As corporations blow record sums repurchasing their stock to inflate CEO pay, Congress is advancing a tax aimed at curbing this harmful practice.
The Only CEO Pay Number that Really Matters
How much did America's top execs make last year? The scorekeepers don't all agree. But that won't matter if we keep our eyes on the most important figure of all: the pay gap between CEOs and workers.
Research & Commentary
April 20, 2013
The new numbers on executive pay have been coming fast and furious the last few weeks. So how are America’s top execs faring these days? Last Wednesday, two business correspondents gave two totally different answers.
CEOs, journalist Darcy Keith reported, are once again “scoring big pay increases.” The data, countered analyst Rick Newman, show that shareholder activists now have “more power to rein in bloated executive pay packages.”
Why all this uncertainty about how well top execs are doing? In theory, none of this confusion should exist. By law, after all, U.S. corporations must publicly disclose exactly what they’re paying their top execs.
But exactly how corporations pay their top execs can get tricky. Straight salary — the stuff of standard paychecks — only makes up about 10 percent of typical big-time corporate executive compensation.
Most executive pay today comes as stock-related compensation, as either stock “options” or “restricted” stock. Options give executives the right, down the road, to buy shares of their company stock at today’s share price. If that share price rises, the execs can buy low and sell high. Instant windfall.
“Restricted” stock awards give executives actual shares of stock, not just an option to buy them. Execs do have to wait a few years before they can actually claim these shares. No big deal. The shares will still have value, in future years, even if a company’s share price falls.
But how should we value right now all this share-related compensation? Should CEO pay scorekeepers, in their annual tallies, estimate how much stock awards granted this year will be worth in years to come?
Or should scorekeepers only tally stock-related awards when execs actually profit personally from them, either by “exercising” their options or gaining title to restricted shares that have “vested”?
Different executive pay scorekeepers give different answers. Some estimate the future value. Others wait until execs actually profit personally.
Out of all this scorekeeping confusion come — no surprise — substantially different results. USA Today last month found an 8 percent hike in 2012 CEO pay. “CEO pay rockets,” the paper reported. The New York Times earlier this month found CEO average pay up 18.7 percent.
But Towers Watson, a corporate consulting firm, announced last week that CEO pay growth “slowed considerably in 2012,” rising at just a 1.2 percent rate.
This Towers Watson finding came one day after researchers at the AFL-CIO, America’s national labor federation, reported that U.S. CEOs are now making 354 times the pay of average U.S. workers, the “largest pay gap in the world.”
Wait, things actually get even more complicated. Rick Newman at US News and World Report looks at the same data as the AFL-CIO and pronounces that the CEO-worker pay gap “is actually narrowing.”
This gap, the AFL-CIO acknowledges, did drop in 2012, from 380 to 354 times, but only because the dip in Apple CEO Tim Cook’s pay — from over $376 million in 2011 to $4.2 million in 2012 — wildly lowered 2012’s overall CEO pay average.
What matters most, the AFL-CIO stresses, remains the trend line, and that trend tells a crystal-clear story. Three decades ago, in 1982, American CEOs averaged 42 times more than average U.S. workers. Two decades ago, in 1992, the gap stood at 201 times. A decade ago: 281 times. The latest ratio: the 354 times.
How do we reverse this growing gap? Identifying the specific pay gap ratio between CEOs and their own workers would be a good first step.
Corporations have had to publish, for decades now, how much they pay their top executives. They haven’t had to tell us how much they pay their workers. The Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010, at least on paper, changes this dynamic.
Dodd-Frank requires corporations to annual disclose the gap between what they pay their CEOs and their most typical workers. But a Corporate America lobbying blitz has kept the Securities and Exchange Commission from writing the federal regulations needed to enforce this Dodd-Frank pay disclosure mandate.
The SEC chairman who let corporate lobbying bury the mandate, Mary Schapiro, left the agency in December. Corporate America takes care of its friends. This week Schapiro will join the General Electric board of directors.
Schapiro’s successor, Mary Jo White, hails from the same corporate world Schapiro is now joining. Americans for Financial Reform, a coalition helping to lead the charge against CEO pay excess, is urging White to start up fresh and move expeditiously to start enforcing Dodd-Frank.
America’s major corporations are still pushing the other way. Why do they so relentlessly oppose pay ratio disclosure? Disclosure, by itself, won’t shove down CEO pay levels. But disclosure could open the door to other significant steps that could put a damper on CEO pay excess.
Lawmakers could, for instance, choose to deny government contracts or subsidies or tax breaks to corporations that pay their top executives over 25 or 50 or 100 times what their own workers are making.
Far-fetched? Current law already denies government contracts to companies that discriminate by race or gender in their employment practices.
As a society, we’ve concluded that our tax dollars must not go to corporations that widen racial or gender inequality. So why should we let our tax dollars enrich corporations that widen our economic divide?
Sam Pizzigati co-edits Inequality.org. Among his books on maldistributed income and wealth: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. His latest book, The Case for a Maximum Wage, will appear this spring. Follow him at @Too_Much_Online.