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Pigs at the Trough

There’s no doubt about it, I‘ve got to stop reading news magazines. There’s simply too much distressful information there.

We’ve long had a subscription to Newsweektm. We can’t keep up with it. The latest copy often just lays around on the counter until it eventually gets pissed on by one (or more) of our cats. Whereupon we throw it away unread. We really ought to follow our cats’ take on current events. It would surely help us establish a leveler psychological homeostasis, and keep our blood pressure under better control.

Before it got pissed on, I managed to catch a small statistic in a sidebar in the latest Newsweek (June 13, 2005). This had to do with CEO compensation: In 1980, the average CEO’s compensation as a ratio of an average production worker’s pay was 42 to 1. By 2004, that ratio had jumped to 358 to 1.

Now I’m sagacious enough to know a little bit about the magnitude of the responsibilities and expectations placed by the shareholders on the head of your typical CEO. They are significant. But something’s really gotten out of hand here. There’s nobody this side of Aldebaran who does anything worth 358X my salary. That is to say, no single person can be 358X more skilled, more dedicated, more experienced, more knowledgeable, more effective, more productive, more inspirational, more canny/savvy, more hardworking, more valuable than me or any other "average worker" out there. Nobody.

According to the Institute for Policy Studies, executive pay jumped 571 percent between 1990 and 2000. The explosion in CEO pay over the decade dwarfed the 37 percent growth in worker pay.

As the IPS calculates it, if the average annual pay for production workers had grown at the same rate since 1990 as it had for CEOs, their 2000 annual earnings would have been $120,491 instead of $24,668. Likewise, if the minimum wage -- which stood at $3.80 an hour in 1990 -- had grown at the same rate as CEO pay over the decade, it would now be $25.50 an hour, rather than the $5.15 rate it currently is.

There is little correlation between company performance and CEO compensation. True, if a company does really well, the CEO’s takeaway is astronomical – mostly as a result of the increased value of stock options. But if the company’s performance sucks -- it’s merely huge, thanks to bonuses. Looking at current business events, is there any wonder why there's such a temptation for a CEO to embark on a little book-cooking exercise to nudge up his take? 

Here’s another sad side of it. CEOs of firms that announced layoffs of 1,000 or more workers earned about 80 percent more, on average, than executives at 365 top firms surveyed by Business Week. The layoff leaders earned an average of $23.7 million in total compensation in 2000, compared with a $13.1 million average for executives as a whole. The top job-cutters received an increase in salary and bonus of nearly 20 percent in 2000, compared to average raises in that year for U.S. wage workers of about 3 percent and for salaried employees of 4 percent. (These data were compiled in 2001.)

These huge levels of CEO compensation are not the norm for the rest of the industrialized world. Typically, CEO pay in other industrialized countries is only about one third of what American CEOs make.

One of President Clinton's principal campaign goals in 1992 was to curb excessive compensation of corporate executives. True to his word, after being elected Clinton insisted that the 1993 tax law include a provision limiting executive pay. As a result, the legislation denied a corporate tax deduction for pay in excess of $1 million. With the corporate tax rate being 35%, in effect it cost corporations 35% more to pay their top executives more than $1 million per year. But as is so often the case, the "Law of Unintended Consequences" then took over. The legislation applied only to cash wages and not to performance-based compensation and stock options. Bonuses and stock options, which until then had only constituted a relatively minor portion of executive compensation, suddenly widened into a giant, greasy loophole in the law that corporate boards took advantage of to compensate CEOs in a fashion that would evade corporate tax liabilities. In Washington, as anywhere else, no good deed goes unpunished.

