The lackluster financial reform bill now nearing a floor vote in the U.S. Senate includes a surprising provision that could help revitalize the struggle against outrageously excessive CEO pay.
By Sam Pizzigati
Nearly six decades ago, at the height of the Great Depression, an over $1 million pay package [1] for the top executive at National City Bank — the Wall Street giant we know today as Citigroup — scandalized the nation. An angry Congress would soon require corporations to start disclosing their top executive salaries.
Could we be about to see another landmark leap on executive pay disclosure? Could be. Congress may shortly shine the brightest light yet on executive pay excess — and few observers have so far noticed.
The new light would come from a simple little amendment, introduced by Senator Bob Menendez of New Jersey, that the Senate Banking Committee last month tacked onto [2] the financial reform bill now about to hit the Senate floor.
The Menendez amendment would require all U.S. companies to disclose, for the first time ever, the gap between what they pay their CEO on an annual basis and what they pay their average workers.
Up until now, we’ve only had broad “average” data on corporate pay gaps. We’ve been able to compare national CEO pay averages with national worker pay figures. But we’ve never been able to specify pay gaps within individual corporations or compare the gaps between one corporation and another.
The Menendez amendment would give us that capacity. Corporations would be required to compute “the median annual total compensation of their employees (excluding the CEO)” and reveal “the ratio between CEO and employee pay.”
We already know, via required federal filings, how much top executives make. If the Menendez amendment becomes law, we would know how much more than their workers these top execs are making. This information, once publicly and widely available, could reframe — and recharge — the entire CEO pay debate.
That debate has been revolving rather listlessly, in mainstream public policy circles, around give-and-takes over “performance.” Mainstream reformers regularly rail against the huge paychecks that go to top execs who run their companies into the ground. Top execs who don’t “perform,” the mainstream critique of CEO pay pronounces, simply do not deserve windfall earnings.
How can we prevent these “undeserved” windfalls? Mainstream reformers — mostly pension funds and other institutional investors — argue that if lawmakers gave shareholders more rights and power, these shareholders could start holding corporate boards to a much more rigorous “pay for performance” standard.
In a Corporate America filled with empowered shareholders, the argument goes, only executives who really do perform — by increasing corporate earnings or raising the corporate share price or meeting some other performance metric — would find themselves amply rewarded.
But this mainstream case against “undeserved” executive pay cruises past a fundamental question that clearly deserves asking. In our current economy, ample rewards for successful corporate “performance” only seem to go to the power suits who sit at the corporate summit. Why shouldn’t ample rewards go to everyone within an enterprise who contributes to enterprise success?
In fact, point out experts on the factors that make enterprises effective, rewards most definitely should go to everyone who contributes to enterprise success — because we need to encourage these contributions. In our Information Age economy, the effective enterprise research tells us, enterprises only truly succeed when they tap the creativity of everyone who labors within them.
The bottom line: Corporate compensation practices that lavish rewards at the top, and the top only, nurture defective enterprises. These practices don’t give us enterprises that efficiently provide goods and services that people value. They give us enterprises that overcharge and cut corners, downsize and outsource, and, if all else fails, cook the books to “prove” they’re “performing.”
Our corporations have been lavishing rewards at the top for over a generation now. Our major corporate CEOs used to average 30 times more pay than average workers. CEOs today make over 300 times average worker pay.
The Menendez amendment, if enacted, would zap a laser focus on that gap — at every corporation. With corporate boards required to reveal their CEO-worker pay ratios, we would see exactly which corporations are building a foundation for real performance and which are endangering our economic future.
[3]And if we had this information, we could start acting upon it. We could, for instance, press lawmakers to deny federal and state tax breaks and government contracts to any firms that pay their top execs over 25 times what their workers take home, the gap our most honored management research recommends [4].
Our current corporate pay practices, Lance Lindblom and Laura Shaffer of the Nathan Cummings Foundation noted [5] last week, have left us with an “outrageous” divide that’s not either “socially or economically sustainable.” A financial reform that included the Menendez amendment just might speed an end to that outrage.
Sam Pizzigati edits Too Much, the online newsletter on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Too Much appears weekly. Read the current issue [6] or sign up [3] to receive Too Much in your email inbox.