Every January the news media blare headlines about the outrageous level of CEO pay. These guys make as much by noon on the first day of the year as most of us make in the entire year.
How do the CEOs have this power?
The corporate form is based on a democratic model. So why can’t shareholders just stop this atrocity?
Some shareholders have tried. Their “say on pay” movement began over 30 years ago and slammed into an impenetrable stone wall.
In theory, the corporate form is a democracy, but in practice it is a monarchy — the emperor CEOs set their own salaries.
They do this through the “proxy” system. A proxy allows a nominee to vote on behalf of a shareholder.
Before the Annual General Meeting, management sends out a proxy circular containing a proxy form with a suggested nominee. Many shareholders routinely sign the form and send it back.
The CEO has the power to hire and fire the person who drafts the circular. So, as self- preservation dictates, that employee obeys and writes in the CEO’s choice. The CEO’s choice votes for the directors whom the CEO wishes. In short, the CEO hires and fires the people who decide his salary.
Many shareholders are mom-and-pop investors. They buy their shares because they hope to make money either by dividends or capital gains. They have listened to advisors and have a diverse portfolio with shares in corporations in widespread industries ranging from manufacturing, banking to medical research. They know nothing about running any of them– and have no interest the elections. They often sign the proxy form to be nice, or ignore it.
There is another type of investor: the hedge or equity fund manager, like Michael Douglas’ character Gordon Gecko in Wall Street (a realistic blend of three actual successful money managers and real events).
Hedge Funds are groups of millionaires who band together and entrust their funds to a single money manager. The antiheroes in Michael Lewis’ The Big Short are hedge fund managers.
They are after the fastest and best profit for their millionaire members. Corporate looters, they don’t give one F about the long-term health of a corporation. They want a CEO and Board of Directors who will strip out all corporate savings in high dividends as quickly as possible. They don’t care how much the CEO is paid as long as he goes along with their gambit.
Directors are usually past or present CEOs of other corporations. They are all part of the same backslapping boy’s club and want to maintain the myth that all CEOs are the rarest of rock stars. Only they, their spin continues, can provide our economic plenty. We owe them. Any attempt to curtail the piggish pay would destroy our prosperity.
There’s a CEO myth ripe for bursting: high pay motivates bosses to produce high results. As study after study reports, gluttonis executive pay has nothing to do with performance. They get their money even when the company does poorly. The best example occurred in the 2008 crisis when bankers, who had led their banks the brink of bankruptcy, continued their sky-high pay unabated during and after the near meltdown of our entire global economies from their mismanagement.
Shareholder-power movements have proved totally ineffective. They couldn’t even get the subject of executive compensation on the agenda of the AGM. As one of the reforms of Dodd Frank, corporations were required to put executive pay on the agenda — but Catch 22, the vote is non-binding. The Board is entitled to thumb their noses at it. Since this regulation, CEO pay has continued its upward climb.
Defenders of the CEOs claim that shareholder votes approve the compensation—well surprise, the CEOs control the votes by the proxy system.
Even if shareholder say-on-pay were a binding resolution, as Britain has recently made it, it’s doubtful that it would be effective because the CEOs would still vote the proxies, and the hedge funds would still support them.
Reformists propose taxation. But the tax act is the special province of high-end accountants and tax lawyers who also advise on the drafting of legislation. This group reward cooperative people in the civil service with jobs with a salary of more than double their government pay.
Any legislation will be drafted with the same amount of harmful loopholes as the Clinton attempt in 1993 to cap CEO comp. That provision provided that a corporation could only deduct $1 million in CEO salary against income tax.
In fact, like most government legislation that affects the interests of the superrich, that “reform” was drafted to appear to do something, but do the very opposite. Wording was carefully chosen so that the limit was only on salary not on total compensation — which it easily could have been.
The CEO was free to take his pay in other forms such as the iniquitous stock-option. Not only does the CEO get a lower income tax rate because income earned from stocks attracts lesser tax, but he gets to sell as the ultimate insider.
To steal a useful term from economists, stock options incentivize CEOs to make business decisions for quick gains to increase their own dividends and share price against the long-term health of the Corporation. When the shit wallops the fan and the damaging effects of their short-termism are discovered, if ever, they will be long gone. There never has, and never will, be an attempt to claw back their pay.
Tell me, what insider knows better than a CEO when it’s the best time to buy or dump shares.
Their game can be subtler. Instead of using profits to boost workers’ wages or new research, CEOs have their corporation buyback shares on the market. The fewer the shares the more valuable the CEO’s shares. Also, the buy-back of CEO shares could occur when it comes time to trade in his old model jet for a new one.
In the meantime, the CEO has voting rights to elect the directors he fancies.
The CEOs have another incentive to divert more of the profits into paying higher dividends to shareholders (including them, of course). Stock analysts use the payment of dividends to give the Corporation a AAA rating — which in turn the CEOs use to justify their high salary.
Before Reagan, extensive buy backing would have been stopped as market manipulation. However, as part of his promise to make America great again, Reagan provided a safe haven if the corporation complied with four very loose, ambiguous factors. SEC head Mary Jo White (2013–2016) admitted the regulation is so vague that the SEC cannot, and does not enforce, compliance. It’s open season for stock manipulation.
Obama fell into the same trap in 2009. To limit banker pay from the bailout, he said executives of banks that got bailouts could only take $500,000 in salary and the rest had to be taken in stock options until the bailout money was paid back. There was no limit on the amount of the total pay; so the obscene pay packets continued at the same level as before, but now charged with the increased incentive to screw their corporations in self -interest.
While I believe Obama was a man of good will, he typifies most politicians. They are basically kept ignorant (they know no more than the average voter) of these matters, but depend on advisors in the civil service. These guys are all Wall Street alumni.
A leaked Podesta email from Citibank to Obama revealed it got most of the 31 people it wanted appointed to senior positions in the government that could influence banking policy.
Each election the swamp is recharged with a fresh supply of snakes.
Trump appointees are no different in kind, only with a better media presence.
Let’s break the myths about CEO comp. The first is that these guys are so special they can’t be replaced and they deserve what they’re getting.
At the turn of the 20th century, that astute banker J.P. Morgan observed that he would never invest in a corporation if the bosses pay was 20 times more than the workers’ in that corporation — which it was even at 1965. If it was, Morgan commented, the CEO was more interested in his own profit than the Corporation’s.
And that is precisely what is happening today. It would be far better for the long-term health of the Corporation and the health of the economy, if corporations chose CEOs, fist and foremost, because they would accept a reasonable ratio of their pay to their employees’ pay.
Would public shaming help?
Perhaps, a little.
The best example of public shaming comes from Canada. Its favorite son company, Bombardier, (famous for ski doos, originally designed to replace dog sleds) is not profitable. To keep it afloat, each and every year both the federal and Quebec governments pour in massive corporate welfare.
It does not pay a fair share of tax. It was one of the corporations exposed by Antoine Deltour (never heard of him. No wonder he revealed the tax scam used by companies like Amazon and Apple to use small countries like Luxembourg and Ireland to shift income and expenses as if earned there and avoid US tax, etc, — another blog coming soon). There’s been a near media black out on Deltour and his heroic effort to expose greedy tax practices of darling US companies and his reward of vigorous criminal prosecution.
To simplify, for eleven subsidiaries in eight countries, Bombardier buys shares (deducted from its income) in a Luxembourg subsidiary which pays dividends that come to Canada tax free — all legal. because of a tax treaty Canada signed with Luxembourg.
Don’t rest comfortably wherever you are dear reader, so has the US and every other G 7 nation.
In October 2016, Bombardier Inc. announced intentions to slash 7,500 jobs through 2018.
Shortly thereafter, while the executives were busy firing low end-workers — and in the face of existing for years on government grant life support — Bombardier’s Board of Directors announced this year’s tax payer grants would flow into the paycheque of six executives by a 50% increase of US$326 million (They do not run a profitable company so it must be a reward for their skill in getting great government grants — involuntary snarky comment that I could not control).
After a public outcry about “ancien aristocrates”, recalling to mind images of the sharp-edged Gallic solution to ending income inequality in the French Revolution, the exec’s deferred (note did not give up) half until performance justified it. Does that mean they don’t get their additional $160 million until the company is profitable without taxpayer subsidies, or until the news cycle ends? Okay, we all know the answer to that.
It’s inexcusable that neither the Quebec nor Trudeau government had the guts to say, ‘Hey, if you get government grants your execs don’t get big raises.’ Indeed, any government could say. ‘If you get a grant. any amount of exec pay over 20 times the average worker pay is deducted from it’. Easy, right? That’ll be the day!
Trump is poised to protect his CEO buddies from public shaming. One of the Dodd-Frank regulations supposed to kick in for 2017 required corporations to publish the ratio of their executive pay to their average employee pay.
As part of Trump’s campaign to undo everything that Obama did, his administration Is poised to relieve the executives from the danger of that public shaming. Acting SEC Chairman Michael Piwowar invited submissions to revoke that regulation.
Ironically, the working-class Trump supporter won’t have the faintest idea of how this, among other Trump policies, will continue their economic oppression. Economists estimate that 70% of the income gap is due to executive pay from corporations and financial professionals (bankers and the lawyers and accountants who advise them).
The C-suite pay situation is so out of control that it needs radical legislative intervention. As the lady with the sign says, there should be a maximum wage.
The best solution would be to mandate that exec total compensation cannot be more than 40 times the average worker compensation. That will likely work out to a very comfortable few million dollars. If a CEO will not accept that, they are the type of executive who will sacrifice the corporation’s interests to their own.
Any executive earning over $200,000 per year should not get pension contributions. If they can’t save for retirement on that salary without pension support, they cannot manage money and aren’t worth their high pay. That restriction should apply to government positions.
As a beginning, every government grant or tax break should come with a 20 to 1 ratio condition. It should be unacceptable for CEOs to claim the desperate need for government support out of one corner of their mouths and entitlement to superior pay for super management on the other.
The next hurdle would be to ensure some of the savings trickle down to workers—not leach out to hedge funds in dividends.
Revamping cannot be done while the voting public believes the propaganda that the CEOs are unique superstars that will, like Ayn Rand’s fictional heroes in Atlas Shrugged, leave us and the lights will go out. That hype must be exposed.
Bottom line: CEO salary was under control from the 1930’s until the Reagan era and it can be put under control again.