The Interfaith Center on Corporate Responsibility, or ICCR, an association of pensions and trusts of socially minded church groups, has released a fresh look at CEO pay entitled, “Excessive Executive Compensation: Investor Guidance.”
At the same moment, stories circulate about the greatly anticipated IPO of SpaceX, which is breaking all the norms designed to protect investors, while delivering (if price predictions hold) astronomical (no pun intended) wealth for CEO Elon Musk.
The ICCR report chronicles attempts since the 1990s by regulators and like-minded investors to rein in pay. That was the decade compensation really began to lose its bearings due to a host of factors, including the rise of Silicon Valley and stock-based compensation. CEO pay has grown rapidly since then and continues to hover at about 300 times average worker pay. In extreme cases, the multiple is much, much higher.
The issue isn’t just what markets call “quantum”—or total amount of pay for an executive—it’s about the weight placed on stock in pay packages that leads to laser focus on the share price, inequality in the firm, and a widening wealth gap in the US through concentrated ownership in the stock market.
Sensible solutions are available. But who has sufficient influence and motivation to enable a reset?
How about investors?
Members of ICCR have a history of deploying shareholder tools to advance specific social or environmental causes. Think back to the successful 1980s campaign for corporations to adopt the Sullivan Principles and end apartheid in South Africa.
It seems that crafting a sensible and effective pay plan should be much easier than overturning a pernicious system of minority rule in a foreign country. After all, the choices on pay structure and how much the CEO earns are 100% within the control of the enterprise in which investors have a direct interest.
CEOs, for the most part, negotiate their own pay. The buck stops with directors, who are selected by CEOs but elected by shareholders.
Yet institutional investors support any pay package as long as the stock price is heading in the right direction. “Say on Pay” votes by investors brought the transparency that was supposed to act as a “disinfectant”, but public disclosures have done nothing to slow down CEO pay and may actually make the problem worse, by easing comparisons across companies.
And how about Boards?
Directors have their own issues with applying common sense to comp. They fear sending a signal to the market that they lack faith in the Chief Executive if they don’t keep up with a made-up peer group. It’s evidence of a collective action problem for sure. While the directors’ legal fiduciary duty is to the long-term health of the enterprise they serve, including its purpose, strategy and employees, what takes up most of the air in the room becomes, as noted in a recent HBR piece on Boards, “the damage that any one stakeholder group could inflict on the company if a decision goes against its wishes or interests.” The boardroom becomes an echo chamber with the focus on performance, defined narrowly. The societal consequences are ignored.
Will government solve it?
In 1993, President Clinton tried to curb pay through a $1MM cap on deductibility of cash compensation—which in turn fueled growth in stock awards which were still allowed. It was the Dodd Frank Act, passed in 2010 in the wake of the financial meltdown, that brought us Say on Pay, with no results and unintended consequences. Redistribution of wealth through the tax system is being considered in New York and California, but a political divide on this issue is already apparent.
Relying on redistribution may yet be an answer, but taxes on wealth are complex to assess and administer. It also suggests we can’t fix the problem at the source and are resigned to a system that will continue to grow and undermine both business and democracy.
Business is a team sport, but even with all the noise in recent years about “stakeholders” we pay CEOs as if they are the only ones who matter. In public companies, it is now an imperative to place the stock price at the center of rewards and metrics. Investors are compromised, proxy advisory firms consider it a mandate, and we can’t depend on shareholders, or boards, whose members bear the responsibility to move us in a sensible direction.
Arguments like “the rising tide lifts are board” and the belief that most Americans benefit from the upside of equity markets persist but defy reality. Stock ownership is highly concentrated, and most Americans have a modest stake in the stock market, if any. To address immediate disparities, people at the lower end of the pay scale first need higher wages to pay their bills and cover emergency expenses. Raising wages is more challenging when the CEO is rewarded for curbing expenses in order to return more cash and “value” to shareholders.
“Pay for Performance” still rules the day.
In a useful piece entitled “The New Inequality,” Paul Krugman details the connection between the choices made by firms and the growth in inequality and extreme concentration of wealth: “A rising share of income is going to capital rather than labor, which means that it is flowing to a small part of the population.” The impact on politics and distrust in institutions only grows.
With all of the noise about “stakeholder” capitalism, if we continue to pay the the executives in stock grants or options, we can expect what we have now—the focus on the stock price, with labor in a tailspin. Long-term investment in decarbonization and environment is also undermined. The health of the enterprise is key, but it’s the impact in the commons that matters most.
The costs of the status quo are seen in politics and in the behaviors of a growing segment of the population, especially younger generations. With no opportunity to get ahead in the economy, and the belief that the system is rigged against them, they resort to risky behaviors to try to get a foothold—from crypto to sports gambling. There’s now a name for this trend: “financial nihilism.”
What we have is a problem with no solution in sight.
It brings me back to executives and the agency that resides within companies. If investors, employees, consumers, and government are on the sidelines, the answer will have to come from within the enterprise, and through collective action on common-sense protocols embraced by influential executives and boards. What other choice is there? That is where the best solutions and real control resides.
The US model is not the only model; alternatives exist in other markets. The stakes are high. Who will make the next move?
This blog post was originally published on LinkedIn. Follow Judy Samuelson for more insights on business and society.
