A new report claims that excessive executive compensation in the US is taking a staggering economic and social toll on American society, threatening leadership in the business, government, and nonprofit sectors and creating instability in the economy. The report gives a good summary of the gross disparity between top earners and average earners and disparages the arguments justifying the excesses.
According to Executive Excess 2007, the fourteenth annual survey of executive compensation from the Institute of Policy Studies and United for a Fair Economy, the figures stand in stark contrast: the CEO of a large company pulls down an average $10.8 million per year in salary and bonuses (excluding perks and some stock options, whose value can run to many millions more. But the average wage is only $29,544 (only about 160% of the poverty level for a family of four). Despite an increase this year to $5.85 per hour, the real value of the minimum wage has declined 7% over the past decade and real wages have risen little over the same period. During this time, executive pay has soared by 450%. The stark comparison even raises the illegitimacy of capitalism and democracy because the socio-economic profile is so feudal. You have to ask what these “leaders” stand for when they are so intent on grabbing more from so many who have relatively little.
The report appropriately debunks the rationalisations for excessive compensation: Excessive compensation is not necessary to attract talent. In fact it may do the reverse by attracting machiavellian individuals out for themselves rather than their employer. Executive Excess 2007 makes the case that it actually erodes good leadership by giving the highest rewards to those who ignore long-term stability in favor of short-term market gains. Employee relations may also suffer, leading to negative impacts on company performance. Enlightened analysis has shown for a long time that money does not make happiness, in fact often the reverse once average needs have been met. And high CEO pay does not correlate with outstanding performance either. The great illustration today is Angelo Mozilo of Countrywide Financial, “the sixth highest paid CEO in 2006…with $42.9 million. In July 2007, the company’s sub-prime mortgage woes drove its foreclosure rates to the highest level in more than five years and contributed to a global liquidity crisis.”
The report makes some proposals for change:
- Eliminate tax subsidies for excessive CEO pay.
- End preferential tax treatment of private investment company executive income.
- Cap tax-free “deferred” executive pay.
- Eliminate the tax reporting loophole on CEO stock options.
- Link government procurement to executive pay.