The Only CEO Pay Number that Really Matters

April 22, 2013

THIS WEEK

Apple just keeps churning out geniuses. First we had the late Steve Jobs, the exalted visionary who, legend has it, single-handedly sent Apple soaring. Jobs ended up a billionaire. Then we learned that Jobs had some genius help. Tim Cook, his number two, turned out to be worth $378 million in 2011, the year he succeeded Jobs as CEO. No CEO on the planet took home more that year.

Last week we learned that Cook has his own genius sidekicks. In 2012, four of the five top-paid execs in America served as his understudies: his technology vice president at $85.5 million, his operations VP at $68.7 million, his general counsel at $69 million, and his chief financial guy at $68.6 million.

Ron Johnson might have made that group. But Johnson, Apple’s retail genius, left in 2011 to grab a $53 million CEO paycheck at J. C. Penney. How did that work out? An epic disaster. Penney gave Johnson the heave-ho earlier this month.

Hmmm. Maybe our executive superstars don’t rate as geniuses after all. Maybe, we suggest this week in Too Much, they just rate as appallingly overpaid.

GREED AT A GLANCE

Earlier this year, billionaire New York mayor Michael Bloomberg delivered his final “state of the city” address. The mayor filled his valedictory with a host of stats on the Big Apple’s progress since his 2002 election. Bicyclists, he noted, have 440 more miles of bike lanes. The Nation magazine has just catalogued a few of the metrics the mayor overlooked. In the Bloomberg decade, New York’s richest 1 percent have seen their share of city income jump from 27 to 39 percent. The city poverty rate, meanwhile, has held eerily steady, 21 percent in 2001 and 20 percent in 2011. Homelessness has jumped by 61 percent. Bloomberg himself? His net worth, $5 billion in 2005, now sits at $27 billion . . .

In 2011, months before the emergence of the Occupy Wall Street movement in the United States, the indignatos — the “outraged” — occupied city squares all across Spain. Earlier this month, the egalitarian thinker who helped inspire the indignatos, the economist José Luis Sampedro, passed away at the age of 96. Sampedro had been an eloquent advocate for greater economic equality ever since he first experienced Sweden in 1949. The world has two types of economists, he often quipped, “those who work to make the rich even richer and those of us who work to make the poor less poor.” Added Sampedro, in support of the indignatos: “To consider money as a supreme good will lead us to catastrophe.”

Gallup has just released its latest polling on taxes and America's wealth. Among “moderates,” Gallup finds, 65 percent feel the nation's wealth “should be more evenly distributed.” Last week also saw the American Enterprise Institute release a new compendium on tax-related polling since 1937. The collection — the most comprehensive “ever,” says the conservative AEI — highlights polls that show an America hostile to high taxes on high incomes. Missing from the collection: key polls that show the reverse, like the Gallup survey on Franklin Roosevelt’s 1942 call for a 100 percent tax on income over $25,000, about $360,000 today. By a 47-38 percent margin, Gallup found, Americans backed FDR’s income cap notion. Congress eventually gave FDR a 94 percent tax rate on income over $200,000.

Quote of the Week

“Being wealthy in modern America means you don’t come across anyone who isn’t.”
Robert Reich, former U.S. labor secretary, The Dis-Uniting of America, April 17, 2013

PETULANT PLUTOCRAT OF THE WEEK

Back in the Clinton years Eugene Ludwig ran the Office of the Comptroller of the Currency, the U.S. agency that oversees the nation’s big banks. Ludwig wanted to do less overseeing. He championed bank deregulation. America’s banks, Ludwig argued in 1997, need more “freedom.” Banks would get that “freedom.” Ludwig would get rich. He now lives in a $11.5 million D.C. estate and makes over $30 million a year as the CEO at the Promontory Financial Group, the consulting firm his former agency hired to sort out the massive foreclosure fraud big banks committed in 2009 and 2010. Promontory collected $1 billion in fees for this now abandoned effort. Turns out that Promontory was letting banks themselves determine how much their frauds cost homeowners. And why not? For Ludwig, after all, bankers still need their freedom.

 

IMAGES OF INEQUALITY

The best place in America “for billionaires who value majestic natural beauty over man-made trifles”? The experts at curbed.com who track luxury real estate feel that “best place” just might be the plush Rana Creek Ranch in California’s Carmel Valley. The ranch stretches half the size of San Francisco and just went on the market for $60 million. Rana Creek offers billionaires much more than beauty. The cattle on the grounds qualify the property for amazing tax breaks.

