Runaway CEO Pay Helped Create the Economic Crisis; So Why Are Politicians Still Covering For Rich Execs?
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A global catastrophe occurs. An outraged public shakes pitchforks at the corporate culprits. Lawmakers respond. They propose some modest new laws that require corporations to more fully disclose what they’re doing. Corporate America, unchastened, goes ballistic.
Sound familiar? We’ve seen this story play out before. In fact, we’ve seen this story play out after almost every grand corporate catastrophe over the last 80 years.
Back in 1933, with the nation still reeling from the stock market crash, President Franklin Roosevelt pushed for legislation that required firms to register securities trades and provide basic financial information. That act eventually passed — over shrill Wall Street opposition.
A more modern example? In 1984, a Union Carbide chemical leak killed thousands in India’s Bhopal. U.S. lawmakers had to battle relentless industry opposition before they could pass a right-to-know law on toxic emissions.
And now, in 2011, history repeats — over executive pay disclosure rules adopted in the wake of the 2008 financial crash.
Runaway executive pay, almost all analysts now believe, played a key driving role in the run-up to the Great Recession. Executive pay excesses, as President Obama has put it, “have contributed to a reckless culture.”
Rep. Elijah Cummings (D-MD), Ranking Member of the House Oversight and Government Reform Committee, this week called on Republican leaders to hold hearings “to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today.”
In part, Cummings wants to look at the status of several CEO compensation-related reporting requirements included in the 2010 Dodd-Frank reform law that are currently under corporate assault. No. 1 on their hit list: a provision that requires U.S. corporations to publicly disclose, on an annual basis, the ratio between their CEO and median employee pay.
Given what Congress could have legislated, this most certainly rates as a modest reform. We’re not talking about banning bonuses or even limiting the tax deductibility of executive compensation. We’re just talking disclosure here.
Is this too much to ask? Outrageous pay packages, research indicates, encourage outrageous executive behaviors that range from high-risk investing gambles to outsourcing jobs and cooking the corporate books. The wider the pay gap between the guy in the corner suite and that guy’s workers, the lower the workforce morale, the higher the turnover.
In other words, the more cash we let corporations stuff in executive pockets at employee expense, the less competitive our corporations become.
The corporate lobby doesn’t see things this way. This past July, the U.S. Chamber of Commerce cheered when the House Financial Services Committee approved a repeal of the Dodd-Frank pay ratio provision. The full House will likely pass the bill early this fall.
That would set up a battle in the Senate, where “moderate” Democrats may see CEO-worker pay disclosure as an inconsequential bone they can throw to the rabid anti-Dodd-Frankers.
The main corporate argument against the disclosure mandate? Compliance, they declare, would be too burdensome. The association for human resources executives claims: “It is a common misperception that pay information as mandated by Dodd-Frank is ‘available at the touch of a button.’”
In other words, corporations that routinely pay CEOs over $10 million a year can’t afford to perform enough arithmetic to know how much their typical employees are making.
It seems clear that corporations simply want to avoid embarrassment and public outrage. Our organization, the Institute for Policy Studies, has been able to track national average CEO-worker pay ratios for almost 20 years. Last year, we find in our latest Executive Excess report, S&P 500 CEOs made 325 times what average American workers made, up from 263-to-1 in 2009.