
Even
if a company’s CEO simply played online solitaire for thirty years, the
company’s stock would have ridden the wave.
Besides,
that stock market surge has had less to do with widespread economic gains that
with changes in market rules favoring big companies and major banks over
average employees, consumers, and taxpayers.
Consider,
for example, the stronger and more extensive intellectual-property rights now
enjoyed by major corporations, and the far weaker antitrust enforcement against
them.
Add
in the rash of taxpayer-funded bailouts, taxpayer-funded subsidies, and
bankruptcies favoring big banks and corporations over employees and small
borrowers.
Not
to mention trade agreements making it easier to outsource American jobs, and state
legislation (ironically called “right-to-work” laws) dramatically reducing the
power of unions to bargain for higher wages.
The
result has been higher stock prices but not higher living standards for most
Americans.
Which
doesn’t justify sky-high CEO pay unless you think some CEOs deserve it for
their political prowess in wangling these legal changes through Congress and
state legislatures.
It
turns out the higher the CEO pay, the worse the firm does.
Professors
Michael J. Cooper of the University of Utah, Huseyin Gulen of Purdue
University, and P. Raghavendra Rau of the University of Cambridge, recently found that companies with the highest-paid CEOs
returned about 10 percent less to their shareholders than do
their industry peers.
So
why aren’t shareholders hollering about CEO pay? Because corporate law in the
United States gives shareholders at most an advisory role.
They
can holler all they want, but CEOs don’t have to listen.
Larry
Ellison, the CEO of Oracle, received a pay package in 2013 valued at $78.4 million, a sum so stunning that Oracle
shareholders rejected it. That made no difference because Ellison controlled
the board.
In
Australia, by contrast, shareholders have the right to force an entire
corporate board to stand for re-election if 25 percent or more of a company’s
shareholders vote against a CEO pay plan two years in a row.
Which
is why Australian CEOs are paid an average of only 70 times the pay of the typical Australian worker.
The
new SEC rule requiring disclosure of pay ratios could help strengthen the hand
of American shareholders.
The
rule might generate other reforms as well – such as pegging corporate tax rates
to those ratios.
Under
a bill introduced in the California legislature last
year, a company whose CEO earns only 25 times the pay of its typical worker
would pay a corporate tax rate of only 7 percent, rather than the 8.8 percent
rate now applied to all California firms.
On
the other hand, a company whose CEO earns 200 times the pay of its typical
employee, would face a 9.5 percent rate. If the CEO earned 400 times, the rate
would be 13 percent.
The
bill hasn’t made it through the legislature because business groups call
it a “job killer.”
The
reality is the opposite. CEOs don’t create jobs. Their customers create jobs by
buying more of what their companies have to sell.
So
pushing companies to put less money into the hands of their CEOs and more into
the hands of their average employees will create more jobs.
The
SEC’s disclosure rule isn’t perfect. Some corporations could try to game it by
contracting out their low-wage jobs. Some industries pay their typical workers
higher wages than other industries.
But
the rule marks an important start.
ROBERT
B. REICH, Chancellor’s Professor of Public Policy at the University of
California at Berkeley and Senior Fellow at the Blum Center for Developing
Economies, was Secretary of Labor in the Clinton administration. Time Magazine
named him one of the ten most effective cabinet secretaries of the twentieth
century. He has written thirteen books, including the best sellers
“Aftershock" and “The Work of Nations." His latest, "Beyond
Outrage," is now out in paperback. He is also a founding editor of the
American Prospect magazine and chairman of Common Cause. His new film,
"Inequality for All," is now available on Netflix, iTunes, DVD, and
On Demand.