Web Gem

Economic Hardship Reporting Project/ Real-life stories about the world our CEOs and Wall Street “masters of the universe” have created.

PROGRESS AND PROMISE

U.S. Presidents have been releasing their tax returns since the 1970s. But last year only 17 members of Congress voluntarily released their returns. Emory law school's Dorothy Brown has proposed an endrun around that disinclination. She's asking the IRS to start releasing an annual study that provides “in summary fashion” the info from the tax returns of all 535 members of Congress. A report on this order, says Brown, might build public pressure for moves against tax loopholes. Back in 1934, interestingly, Congress actually enacted a law that required all high-income earners to reveal their incomes and taxes paid. But America’s wealthy quickly mobilized and, in less than a year, had the law repealed.

Take Action
on Inequality

Stay up-to-date on campaigns for greater tax justice. Check out Americans for Tax Justice on Twitter and Facebook.

inequality by the numbers

Stat of the Week

The share of America’s national income that goes to the nation’s top 1 percent has jumped by over 10 percentage points since the late 1970s. This redistribution of income up the income ladder, notes economist Dean Baker, “has roughly the same impact on the living standards of ordinary workers as a doubling of all federal taxes.”

IN FOCUS

The Only CEO Pay Number that Really Matters

How much did America's top execs make last year? The scorekeepers don't all agree. But that won't matter if we keep our eyes on the most important figure of all: the pay gap between CEOs and workers.

The new numbers on executive pay have been coming fast and furious the last few weeks. So how are America's top execs faring these days? Last Wednesday, two business correspondents gave two totally different answers.

CEOs, journalist Darcy Keith reported, are once again “scoring big pay increases.” The data, countered analyst Rick Newman, show that shareholder activists now have “more power to rein in bloated executive pay packages.”

Why all this uncertainty about how well top execs are doing? In theory, none of this confusion should exist. By law, after all, U.S. corporations must publicly disclose exactly what they’re paying their top execs.

But exactly how corporations pay their top execs can get tricky. Straight salary — the stuff of standard paychecks — only makes up about 10 percent of typical big-time corporate executive compensation.

Most executive pay today comes as stock-related compensation, as either stock “options” or “restricted” stock. Options give executives the right, down the road, to buy shares of their company stock at today’s share price. If that share price rises, the execs can buy low and sell high. Instant windfall.

“Restricted” stock awards give executives actual shares of stock, not just an option to buy them. Execs do have to wait a few years before they can actually claim these shares. No big deal. The shares will still have value, in future years, even if a company’s share price falls.

But how should we value right now all this share-related compensation? Should CEO pay scorekeepers, in their annual tallies, estimate how much stock awards granted this year will be worth in years to come?

Or should scorekeepers only tally stock-related awards when execs actually profit personally from them, either by “exercising” their options or gaining title to restricted shares that have “vested”?

Different executive pay scorekeepers give different answers. Some estimate the future value. Others wait until execs actually profit personally.

Scorekeepers also keep score on different sets of corporations. USA Today’s new scorecard for 2012 tallies pay at 170 firms, the New York Times at just 100.

Out of all this scorekeeping confusion come — no surprise — substantially different results. USA Today last month found an 8 percent hike in 2012 CEO pay. “CEO pay rockets,” the paper reported. The New York Times earlier this month found CEO average pay up 18.7 percent.

But Towers Watson, a corporate consulting firm, announced last week that CEO pay growth “slowed considerably in 2012,” rising at just a 1.2 percent rate.

This Towers Watson finding came one day after researchers at the AFL-CIO, America’s national labor federation, reported that U.S. CEOs are now making 354 times the pay of average U.S. workers, the “largest pay gap in the world.”

Wait, things actually get even more complicated. Rick Newman at US News and World Report looks at the same data as the AFL-CIO and pronounces that the CEO-worker pay gap “is actually narrowing.”

This gap, the AFL-CIO acknowledges, did drop in 2012, from 380 to 354 times, but only because the dip in Apple CEO Tim Cook’s pay — from over $376 million in 2011 to $4.2 million in 2012 — wildly lowered 2012's overall CEO pay average.

What matters most, the AFL-CIO stresses, remains the trend line, and that trend tells a crystal-clear story. Three decades ago, in 1982, American CEOs averaged 42 times more than average U.S. workers. Two decades ago, in 1992, the gap stood at 201 times. A decade ago: 281 times. The latest ratio: the 354 times.

