Are Corporate Titans Really Worth the Billions They Suck In?
In the span of just a few weeks, two enterprises that have become institutional fixtures on the American scene -- Chrysler, the Big Three automaker, and the Ford Foundation, the philanthropic pace-setter -- have named new top executives.
Neither of the two has any experience in the industry he now labors.
Robert Nardelli, the new Chrysler CEO, has never before worked for a car company. He comes out of General Electric and a brief, unhappy stint at Home Depot. Luis UbiÃƒÂ±as, the new Ford Foundation president, has never before run a nonprofit. He spent the last 18 years at McKinsey & Company, the consulting firm, working mostly with the high-tech sector.
No matter. In the United States today, you don't need to have experience in the work of an enterprise to lead it. You just need to be a leader. You need to have demonstrated a capacity to innovate and inspire, analyze and imagine. If you have these leadership skills, you are considered able to perform successfully as a leader almost anywhere. A general can become a school superintendent. A media entrepreneur can become a mayor. A credit card executive can run a computer company.
Leadership, in short, has become a marketable skill set. We have academic centers that teach leadership, headhunters who search for it. Leadership skills, and leadership skills alone, can make you an eminently hot commodity in the job market.
But this leadership market operates in a curious fashion. It has no "going rate." Some individuals with leadership skills in our contemporary United States -- those who sit atop America's business enterprises -- are capturing far more compensation for their labors than those in other fields who appear to hold the same exact leadership skill set.
We have just helped complete the 14th annual edition of Executive Excess, the Institute for Policy Studies analysis that typically concentrates on the pay gap between America's top corporate executives and our nation's workers. This time around, we took a somewhat different approach. We didn't just compare CEO and worker compensation. We compared America's business leaders with leaders elsewhere in American society, leaders in sectors ranging from nonprofits and the military to the federal executive and legislative branches.
What did we find? The pay gap between business leaders today and their leadership counterparts in other walks of American life is now running wider -- often phenomenally wider -- than the pay gap a generation ago between business leaders and average American workers.
Back around 1980, big-time corporate CEOs in the United States took home just over 40 times the pay of average American workers. Today's average American CEO from a Fortune 500 company makes 364 times an average worker's pay and over 70 times the pay of a four-star Army general.
Another example of our contemporary leadership pay gap: Last year, the top 20 earners in the most lucrative corner of America's business sector, the private equity and hedge fund world, pocketed 680 times more in rewards for their labors than the nation's 20 highest-paid leaders of nonprofit institutions pocketed for theirs -- and 3,315 times more than the top 20 officials of the federal executive branch, an august group that includes the President of the United States.
The gaps become even more profound when we look at the leaders of Congress, an institution whose pay policies have down through the years regularly fueled public outrage. Last year, the pay for the 20 highest-ranking leaders in Congress, taken together, totaled less than the personal earnings of the corporate CEO who ranked 348 th in the Associated Press's compensation survey.
Once upon a time, we didn't have this sort of leadership pay gap in the United States. Indeed, into the 1970s, typical big-time CEOs made only modestly more than Presidents of the United States.
One big reason why: steeply graduated federal income tax rates. Throughout the 1950s, the Eisenhower years, the top marginal tax rate on income over $400,000 hovered at 91 percent. In the 1960s and 1970s, that top rate never dropped below 70 percent on income over $200,000.
These tax rates sent corporate boards a powerful cultural message. If they were paying their top executives over several hundred thousand dollars a year, they were paying too much. And corporations by and large heeded that message. CEO paychecks didn't start soaring into the compensation stratosphere until the early 1980s, with the coming of the Reagan Revolution.
In 1981, Ronald Reagan's first year in office, the top federal marginal rate on America's highest incomes dropped to 50 percent, then fell again five years later to 28 percent. The top rate has bounced around, within a narrow window, ever since and now stands at 35 percent, just half the top rate in place during the Johnson, Nixon, Ford, and Carter administrations.
These top rates, to be sure, don't reflect what high-earners actually pay in taxes, once they exploit all the loopholes they can find. In 2005, the most recent year with IRS data available, the highest earning 0.01 percent of tax filers, all 13,776 of them, reported an average $27.3 million in income. They paid just 20.9 percent of that in federal income tax.
Fifty years earlier, the nation's most affluent made much less in income and paid a far higher tax rate. We have available, for 1955, published IRS data for the 13,983 highest-income returns, a group that almost exactly matches the total of 13,776 returns that made up the top 0.01 percent in 2005. These top 13,983 returns in 1955 averaged, in 2005 dollars, only $1.8 million in income. Nearly half of that, 47.4 percent, went to federal income tax.
Today's much lower top tax rates may not have directly "caused" the executive pay cascade of the past quarter-century. But these lower rates, history seems to show, definitely opened the floodgates.
Should we be worried about our current colossal pay gaps between business leaders and those we hold responsible for protecting our national security, providing essential public services, and crafting the laws that govern us? We certainly should. As a society, we are paying an enormous cost, an incredibly draining cost, for tolerating the sky-high price of business leadership.
Our leadership pay gaps are siphoning off talent from public service and creating a nonstop revolving door between government and the business world that breeds conflict of interest and corruption and distorts our democracy. Our pay gaps are discouraging individuals with leadership talent from entering less lucrative fields where their skills could make an important contribution to our common well-being.
But these gaps have perhaps an even more damaging impact. The higher business leadership pay rises, the louder the demands for higher leadership pay in non-business sectors. In 2005, the most current year with data, the 20 highest-paid nonprofit leaders in the United States averaged nearly $1 million each in compensation, $965,698 to be exact. High paychecks in business are clearly working to raise leadership salaries elsewhere as well -- and increasing the internal pay gaps between leaders and workers in non-business sectors. And that's not good.
Modern enterprises, be they in business or non-business sectors, work best when they flatten top-down hierarchies and endeavor to tap the wisdom and experience of people actually doing the work of the enterprise, the people closest to customers and clients or to the production process. All employees in an enterprise, management science tells us, have important contributions to make.
But compensation policies that concentrate rewards at the top proclaim the exact opposite. These pay policies assume that chief executives add hundreds, even thousands of times more value to our enterprises than average workers. These policies discourage the contribution of average employees. They foster defective, not effective, enterprises.
In the years before his 2005 death at the age of 95, Peter Drucker, the father of modern management science, advocated for a significantly narrower gap between enterprise executives and workers. An enterprise's pay differential between top and bottom, Drucker believed, really ought never stretch much beyond 20-to-1. Any executive pay appreciably above that ratio would only nurture habits and cultures that high-performing and productive enterprises should avoid.
Drucker's long-standing interest in pay ratios suggests a course of action worth exploring today. The government can't dictate what corporations pay their top executives. But the government can certainly stop rewarding corporations that pay their top execs enormously more than their workers.
In Congress, Rep. Barbara Lee (D-Calif.) is promoting a reform that would cap the amount of executive compensation corporations are permitted to deduct off their taxes to 25 times the pay of a company's lowest-paid worker.
Other reformers are talking about taking a similar approach to government procurement, by denying contracts to corporations that pay their top executives over 25 or 50 or even 100 times what their workers earn. We already as a nation deny contracts to companies whose discriminatory employment practices increase racial or gender inequality. Why should we let our tax dollars go to companies that increase -- through top-heavy reward structures -- economic inequality?
We don't yet have a Congress willing to seriously debate proposals like these. We don't yet have a President willing to revisit the top tax rates we place on our nation's highest incomes. We do have a leadership pay gap. Now we need leadership to end it.