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Why the gap?
Apologists for highly paid CEOs argue they are merely getting the pay they deserve for their talents. Their pay is determined freely by the laws of supply and demand in the marketplace. Right?There might be more to it than that. For one thing, U.S. execs make three times as much as their European counterparts, even though these European bosses manage companies that are 40% bigger. (The top 20 highest-paid execs at U.S. public companies made $36.4 million on average last year, while the same group in Europe got just $12.5 million on average.)
Yet, presumably, companies on both continents draw from similar talent pools in terms of education, work experience and cultural background. If that's true, it's hard to accept the notion that rich pay in the U.S. is the result of a scarcity of talent.
Next, CEO pay in the U.S. has grown to become 364 times the average worker's pay. It was just 40 times the average pay in 1980. It's hard to imagine that top leadership skills have grown so much scarcer in the past 27 years.
Many pay analysts suspect the bloated pay packages for U.S. execs are more the result of a marketplace failure than the basic laws of supply and demand from Econ 101. Exorbitant pay packages are often awarded by board compensation committees that are too cozy with CEOs, believes Paul Hodgson, an executive-compensation expert at the Corporate Library. They also fail to link pay to performance, which makes it easier for pay to spiral higher, he says.
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Other critics point a finger at the consulting firms that advise companies on CEO pay. The problem is they have an incentive to recommend rich pay packages -- because they also get paid for doing other consulting jobs for the same company.
What you can do
"Executive Excess 2007" suggests supporting efforts in Washington, D.C., to reform the policies that Cavanagh and his think tank identify as contributing to overly rich pay for CEOs.These reform efforts include:
- Proposals to close the tax loophole that lets companies deduct as much executive pay as they want, as long as the compensation is defined as a performance incentive. Rep. Barbara Lee, D-Calif., is promoting a cap on deductions at 25 times the earnings of a company's lowest-paid workers. Financier John Pierpont Morgan thought the ideal ratio was 20-to-1 a century ago, says "Executive Excess 2007."
- Proposals to tax the earnings of the top execs at private-equity shops and hedge funds as ordinary income instead of distributed capital gains. That would increase their taxes to 35% from 15%, in many cases. The loophole costs the federal government about $12.6 billion a year, says the Economic Policy Institute. Rep. Sander Levin, D-Michigan, is sponsoring legislation to make this change.
- Proposals to limit the amount of income execs can roll into their retirement plans, where the money grows tax free. Rank-and-file workers face limits, but top execs do not. Senate Finance Committee Chairman Max Baucus, D-Montana, and Sen. Charles Grassley, R-Iowa, of the same committee, are developing proposals here.
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Executive excessA new study says society is paying a high price for those skyrocketing salaries.
It's also important to tell your reps in Washington, D.C., that you want the Securities and Exchange Commission to take some action.
Tell them you want the SEC to loosen rules so that it's easier for shareholders to get their own slate of board members on company proxy statements circulated ahead of annual meetings, says Daniel Pedrotty, a corporate governance expert at the AFL-CIO Office of Investment.
When shareholders save on costs by having their slates distributed by the corporate proxy machine, they're more likely to propose board candidates who aren't management lap dogs on executive pay.
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