A Hard-Won Victory on CEO Pay

Runaway CEO pay at Wall Street banks was one of the driving forces behind the financial crisis of 2008-09. Pay packages “too often rewarded the quick deal [and] the short-term gain—without proper consideration of long-term consequences,” a federal panel of inquiry concluded.

That same plot line — crazed compensation leading to recklessness and fraud — was at work in the Enron-WorldCom cycle of corporate scandals a decade earlier. And even when excessive pay at the top doesn’t lead to out-and-out disaster, a large body of research tells us that it’s generally bad for employee productivity, morale, teamwork, and loyalty.

The Dodd Frank financial reforms of 2010 included two pay-related provisions. One was specifically directed at banks, barring compensation arrangements that would encourage excessive gambling and put the public at risk. The other applied to large public corporations in general: every year, as part of their filings with the Securities and Exchange Commission, companies would have to disclose just how their CEOs’ pay compared to a typical employee’s pay.

The pay-ratio rule was among the shortest and simplest of all Dodd Frank’s requirements, but furiously resisted nonetheless. For the next seven-plus years, corporate America tried to keep the new rule from taking effect, setting teams of lobbyists and researchers to work raising all manner of implausible arguments against it. The numbers would be meaningless, confusing, and “heavily biased against businesses that rely on seasonal and part-time workers,” one big retail trade association declared. The cost of collecting the information would be “egregious,” according to the U.S. Chamber of Commerce. Corporate forces spent a ton of money bemoaning the amount of money they would supposedly have to spend.

For years, the SEC put the pay-ratio rule at the tail end of a long To Do list, as industry opponents made repeated efforts to get their friends in Congress to repeal the requirement. As recently as early 2017, a Trump-appointed acting SEC chair made noises about scuttling the rule. All the while, AFR member organizations kept pressing the case. During the official comment period, well over a hundred thousand individuals and organizations voiced support for the pay-ratio rule — a level of response that tended to discredit opponents’ claims that the data was really of no interest to shareholders or the public.

Now the early results are in, and Minnesota Congressman Keith Ellison has issued a report examining the data from the first 225 companies to comply.

Ellison’s report begins with two thought experiments: first, it asks how many typical workers a company could hire for the price of a single CEO. The answer is generally in the hundreds and often in the thousands. The $21.6 million collected by McDonald’s CEO Steve Easterbrook in 2017, for example, would have been enough to cover 3,101 median workers.

The report also frames the question in terms of how long a typical employee would have to work in order to make a single year of CEO pay. Multiple lifetimes, in most cases. At The Gap, for example, it would take 64 careers of 45 years each for a median employee to accumulate the $15.6 million bestowed on CEO Jeff Kirwan last year.

These numbers may not tell the whole story. Many companies make heavy use of third-party contractors, whose employees aren’t included in the reckoning.  U.S. corporations, as Ralph Nader and Steven Clifford pointed out in a USA Today op ed, are also not required to count stock-option profits as part of executive compensation, even though those gains often exceed a CEO’s base salary,

But the data is alarming even if incomplete. The U.S. has the world’s highest CEO pay both in absolute terms and as a multiple of a typical worker’s pay, according to Bloomberg, and the pay gap has grown exponentially — from about 20 to 1 for a typical large company half a century ago, to 339 to 1 today by the Ellison staff’s count. That trend is “a dramatic indicator” of a pattern of extreme and growing inequality, driven by soaring compensation levels for the top 1 percent of US households. About two-thirds of those households are headed by corporate executives, the report says.

There has been much talk about linking CEO pay to long-term performance. The data is not especially reassuring on that count. Take the toymaker Mattel, which spent $31.3 million on CEO compensation in 2017, and came away with the most extreme pay ratio of all — 4,897 to 1. After losing more than a billion dollars last year, the company recently announced the departure of CEO Margaret Georgiadis, who had failed to halt a steep slide in sales. The value of the company fell by nearly 50 percent during her CEO-ship.

“Academics and policymakers have come up with a number of ideas that could help
curtail skyrocketing CEO pay and make our nation more equal,” the report says. As examples, it points to Portland, Oregon, which has established a graduated tax penalty for publicly traded companies with pay gaps of 100:1 or more, and to a bill under consideration in Rhode Island, which would give preferential treatment in government contracts to companies with low CEO-to-worker pay ratios. That sort of thing could also be done at the federal level.

A more progressive income tax structure would make a big difference, of course. Throughout most of the post-World-War-Two era, top marginal tax rates in the U.S. were 70 percent or higher, “and, not surprisingly, executive compensation levels were substantially lower,” the report says. “CEOs had no incentive to demand sky-high pay, since much of it would be taxed away anyway.”

Corporate America raised an enormous ruckus about the pay-ratio provision of Dodd-Frank. Why did big companies put so much energy into fighting a mere disclosure requirement? Clearly, they feared that more public awareness would lead to more public pressure for action. Let’s prove them right. — Jim Lardner

What should be done to stop banks like Wells Fargo from scamming us?

Image via Peg Hunter (CC BY-NC 2.0) / Cropped from original

Wells Fargo’s CEO John Stumpf deserves every bit of the anger that the Senate Banking Committee directed at him for leading Wells Fargo while it created more than 2 million fake deposit and credit-card accounts, and then charged unknowing customers for them.

Stumpf has tried to lay the blame at the feet of workers. But this was not the behavior of a few out-of-control workers. The problem was systematic, and it followed from Wells Fargo’s use of high-stakes sales quotas for its employees. As the Los Angeles City Attorney’s office explained in its lawsuit, these quotas were often impossible to fulfill, and yet employees who fell short were often fired.

But Wells Fargo’s failure points to a broader problem. After all, this is hardly the first time Wells has faced scrutiny for illegal acts. As Senator Sherrod Brown (D-OH) pointed out, this is only one of 39 enforcement actions that Wells has faced in the last ten years.

Wells Fargo has racked up over $10 billion in fines for offenses from racial discrimination in mortgage lending, tomortgage fraud, to violations of the Americans with Disabilities Act.

So what should be done to stop banks from scamming us? Americans for Financial Reform has five specific proposals.

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The best-paid hedge fund managers made $13 billion last year

That’s enough to end family homelessness in America

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Image credit: Pictures of Money (CC BY 2.0)

The 25 highest paid hedge fund managers in America took home $13 billion in compensation last year, according to Reuters.

They’re able to make such astronomical amounts thanks in part to the many loopholes in our financial regulation. So-called “activist” hedge funds, for example, abuse lax securities laws to gain large stakes in public companies, and then demand cost-cutting, layoffs, and more debt. These moves enrich the hedge funds while often dooming the companies they acquire.

To top it off, hedge funds are costly investments whose performance often just mirrors the stock market overall, despite charging exorbitant fees. In 2015, those fees added up to a cool $13 billion in compensation for the 25 managers at the top of Reuters’ list.

It’s hard to wrap your head around a number like $13 billion. To make it a little easier, here are a few comparisons — inspired by a report from the Coalition on Human Needs.

$13 billion could end family homelessness for ten years

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Image credit: Lavin Han (CC BY-ND 2.0)

The Department of Housing and Urban Development (HUD) has said that it would take $11 billion over ten years to provide housing subsidies to 550,000 more families — an amount that could effectively end family homelessness, since in January 2015, HUD found that 564,708 people were homeless on a given night.

And we’d still have $2 billion left over.
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