Annual-meeting season is unfolding for US corporations, and the script is playing out as usual — chief executives will get their way.
They may endure the verbal lashings of a couple of shareholders, perhaps face a slightly embarrassing “say on pay” vote about their princely income and then intone that after careful analysis, a compensation committee, advised by experts, unanimously approved their ridiculous pay package.
Extreme executive compensation is hardly a new issue — in the late 1970s, General Motors executives were under fire for accepting $1 million paychecks while union workers were absorbing cutbacks. A Clinton-era law tried to pinch pay by limiting to $1 million the tax deduction companies could claim for the CEO’s cash compensation. Boards responded by granting CEOs more in stock and stock options.
That switch to equity-based pay is one reason chief executives have benefited disproportionately, with some now earning more than 1,000 times the median salary of their employees. According to a study by the Economic Policy Institute, CEO payouts rose about 1,000 per cent between 1978 and 2017 in 2017 dollars. The S&P 500 index, by contrast, rose 637 per cent, while the typical worker’s salary increased all of 11.2 per cent.
The average American worker’s wages were flat in real terms from 2000 through 2018 before picking up this year.
The extravagance of CEO pay surfaced anew when Abigail Disney, granddaughter of the Walt Disney Company co-founder Roy Disney, called Bob Iger’s $65 million compensation “insane”. She then criticised the company for bragging, in its response to her, that it paid theme park workers a minimum of $15 an hour — twice the federal minimum.
Big deal, she countered. “Cast members” still struggle to make ends meet while Iger is earning 1,424 times the median employee pay. This is the same Scrooge McDisney company that in 2015 imported lower-paid foreign workers on special visas to replace the local technical staff in Orlando, Florida — and compelled the fired workers to train their own replacements.
In the biopharma business, chief executives have also benefited from price jumps in prescription medicines. Richard Gonzalez, CEO of AbbVie, told a congressional hearing that his pay was tied to the price of the company’s drug for rheumatoid arthritis and other conditions, Humira. The annual per-patient cost of that medicine doubled between 2012 and 2018 to $38,000.
There are some good reasons CEO pay has risen. Large companies keep getting bigger, and in some ways, more complex. Health care, pharmaceutical and media companies have made sizeable acquisitions as these industries continue to consolidate. Disney, for instance, just bought a large chunk of 21st Century Fox’s media and entertainment properties for $71.3 billion. AT&T bought Time Warner for $85 billion.
And no one is arguing that Iger, for instance, isn’t a first-rate CEO. But executive pay is exceeding revenue and profit growth.
Captains of industry were always paid very nicely for steering the corporate ship. In 1994, General Electric’s chief executive, Jack Welch, pocketed $4.35 million in salary and $7.8 million in stock awards. By today’s standards, Welch was vastly underpaid.
Welch became the poster boy for the new boss: a portfolio management whizz willing to cut costs, businesses and people to increase value for shareholders, and who expected to be rewarded for it. By 1998 Welch’s total compensation had reached $10 million and by 2000 some 60 per cent more, $16.8 million, on GE’s seemingly magical ability to outperform the S&P 500.
That sort of magic is no longer needed to justify fantasy levels of pay. Of the 100 highest-paid executives, 47 lead companies whose total shareholder return — stock price and dividends — went down in 2018, according to a “New York Times” survey conducted by Equilar.
This all flows through a virtueless circle in which CEO pay gets ratcheted up by boards of directors stocked with other CEOs who can leverage the same reasoning to justify their own ballooning salaries.
Among Disney’s directors is GM’s chief executive, Mary Barra, who earned nearly $22 million last year, or about 281 times the median salary of a GM employee — at least those who remained employed. In March, Barra idled more than 5,000 workers in Ohio and Michigan.
There’s also Safra Catz, the co-chief executive of Oracle, who collected $108 million in compensation in 2018. (The other co-CEO, Mark Hurd, collected a similar amount; it’s only fair.) Might be a tad difficult for Catz to make the case that Iger is overpaid.
Measured by a market in which the S&P 500 index has tripled since 2009, every chief executive is a managerial genius. Never mind that last year the market was propped up by $806.4 billion in corporate stock buy-backs that supported stock prices, and thus CEO pay, by reducing the number of available shares.
Consider, too, the source of the buy-back money: a corporate tax cut, not increased profits created by superior management. In 2018, in fact, corporations spent more on buy-backs than they did on capital expenditures. This year, buy-backs are on another record pace.
Why wouldn’t chief executives propose more buy-backs? They are a surer path to better pay than capital investments, which take a longer time to generate a return. Not necessarily better for the company, but better for the bosses.
The CEOs got some extra gravy on their extra helpings, too. Thanks to the Trump tax cuts, their earnings were taxed at a lower rate, saving them hundreds of thousands of dollars; employees, on the other hand, saved only hundreds of dollars, or even less.
Top executives deserve to be rewarded for their leadership. And tying some of their pay to their company’s performance is reasonable. What’s not reasonable is leaving employees 1,000 miles behind their leaders under the assumption that he or she would bolt for something else.
Top talent may be scarce, but so are top jobs. Why don’t boards take the approach they use with their workers? Test the idea of paying less — would someone else work for half the pay and deliver 90 per cent of the value of Oracle’s two $100 million co-bosses?
At the very least, boards need to link CEO pay raises to employee pay raises, so that workers can share in some of the growth they’ve helped to create.