How do we reverse this growing gap? Identifying the specific pay gap ratio between CEOs and their own workers would be a good first step.

Corporations have had to publish, for decades now, how much they pay their top executives. They haven't had to tell us how much they pay their workers. The Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010, at least on paper, changes this dynamic.

Dodd-Frank requires corporations to annual disclose the gap between what they pay their CEOs and their most typical workers. But a Corporate America lobbying blitz has kept the Securities and Exchange Commission from writing the federal regulations needed to enforce this Dodd-Frank pay disclosure mandate.

The SEC chairman who let corporate lobbying bury the mandate, Mary Schapiro, left the agency in December. Corporate America takes care of its friends. This week Schapiro will join the General Electric board of directors.

Schapiro’s successor, Mary Jo White, hails from the same corporate world Schapiro is now joining. Americans for Financial Reform, a coalition helping to lead the charge against CEO pay excess, is urging White to start up fresh and move expeditiously to start enforcing Dodd-Frank.

America's major corporations are still pushing the other way. Why do they so relentlessly oppose pay ratio disclosure? Disclosure, by itself, won't shove down CEO pay levels. But disclosure could open the door to other significant steps that could put a damper on CEO pay excess.

Lawmakers could, for instance, choose to deny government contracts or subsidies or tax breaks to corporations that pay their top executives over 25 or 50 or 100 times what their own workers are making.

Far-fetched? Current law already denies government contracts to companies that discriminate by race or gender in their employment practices.

As a society, we've concluded that our tax dollars must not go to corporations that widen racial or gender inequality. So why should we let our tax dollars enrich corporations that widen our economic divide?

New Wisdom
on Wealth

Chye-Ching Huang and Nathaniel Frentz, Myths and Realities about the Estate Tax, Center for Budget and Policy Priorities, April 16, 2013. A cogent counter to the claims of the estate tax-repeal crowd.

Sarah Bloom Raskin, Aspects of Inequality in the Recent Business Cycle, April 18, 2013. A Fed Reserve governor argues that maldistributions of income and wealth have inflamed the Great Recession and slowed the recovery from it.

Katie Prisco-Buxbaum, Economic inequality at Emerson, Berkeley Beacon, April 18, 2013. A perceptive college student explores the toll America's deep economic divide exacts.

Citizens for Tax Justice, The Corporate Tax Code Gives Away as Much as It Takes In, April 18, 2013. Thanks to decades of CEO machinations, the myriad deductions, credits, and other corporate loopholes in the U.S. tax code are denying the U.S. Treasury $181 billion a year.

Elizabeth McNichol, Strategies to Address the State Tax Volatility Problem Eliminating State Income Tax Not a Solution, Center for Budget and Policy Priorities, April 18, 2013. A good counter to a new right-wing push that would sharply reduce state taxes on high incomes.

Watch the Laura Flanders Show interview with Too Much editor Sam Pizzigati on his new book, The Rich Don't Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class.

new and notable

Eight Great Steps Away from Austerity

Rebecca Thiess, Many options exist for raising revenue in a smart and progressive manner, Economic Policy Institute, Brief #354, April 18, 2013.

For far too long, economist Rebecca Thiess reminds us in this welcome new paper, average Americans have suffered under a tax system that has “lacked progressivity and efficiency, exacerbated income inequality, and underfunded key national priorities.”

The widely ballyhooed “fiscal cliff deal” enacted early this January, Thiess adds, has only “cemented in place” much of this suffering.

How do we crack the cement? This new study that Thiess has prepared for the Economic Policy Institute spells out eight “progressive revenue options” that ought to be “front and center in upcoming fiscal and tax policy debates.”

These eight moves, all together, would raise $5.1 trillion in new revenue over the next decade — and enhance the current well-being and future life chances of every American working family.

America’s awesomely affluent would, on the other hand, end up paying Uncle Sam quite a bit more if these eight policy shifts actually went into effect. But these affluents would still enjoy a quality of life and future second to none.

None of the eight individual or corporate tax changes author Thiess lists in this new paper will come as a surprise to well-read tax reformers. But Thiess adds ample value. Her list clearly describes why we need each of the eight reforms and how much revenue each reform will raise over a ten-year span.

In sum, an ace action plan — and a great yardstick for measuring our progress.