Commentary—

Congress Should Now Regulate CEO Pay

By Sam Pizzagati

Do Americans care about reining in executive pay? You bet they do.

Earlier this year, the Securities and Exchange Commission (SEC), the federal agency that regulates publicly traded companies, released a draft of new rules that require corporations to more fully disclose just how much they pay their top executives. Agency officials then invited public reactions. They got them — and then some. The SEC received, in all, over 20,000 comment letters, more letters than the agency had ever received on any single issue in its entire 72-year history.

What did Americans have to say in those comments? We don’t know exactly. But we already do know, from public opinion polls, exactly how Americans feel about how much CEOs are making. Americans are outraged. And Americans have been outraged about CEO pay for quite some time. Since 1990, after adjusting for inflation, the compensation going to America’s big-time CEOs has nearly quadrupled.

A new report from the Institute for Policy Studies and United for a Fair Economy, Executive Excess 2006, helps place this quadrupling in perspective. Workers in the United States, the report notes, averaged $28,000 in take-home pay last year. If their pay had increased, since 1990, at the same rate as CEO pay, average workers last year would have taken home paychecks worth a whopping $108,000. Why has CEO pay continued to rise despite so much public opposition? One essential reason: The change agent that reformers have been counting on — the corporate shareholder — hasn’t delivered. Here and there, to be sure, shareholders have passed resolutions that ask for changes in how corporate boards go about setting executive pay levels. But none of these efforts has yet translated into more reasonable levels of executive pay.

Instead, we continue to see unreasonableness everywhere. At the end of last year, for instance, Lee Raymond retired as ExxonMobil’s CEO. With Americans paying $3 a gallon at the pump, Raymond collected $70 million in 2005 pay — that’s over $33,500 an hour — and then walked off with a package of retirement goodies worth another several hundred million. Why have shareholders accomplished so little? Their failure reflects, in part, the power dynamics inside modern American corporations. Shareholders, be they institutional investors like pension funds or just plain folks, face a corporate decisionmaking deck that’s stacked against them.

In theory, shareholders elect corporate boards of directors. In practice, antidemocratic voting rules make defeating management-picked board candidates almost impossible. Shareholders can always pass resolutions, but corporate governance laws don’t require corporate boards to implement them. A number of reformers want these laws changed, to give shareholders a better shot at influencing corporate policy. But even if the rules change, don’t expect any grand shareholder revolt against overpaid executives.

What’s the problem here? Shareholders and the public, at base, simply don’t share the same interests. Shareholders have their eye on the corporate bottom line. The public interest goes beyond that bottom line. That’s why we, the public, have historically not counted on shareholders to make sure corporations behave responsibly. Take pollution. As a society, we don’t sit back and wait for shareholders to keep their corporate managements from fouling our environment. We insist on government regulations that require companies to consider the environment.

By the same token, we don’t count on shareholders to keep corporations from exploiting workers. Instead, we legislate minimum wage laws. Nor do we, as a society, expect shareholders to protect women and minorities against discriminatory corporate employment practices. We’ve made this discrimination illegal. We’ve taken steps like these because we realize that the decisions corporations make can have an effect on us all. Companies that pollute or exploit or discriminate, we understand, leave our communities lesser places.  

Companies that excessively overpay their executives have the same negative impact. The grotesquely huge rewards these companies dangle in front of their CEOs give these top execs an incentive to behave grotesquely — an incentive to squeeze consumers, to outsource jobs, to ax pension plans, and to evade taxes that support local schools. All of us, in short, may not be “shareholders.” But we are all “stakeholders” in the decisions that corporations make, and we have a stake, each and every one of us, in moderating out-of-control executive pay.

(Sam Pizzigati, a contributor to Executive Excess 2006, edits Too Much, an online weekly on excess and inequality. He wrote this for United for a Fair Economy. United for a Fair Economy is a Boston-based national, independent, nonpartisan organization that puts a spotlight on the dangers of growing income, wage, and wealth inequality in the United States.)