Portside Date: June 21, 2016

Author: Jon Talton

Date of source: June 21, 2016

The Seattle Times

A clichéd phrase has been running through my head lately as I think about the many challenges we face, from ill-considered trade agreements and the hollowing out of the middle class to rising inequality and climate change.

“How do you put the toothpaste back in the tube?”

It’s usually invoked for a problem that is complex or a tremendous mess not easily remedied.

And nowhere is this more true than in the scandalous rise in executive compensation.

Growth in median compensation may have slowed lately, or even fallen for some of the highest-paid chief executives. But this is little recompense for workers who have seen their wages stagnate or fall for decades.

Last year, the average chief executive of an S&P 500 company was paid 335 times more than the average nonsupervisory worker, according to the AFL-CIO’s useful interactive site, Executive Paywatch.

This stunning disparity has been the norm since the 1990s, but it wasn’t always this way. In 1965, the average CEO made 20 times the pay of the average worker; it was around 34-to-1 in 1980. By 1998, it was nearly 322-to-1.

The toothpaste spurted out partly because of good intentions gone awry. Stung in the 1980s by criticism of what was then considered outlandish pay, boards began awarding much of executive comp in stock options. The goal was to align the incentives for top executives with the performance of a company’s stock. Hence, the bosses would have a reason to better serve shareholders.

It went wrong because of flawed corporate governance. Even if directors weren’t lap dogs of top management, they were often selected by the chief executive. And even nominally independent directors were of the same class and mindset of CEOs. Being a director typically brings hefty compensation for attending a few meetings a year, so why rock the boat?

Also, directors typically were in thrall to the cult of the star chief executive, epitomized by Jack Welch of General Electric. These lionized captains were distinguished by anti-worker policies, including keeping labor costs down, busting unions, engaging in job-killing mergers and sending work overseas. Anything to keep the stock price up and deliver short-term gains.

In finance, executives were better compensated for taking on risk, even if it ultimately resulted in the destruction of the company (think Kerry Killinger of Washington Mutual).

Executives these days are also rewarded for ensuring tax avoidance, their companies enjoying all the privileges and benefits of the world’s richest market and protection of American law while the nation’s infrastructure falls apart and funding for education and research lags. They have incentives to spend on stock buybacks rather than investing in the company’s future and creating jobs.

In many cases, comp has gone up even if the stock didn’t do well.

The criminally caused crashes of 2001, epitomized by Enron, and the rackets that helped cause the Great Recession each brought more reforms. Among them were the nonbinding say-on-pay vote and the Dodd-Frank mandate to disclose the ratio of CEO-to-worker compensation. Companies fought the latter for five years.

Say-on-pay is probably causing many companies to shift at least some parts of executive compensation, such as stock grants, to performance-based rewards.

But doing this also allows them a chance to bypass a 1993 law — another reform aimed at reining in runaway pay. It placed a $1 million cap on the tax deductibility of each executive’s package. Pay for performance lets companies get around it and gain big tax benefits, according to reporting by ProPublica.

It is no coincidence that CEO pay has reached astronomical levels at the same time that income inequality has widened to a level not seen since the eve of the Great Depression or even the Gilded Age of the late 19th century. A wide body of scholarship has linked the two. CEOs make up a big chunk of the 1 percent.

Gonzaga professor Daniel Morrissey wrapped up the cause and effect in a paper published in the William and Mary Business Law Review in 2013. Inequality creates a feedback loop. He aptly quotes Nobel laureate economist Joseph Stiglitz: “…one big part of the reason we have so much inequality is that the top 1 percent want it that way … Wealth begets power, which begets more wealth.”

No wonder both major political parties have seen populist insurgencies, not totally similar in their aims but uniting people who believe they are getting a raw deal, one very different from the America where the middle class was at its zenith.

So what to do about that toothpaste?

We can continue with incremental efforts such as say-on-pay or the Dodd-Frank disclosure rule. Economist Dean Baker suggests that directors lose their stipends if shareholders turn down a say-on-pay vote.

A more radical approach would be to wipe up the mess and get a new tube of toothpaste.

More on income inequality Seattle area, statewide jobless rates hold steady in May Seattle and the 'housing trilemma' | Jon Talton Should the state enact an income tax? Readers offer their two cents | Letters to the editor Behind many woes, the problem of poor wage growth | Jon Talton The very rich aren’t likely to flee income-tax states | FYI Guy Bill Gates again tops Forbes list as richest person in U.S. One measure would be returning to the progressive taxation system that operated from the 1940s until 1981, with a top marginal rate of, say, 70 percent as opposed to today’s 39.6 percent.

Another is to eliminate the tax-option loophole, which helps subsidize high compensation. (It allows companies to deduct the market value of the options, even though they are not a real expense, thus lowering their taxes. This arguably encourages companies to grant even more options in big comp packages.) According to a report from Citizens for Tax Justice, 315 big companies have used this to avoid $64.6 billion in taxes over the past five years.

Corporate tax rates could be set higher for firms with high CEO-to-worker pay differentials. Say-on-pay could be made mandatory rather than advisory. Public companies could be required to separate the chairman and chief-executive jobs. And unionization could be made easier, giving workers greater bargaining power.

Even all this might not curtail the greed. But it would be a start.