For our policy brief project, my group is tackling the subject of executive pay and taxation. For the upperclassmen that may not be familiar, this year’s theme for policy briefs is fairness. After pitching our ideas to Melissa and Dean Brady, my group realized that we needed to take a step back from the policies and the implementation and focus on why we find the current state of CEO pay unfair. This is the task I tried to accomplish this week.
When we were first brainstorming ideas as a class for topics associated with fairness, I proposed campaign finance reform. Another student in my class proposed executive pay. It was no surprise that when it came time for us to pick our top two choices, we each picked our own and each other’s. The two topics have commonalities in that they both address the inequality created by abuses of power and money.
After my interest in the subject was stimulated, I watched Inside Job, a phenomenal documentary that provides a comprehensive breakdown of the financial crisis of 2008. It frustrated and appalled me to see the irresponsibility of some of the executives of America’s largest financial institutions. Many of them, as a result of an executive compensation scale that rewards short-term performance, took on incredible amounts of risk that ultimately proved disastrous for the U.S. economy. Brandon J. Rees of the AFL-CIO testified before Congress, “Today’s executive compensation packages are creating improper incentives for executives.” He pointed to the motivations CEOs have to manipulate stock prices through fraudulent accounting as a result of owning stock options.
If you look at the case of Lehman Brothers, the bank whose collapse almost sunk the global economy, its executive, Dick Fuld, was an enthusiastic advocate of performance-related pay. As it turned out, a retroactive analysis of Lehman Brothers found that the company shuffled $50 billion of assets off its books in the months before its collapse in order to conceal its dependence on borrowed money. Association does not necessarily prove causation, and it is not entirely clear that Fuld’s pay package was the determinant of his fraudulent actions. However, this example, and others illustrate the harm created by an unchecked executive pay system:
In May of 2012 the Financial Times reported that Vikram Pandit, the chief executive of CitiGroup, sought a $15m pay package despite that fact that shares of his company had declined 90 percent over the last decade. Martin Sullivan was paid $47m when he left AIG, despite the fact that, on his watch, the company’s share price fell by 98% and required a multi-billion dollar bailout from the U.S. government to survive.
The fundamental reason why the dramatic increase in CEO pay is unfair is that it has contributed to the growing problem of inequality. In the case of publicly-traded companies, the rise in the proportion of profits going to CEOs is hurting shareholders. It hurts the working-class, which sees diminished returns on the pension funds it uses to save for retirement.
My group feels that the American people should galvanize support behind initiatives that seek to create a more reasonable and fair compensation system. Addressing runaway CEO pay has to be a component of any comprehensive plan to reduce economic inequality.
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