[corp-focus] Executive Pay and "The Market Economy"

[robert weissman]

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Executive Pay and "The Market Economy"
By Robert Weissman
September 11, 2008

It's pretty hard these days to justify astronomical executive pay. In 
2007, the average CEO's pay of $10.5 million was 344 times higher on 
average than the average worker's wage, according to Executive Excess 
2008, a joint report from the Washington, D.C.-based Institute for 
Policy Studies and Boston-based United for a Fair Economy. The top 50 
private investment fund managers each took home more than 19,000 times 
the average worker's earnings.

But never fear, Jack and Suzy Welch -- the former high-flying CEO of 
General Electric and his wife, the former editor of the Harvard Business 
Review -- are willing to defend high executive pay by return to first 
principles and invocation of "the market economy." In a recent issue of 
Business Week, they write, "Yes, most CEOs make a ton of money, and 
sometimes they make too much, but in a market economy salaries are set 
by supply and demand. We also live in a market economy where companies 
that field the best teams win, and, because of global competition, the 
best teams tend to be expensive."

There are several decisive rebuttals to this claptrap.

First, there is no plausible market-based story why executive pay should 
have been bid up so much over the past quarter century. Are executives 
working harder now? Making better decisions? Has the CEO supply and 
demand equation changed?

Second, executive pay is not set by the market, but by boards of 
directors, who frequently are CEO cronies and excuse their behavior by 
relying on conflicted compensation consultants.

Third, the most super-high compensation packages are typically based on 
performance standards, with executives cashing in on stock options as 
share values rise. But this is a system easily gamed, with those same 
shares sold before short-term thinking leads to medium-term losses. By 
way of example, consider the massive pay packages obtained by the ousted 
CEOs of the now-floundering Wall Street firms.

And now comes a new analysis that further debunks the market-based 
rationalization for ridiculous CEO compensation levels. Executive Excess 
2008 shows how taxpayers are helping foot the bill for these outrageous 
compensation packages.

Executive Excess 2008 highlights five distinct U.S. tax subsidies for 
executive pay. These are actually market distorting, in that they let 
top executives and investment fund managers take home more than they 
would if they played by the same tax rules as regular people. 
Altogether, Executive Excess 2008 reports, the five tax loopholes heap 
$20 billion in subsidies on the corporate and hedge fund honchos.

* The hedge fund manager loophole, involving what is called "carried 
interest," enables investment fund managers to treat most of their 
salaries as capital gains, and to pay taxes at the capital gains rate, 
rather than the ordinary income tax rate. Annual cost to taxpayers: $2.6 
billion.

* The pensions for the rich loophole. While regular people can place a 
maximum of $15,500 in 401(k) plans -- deferring taxes until they 
withdraw the money -- CEOs can place unlimited amounts in deferred pay 
plans. Annual cost to taxpayers: $80 million.

* The offshoring loophole. Although companies cannot deduct the expense 
of executive compensation in deferred accounts, this is no problem for 
businesses registered in offshore tax havens. Set up an offshore 
subsidiary, and you can deduct the deferred income from revenue. Annual 
cost to taxpayers: $2 billion.

* The greed loophole. Money spent on wages and salaries are deducted 
from corporate revenues, and is not taxable. For top executives, 
however, U.S. tax rules impose a limit: corporations cannot deduct 
salaries and compensation that is more than "reasonable." An effort to 
define reasonable as $1 million has been entirely circumvented -- and 
corporations can, in effect, deduct whatever they pay CEOs. Annual cost 
to taxpayers: $5.2 billion.

* The double-standard loophole. Stock options -- the right to buy stock 
at a preset value, at a later date -- are now a huge component of 
executive pay. For their internal accounting, corporations value stock 
options using the value of the stock on the date of the option grant. 
For tax purposes, however, they can deduct the generally much higher 
value of the stock on the date the options are exercised. In other 
words, they can deduct more than they list as their expense. Annual cost 
to taxpayers: $10 billion.

Not long ago, it was possible to argue that executive pay was an 
important but symbolic issue. But then it became clear that 
ever-escalating executive pay is creating a culture of greed that is 
fueling income and wealth inequality. And now it has become clear that 
executive pay schemes are contributing to corporate practices harmful 
not only to workers, consumers, communities and the environment, but to 
corporations themselves, and even to the functioning of the economy.

The foolish and inexcusable housing-related investments by Wall Street 
firms, Fannie Mae and Freddie Mac resulted in no small part from 
executive compensation-driven efforts to drive up short-term stock 
values. These decisions were so bad, and of such enormous scale, that 
they have endangered the functioning of the financial system itself, 
thereby necessitating government intervention and massive taxpayer 
expenses -- an indirect but even more expensive taxpayer subsidy for 
executive compensation.

A "market economy" indeed.


Robert Weissman is editor of the Washington, D.C.-based Multinational 
Monitor, <http://www.multinationalmonitor.org> and director of Essential 
Action <http://www.essentialaction.org>.

(c) Robert Weissman

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