We needn’t even discuss the well-studied and well-documented relationships between CEOs and their boards, or more particularly, their board compensation committees. Being on a compensation committee must be a little bit like dying and going to Incest Heaven. If I had children, that’d be the job I’d encourage them to shoot for – professional shill. If you don’t mind using paint thinner every night to get the grease off your palms…

Well, there are some out there who recognize the eventual chaos that this situation will cause. Rep. Martin Sabo (D-MN) has offered a new Income Equity Act (H.R.2691). This act takes a new shot at denying corporations the right to deduct the excessive pay of top managers from taxable corporate profits. Under it, the deduction for total executive pay is capped at 25 times the lowest paid worker in a firm. For example, if a filing clerk at a firm makes $18,000 per year, that business may only deduct $450,000 — or 25 times $18,000 — in compensation per executive. Under such a provision, companies could reduce their tax liability by either raising the wage floor or reducing top pay.

According to Sabo, an effective act eliminating the deductibility of pay accomplishes a number of things. One, it sets a social norm: corporations cannot expect tax subsidies for excessive and unequal pay. Two, it stimulates an important national debate about what the appropriate gap between highest and lowest paid workers should be. Finally, it generates revenue from corporations that have chosen to heap their profits on a limited few rather than distribute them widely to all workers. The amount of potential revenue is not insignificant. If the Income Equity Act had been applied to only the top two executives at the 365 companies covered in the Business Week pay survey, the act would have generated tax revenues of over $514 million in 1997 and $493 million in 1998.

Here is the pop quiz following this sad homily:

●    What’s the chance, given the pro-business Neocon political climate pervading the Executive, Legislative and (soon) Judicial branches of government, that CEO compensation reform can be effectively implemented?

●     Why does the quality of American goods & services continue to decline as workers become more and more alienated at their workplaces, and increasingly disenchanted with the prospect of "living the good life"?

●     Why do American CEOs think that their sheer, arrogant greed will not continue to accelerate the decline in labor-management relations, resulting in a renaissance of union organizing activities? (And where can we sign up?)

●     When will the Democrats get their heads out of their anal orifices and exploit these facts for political gain?

I can hardly blame my cats for the way they treat the receipt of this kind of news.  Personally, I think they ought to do a Number 2 on it. It deserves no less.

   Back to Essays...  


See also http://www.aflcio.org/corporateamerica/paywatch/ceou/database.cfm to get a little closer to home.

Putting the concept of relative organizational value in perspective:  As a boy growing up in Baltimore in the 1950’s, I was a huge Orioles baseball fan. While Brooks Robinson was my "forever" baseball hero (and I proudly carried his number 5 on my Little League uniform), I also loved Hoyt Wilhelm, the premier knuckleballer of his time, now a Hall-of-Famer. Hoyt played for the Orioles from 1958-62.

Hoyt Wilhelm was a great pitcher, with a professional career that stretched over 20 years -- but he was possibly the worst batter in the history of the game. The first number of his lifetime batting average was an aught -- .088. He would unfailingly swing at the first 3 pitches thrown to him, irrespective of their location, speed, angle or spin -- and he looked truly awful swinging that bat, let me tell you. Most of the time, he sat down after his 3 swings. Once in awhile, his bat found a loophole in the laws of physics and it would actually make contact with the baseball. (It’s probably more accurate to say that the pitcher managed to hit his bat with the thrown ball.) Even more rarely -- on average, less than twice per season -- the baseball gods would take it a step further and turn this vagary of science into a hit.

Now consider if I became a professional baseball player tomorrow, in my decrepit physical condition at age 58. I think I could manage to get at least one hit, given 400 at-bats in a season and 1200 swinging opportunities to do so. (I couldn’t look any worse than Hoyt swinging his bat.) There wouldn’t be anyone in the sport that would get 358X more hits than me that season, or for that matter, in any season before or after my rookie debut.

By the way, there’s another strange statistic about Hoyt Wilhelm that illuminates the true capriciousness of Nature:  He hit a home run in his first major league at-bat. He never managed to repeat that feat in 431 more at-bat opportunities during his 20-year playing career. As for the pitcher suffering the painful ignominy of Hoyt’s first at-bat in 1952, it took a significant effort to pry his name out of the baseball annals. (History can be generous in the way it buries details of shameful events.)  I now know who he was -- but I shan't divulge his identity here out of respect for his family...


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