God bless America

We have looked at the pay of American CEOs before, but the current levels are drawing comment from everyone who fears for a future of dysfunction and inequality as $trillion  companies pay the majority of their value to their leaders.

‘Let the market decide’ has been the mantra for decades.

A new report from the Economic Policy Institute calls attention to the hardy perennial of how much America’s corporate titans make: bosses of the top 350 firms made an average of $18.9m in 2017. That’s a ratio of 312-1 over the median worker in their industries. Big bucks to be sure. And a big change since 1965, when the ratio was just 20-1. But what does it mean? And if there’s a problem, what is it, exactly?

What it means, as the EPI economists carefully document, is that the top US corporate chiefs are paid overwhelmingly with stock options, and their income fluctuates with the market. About 80% of the pay packet is in stocks, and the rise of 17% in 2017 after two flat years surely suggests that the top CEOs (not unreasonably) sensed the market peaked last year. So they cashed in. On the other 20% of the pay packets, no gains occurred.

The US numbers have shock value. But bear in mind that they reflect not only the way companies are run, but also changes over decades in the structure of the US economy and tax law, specifically the rise of market valuations in technology and finance at the expense of the major industrial corporations, and a corresponding decline in unions, which held down the ratios in the sectors the industrial firms dominated a half century back. Plus, there is the radical decline in top marginal tax rates on income and capital gains, beginning in 1978, which gave executives strong reasons to restructure their pay away from inside-the-corporation perks (the penthouses and country clubs of yore) and toward cash and capital assets. The reliance of tech firms on venture capital and bubble psychology, rather than cash flow, deepened this trend.

Note also that there is something a bit artificial about the resulting ‘wealth.’ Crybaby, Jeff Bezos, may have a net worth of over $150bn, mostly in Amazon stock, but he couldn’t convert it into cash if he wanted to, neither by selling nor by borrowing. Any effort to sell would demolish Amazon’s valuation and hence his own fortune. The rich aren’t like us – they have more money, true, but some of it isn’t really money and it can disappear, by the billions, pretty fast.

Further, we know about the 350 CEOs because they head public companies – not hedge funds or private equity firms – and the SEC can (under mandate of law) oblige disclosure of how executives and workers are paid. Is the US really so exceptional? Compared to Japan, probably so; the Japanese have largely retained the successful industrial model that displaced major American industrial firms a generation back. Compared to Germany, we can’t know; German firms are in greater proportion privately held, so they don’t report, and German elites encourage caution and discretion, not advertisement of their wealth. Compared to British bankers, there’s probably not much to choose between the ultra-wealthy of London and New York. Let’s not get started on Russian oligarchs or Saudi princes, compared to whom US CEOs earn a pittance.

The EPI report makes the easy, transparent and irrefutable argument that CEO pay is unrelated to skill. It’s an artifact of the general mood of the stock market and of the specific fads and power of technology, finance and oil. But we don’t need this evidence to overthrow the tired talking point of an efficient (labour) market. If the great financial crisis didn’t blow that one up for you, nothing will.

The important issue raised by this report is one that it doesn’t discuss. Was it a good idea to align CEO compensation in the country’s largest corporations with the casino of the stock market? This has been the mantra of finance economists since the 1970s – maximize shareholder value. Let the market decide. Let the workers and the consumers and the public fend for themselves.

The mantra has produced a world of corporate predators, looters and asset strippers, of technology and bank wealth on the coasts and industrial wastelands in between. In our era of quantitative easing and tax cuts to fuel stock buybacks, it has led to government policies aimed at making the stock market boom, while the corporations and their customers pile up the resulting debts. And so we have a country of wealth, dynamism and power, afflicted by decay, displacement, unemployment, foreclosures and blight – a country riven by resentments and anger and capable of believing the nostrums and bluster of Donald J Trump.

America’s top 350 comfortable and coddled CEOs are not really responsible for this. For all I know, they are mostly hard-working, dedicated and capable men and women. But they are surely a fine microcosm of what we have become.

James K Galbraith is the author of Inequality: What Everyone Needs to Know


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We will fight for a world where everyone feels safe, valued, able to grow, and be inspired by their role and the organisation that they work for. And that starts with us…