6: The Battle Over CEO Pay

When the Top 1% Take on the Top 0.01%

The Progress Report

Salvatore Babones and Chuck Metalitz

In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank has created a new Bureau of Consumer Financial Protection. It also introduced shareholder “Say on Pay” votes on the remuneration of top corporate executives. Starting last year, corporations have had to hold shareholder votes on executive compensation at least once every three years. These votes are nonbinding.

Shareholders can say what they think of CEOs’ inflated pay packages. In many cases, what they are saying is “daylight robbery.” The wave of investor anger hit shore in April when Citigroup’s shareholders voted 55-45 against CEO Vikram Pandit’s $14.8 million pay package. Then in May, shareholders of Knight Capital voted against the remuneration of their CEO Thomas Joyce.

So far, only a handful of US companies have had CEO pay upsets, but Crain’s New York Business reports that many Say-on-Pay votes have been uncomfortably close for management’s comfort. The CEOs of Bank of New York Mellon, NYSE/Euronext, and Lazard all faced “no” votes in excess of 40 percent of shareholders. The mother of all Say-on-Pay votes, the shareholder vote on the pay of Goldman Sachs CEO Lloyd Blankfein, is coming up later this month.

In the UK, The Guardian newspaper has dubbed it the “Shareholder Spring” -- a wave of shareholder protest against outrageous executive pay. After losing a Say-on-Pay vote, resignations have come from Andrew Moss of British insurer Aviva, publisher Trinity Mirror’s Sly Bailey, and pharmaceutical firm AstraZeneca’s David Brennan.

Say on Pay effectively pits the top 1 percent of the population against the top .01 percent, about 15,000 people whose annual income starts at $5.5 million. The top 1 percent of Americans hold nearly 40 percent of the nation’s stock market wealth. The remainder of the top 10 percent holds the bulk of the rest.
Say on Pay gives the shareholders who own America’s corporations (the top 1 percent) the opportunity to vote on the pay packages of the people who run America’s public corporations (the top .01 percent).

By all accounts, America’s corporations are doing better than ever. Corporate profits are at all-time record highs. Corporate taxes are at record lows. So, why are the top 1 percent so angry?

Between the 1930s and the 1970s, average CEO pay hardly increased only about 4 percent (adjusted for inflation). From the mid-1970s through the mid-1990s most of America’s economic gains went to the top 20 percent of earners. After 1998 (between 1999 and 2007), average incomes stagnated for every group below the top 5 percent. Anecdotal evidence suggests that, since 2007, gains have become even more concentrated, with only the top 1 percent continuing to maintain income growth through the current recession.

Now, it seems like even the top 1 percent are struggling to keep up. The economy as a whole is growing at around 2 percent per year. If that growth were distributed equally throughout the economy, everyone’s pay would grow at a rate of around 2 percent. But executive pay in the United States rose an average of 22.8 percent in 2010 and 13.9 percent in 2011. Hedge fund and private equity managers make even more than most CEOs.

The take of the top .01 percent can only rise at double digits if someone else’s raises gets squeezed down to zero. For years that “someone else” was someone else: the working poor. Then it was the college educated. Then it was middle managers and professionals. Now it’s the top 1 percent feeling the squeeze.

The top 1 percent are angry. They’re not used to making sacrifices. As the top 1 percent start to share at least some of the indignities suffered by the other 99 percent, it is likely that their quiescence about rising inequality will start to change.

JJS: The usual reaction of most people is “tax the rich”. Most people don’t ask where the money comes from that coagulates downstream into a fat pay package or a fortune. Nor do they ask about the morality of taxing, always taxing, as the solution to everything.

The first answer is that fat incomes and resultant fortunes must come from fat spending, from the immense sums that people spend for things never produced by anyone’s labor or capital, things like land (under homes) and oil (and other natural resources) and health care due to bottlenecks and lack of competition created by government-granted privileges.

The second answer is that taxes -- using the club of the state to take from anyone -- are a knee-jerk reaction that’s not well suited for the job of bringing about justice. Most taxes backfire and only a very few meet the tests of both efficiency and equity. One of those is the tax on land, or more precisely on the value of locations.

”Economic rent’ beats taxes

McCarron asserts that state and local governments “had better broaden their tax base to include services -- from dog grooming to food catering to movie-going -- that require a physical presence.” Since catering and movie-going are already subject to serious taxes in Chicago and many other places, I wonder whether he sees dog grooming as the solution to our fiscal woes.

According to the graph accompanying the article, consumer spending on services has risen to nearly twice that for goods. But Bureau of Economic Analysis figures show that more than half of “services” expenditure is for housing, utilities, and medical care. Two of these are already taxed. Does the author propose to increase the cost of the third?

Cities will prosper not by expanding taxation, but by focusing on the advantages the community offers and collecting economic rent accordingly.

JJS: That “economic rent” is the money a community spends for land -- more for the better locations -- and for natural resources in general. It’s so much spending that if it were redirected into the community kitty, government would have no excuse to keep taxing goods, services, businesses, wages, and buildings. And if society were recovering these rents for nature and privilege, then these expenditures could no longer be captured by corporations and used to unduly swell CEO pay. Instead of the top getting too much, government could pay the citizenry a dividend. Let the top protest that!

Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics.