Holly Sklar, co-author of “Shifting Fortunes: The Perils of the Growing American Wealth Gap,” has a stunning example of just how in orbit the pay for CEOs has risen. When Coca-Cola CEO Douglas Ivester resigned after only a two-year stint he had accomplished a negative 7.3 percent for shareholders. For that benefit to the company he was rewarded with stock, options and other benefits worth $120 million. Meanwhile, Coca-Cola is laying off thousands of workers and facing a lawsuit alleging the company discriminated against black employees in promotions, pay and performance. As Sklar points out, average workers are digging their way out after years of falling real wages, and now falling housing prices and rising food and fuel prices, while CEOs pay packages are soaring to heights once reserved for a handful of robber barons. Many have called this period a new Gilded Age.
One would have thought that in fairness the workforce should have benefited from the increased productivity during the last four decades. It didn”™t happen. During the dynamic period in the 1990s, the earnings of mathematicians and computer scientists increased by only 4.8 percent, while earnings of engineers actually declined by 1.4 percent. Could this be the reason that this country is running out of engineers? Meanwhile, the earnings of CEOs have increased by 100 percent. The growing mismatch between skills and economic rewards, a cornerstone of the American work ethic, has become wildly out of sync. As discussed in “Unequal Democracy,” by Larry M. Bartels ”“ “On the one hand, labor productivity and output growth exploded; on the other hand median family income fell by 3.8 percent from 1999 to 2004.”
A longer view of this trend reveals a troubling trajectory. In 1980, CEOs made 42 times the pay of average factory workers. In 1990, they made 85 times as much. By 1999, CEOs made 475 times as much as workers. Sklar asks, “How big a gap will we tolerate?”
Bartels notes that while there is certainly no uprising in the population over the growing inequity now obvious to everyone, there is still substantial resentment that the rich and the corporations do not pay their fair share and that the tax system is not progressive enough. Nonetheless, Americans, on average, have a higher tolerance for income inequality than our European counterparts. Americans focus on equality of opportunity, while Europeans tend to see fairness in equal outcomes. Unsurprisingly then, CEO pay packages in Europe have not seen the astronomic increases that we see here at home. Which raises the question ”“ are CEOs in this country that much more productive than those, say, in Europe or in Japan? Hardly! There is nothing to suggest such a conclusion. If workers were paid way beyond what their perceived productive worth to the company there would be a great hue and cry. Not so with extravagant CEO pay. Not only are the lofty pay rates currently offered to CEOs unrelated to productivity, it is not affected by losses that occurred under the CEO”™s watch, as witnessed by Ivester.
For the most part, the true size of these packages is unknown outside of the boardroom because it involves the right to buy shares at a below-market rate. This is a clear cost to the corporation because it involves issuing new shares of stock, thus lowering the value of the existing shares. An attempt on the part of the Financial Standards Board to declare this practice constitutes an expense to the corporation and should be treated as such, was beaten down by the ubiquitous lobbyists. Corporate executives claimed that accurate accounting would significantly lower their share prices, therefore the publicly stated profit. Well, exactly. So much for fiduciary accuracy in the corporate world.
Occidental Petroleum provides an example of the potential loss of the largest CEO package on the workforce. An average worker at Occidental would have received a pay increase of $8,199 if the CEO”™s pay had instead been divided among the work force. A worker”™s pay increase could have been as much as $16, 398, if excessive compensation going to other top executives in the company had also been divided up among the work force.
Yet another hit to the work force was revealed in The Wall Street Journal (Aug. 4) with the headline “Companies Tap Pension Plans To Fund Executive Benefits.” “At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives”™ retirement benefits and pay.” The purpose for moving hundreds of millions of dollars into these plans is to capture the tax benefits that would normally go to the rank and file. There seems to be no laws broken here, which only suggests there should be more protection for the vulnerable worker. Benefits consultants have advised companies to keep quiet, fearing an employee backlash. The IRS has shown little interest in exploring the ramifications of this new strategy.
The damage to American corporations, as well as their work forces, as the result of excessive CEO pay packages is overdue for serious examination and, yes, reform. Since pay packages are determined within the boardroom which is by and large inhabited by close associates of the CEO, or are members of his socioeconomic crowd, one can see how the mutually supportive system is a closed loop.
Incredibly, there is little outrage in the country as CEOs continue to hollow out U.S. corporations. There is little redress in Congress where elected officials tend to have little time for members of the middle or lower classes, giving the most attention to those members of the public who may be donors in the next election. Until the public begins to put together the picture of an economy that has forgotten what it is to be American and figure out how to vote its own interests the country is truly in serious trouble.
Economists and policymakers are fond of referring to the fact that the overall economy is growing and that, of course, a rising tide lifts all boats. “Picture a buoyant luxury cruise ship surrounded by dilapidated dinghies, full of holes and on the verge of sinking. The fact that the tide has lifted them does not mean they are doing well.” (Elizabeth Gudrais, Harvard Magazine, July-August 2008).
Surviving the Future explores a wide range of subjects to assist businesses in adapting to a new energy age. Maureen Morgan, a transit advocate, is on the board of Federated Conservationists of Westchester. Reach her at mmmorgan10@optonline.net.
