It's bad for business.
The House is expected to vote Thursday on a Wall Street deregulation plan that would roll back several Obama-era CEO pay reforms, including a ban on banker bonuses that encourage excessive risk, and a new regulation that requires publicly held corporations to report the ratio between their CEO and median worker pay. But instead of rolling back modest pay reforms already on the books, lawmakers should be pushing for bolder solutions, such as using tax and government contracting policies that reward firms with reasonable CEO pay levels.
While President Donald Trump bashed high CEO pay on the campaign trail, since taking office, he hasn’t raised the slightest concern about his fellow Republicans’ crusade to repeal Obama-era executive compensation reforms.
If Trump truly wants to “make America great again,” one of his primary goals should be to restore CEO pay to the more rational levels of decades past. In 1980, the gap between average pay for the heads of large U.S. corporations and typical workers ran about 42 to 1. Today, this pay ratio stands at 347 to 1.
These extreme disparities are not only unfair, but they’re bad for business.
The mega-millions that flow directly into executives’ pockets every year are just a small fraction of the total cost to American companies. But the effects on employee morale carry a much higher price. When the boss makes 347 times more than you, it’s difficult to swallow the canard that “there is no ‘I’ in team.” A 2016 Glassdoor survey of 1.2 million people bears this out statistically, finding a strong correlation between high CEO pay and low employee approval ratings for their bosses.
A Brookings Institution analysis reached a similar conclusion, finding that “large differences in status” within companies can inhibit participation. And in a study published in Administrative Science Quarterly, four researchers agreed that “extreme wage differentials between workers and management discourage trust and prevent employees from seeing themselves as stakeholders.”
The current compensation system also encourages a short-term mentality that is harmful not only for individual corporations, but for the whole economy. The 2008 financial crisis was just one particularly dramatic example of this dangerous “bonus culture.” Wall Street executives fixated on hitting bonus targets pursued excessively risky strategies that boosted the size of their paychecks in the short term but caused catastrophic economic damage when the house of cards came crashing down.
Another is the stock buyback craze. University of Massachusetts Lowell Professor William Lazonick has calculated that from 2005 to 2014, America’s 500 largest publicly traded corporations spent $3.7 trillion—over half their net income—repurchasing their own shares. CEOs love these buybacks because they artificially inflate the value of their stock-based pay. But by using up so much of their profits to buy back stock, corporations have less to spend on research and development, workforce training, and other long-term productive purposes. In business school, they call this “eating the seed corn.”
Last year’s largest executive pay package—at $236.9 million—went to Marc Lore, the CEO of Walmart’s e-commerce division, according to Bloomberg. If the nation’s largest employer instead paid their low-income workers more and top management less, the beneficial ripple effects would be much larger since low-income families need to spend nearly every dollar they make, whereas executives like Lore squirrel away a good share.
The strongest signs of hope of reining in runaway CEO pay are coming from outside of Washington. Last December, the city council in Portland, Ore. adopted a 10% surtax on top of its existing 2.2% local corporate profits tax on corporations with pay gaps of more than 100 to 1. Since then, legislators in five states have introduced similar bills.
In an ideal world, government wouldn’t need to push corporations to do something that should be common sense. But greed has rendered today’s business leaders unable to help themselves. Blunt policy instruments are needed to knock some sense into a CEO pay system gone mad.
Steven Clifford, the former CEO of King Broadcasting, is the author of The CEO Pay Machine: How it Trashes America and How to Stop It (Blue Rider Press). Sarah Anderson directs the Global Economy Project and co-edits Inequality.org at the Institute for Policy Studies.