In spite of a strong economy and the lowest unemployment rates in more than 20 years, inflation remains negligible, thanks to stagnant wages. The average monthly increase in hourly earnings through the first half of 1997 was just 2.9 cents, compared with 3.8 cents in 1996. When adjusted for inflation, workers wages are barely keeping pace with the cost of living.
While workers tread water, however, their CEOs have been realizing astronomical salary increases. In 1996, average CEO compensation rose an astounding 53%, nearly five times the 11% average increase in corporate profits, according to Business Week magazine.
The increases that CEOs realized last year were not a one-time bonanza. In 1995, average executive pay, including stock options and other forms of compensation, increased by 30%. According to figures compiled by the AFL-CIO, since 1980, CEO pay has increased by nearly 500% while increases in factory wages lagged behind inflation at 70% (inflation over the period was 85%).
The justification for these huge CEO increases? Increasingly, corporate boards have shifted executive compensation away from cash salaries and more towards stock options supposedly tied to corporate profits and stock performance. Many argue that that’s exactly the right formula, the result being record profits and soaring stock prices, giving investors a maximum return on their money. But with CEO compensation rising nearly five times that of corporate profits, clearly something has gone arwry.
Is the formula, in fact, correct? Many CEOs are reaping hugh rewards merely because their company’s stock price has been benefiting from the bull market. And only in a minority of cases are the stock option grants awarded to CEOs actually linked to company performance. In fact, many CEOs are reaping huge rewards in spite of the fact that their company is underperforming the competition or even losing millions of dollars a year.
Take Stephen Case of America Online, for example. Between 1994 and 1996, Mr. Case earned $33.5 million, while AOL’s stock price plunged and the company lost millions of dollars. Even more outrageous are the huge packages paid to CEOs and other top executives when they outright fail and leave the company as a result. John Walter, who came to AT&T in November 1996 as heir apparent to current CEO Bob Allen, quickly lost favor within the company and recently walked away with a severence package of nearly $26 million.
Last December, Michael Ovitz left Disney and got $90 million after spending just 14 months as the number two man behind Michael Eisner. And then there’s Gilbert Amelio, who for 17 months was the head of Apple, who received $7 million in spite of Apple’s precipitous drop in market share, profits and stock price.
If all of this seems unfair, it is. Runaway executive pay is making an already serious income inequality problem even worse. According to figures compiled by the AFL-CIO, if workers had received comparable pay raises to CEOs between 1980 and 1995, minimum wage workers would be paid over $39,000 -- we would have no working poor in this country and the minimum wage would be more than enough of an incentive for people to get off and stay off welfare.
What kind of a message does this disparity in compensation send to America’s workers? Basically, it says that the boss gets all the credit for a company’s success and that workers are lucky not to be downsized or have to take a pay cut. In a global marketplace that’s becoming more and more competitive, the growing inequality between the CEO’s pay and their workers can only result in a less cooperative work environment and lower productivity. The recent strikes at General Motors and UPS could be an indicator of increasing turmoil in employee-employer relations.
What can be done? One way is for stockholders to challenge CEO pay packages and indications are that such challenges are increasing. Proxy fights on the CEO compensation issue more than doubled through the first half of 1997 over the number filed in 1996. Unions and religious groups are behind most of the challenges, but unfortunately, few have been successful. Unions are also trying to raise public awareness of the problem by publicizing CEO pay. The AFL-CIO has set up an internet site called “Executive Pay Watch” and lists the pay of over 250 CEOs.
Another way in which out of control CEO compensation is being addressed is through legislation. Congressman Martin Sabo, D-Minnesota, introduced a bill in Congress called the Income Equity Act (HR 687). Under current law, all CEO compensation is tax deductible as a business expense. Under Congressman Sabo’s proposal, tax deductible compensation would be capped at 25 times the amount of the lowest paid worker in the same company. By way of example, if the lowest paid worker earned an annual salary of $15,000, the amount of CEO compensation that would be tax deductible by the company would be $375,000. While the bill would not limit CEO compensation per se, it would force the company and its shareholders to re-examine how both their CEO and their employees are compensated.
The Income Equity Act bill, however, has attracted few congressional sponsors, and those who have signed on are all Democrats. In a business-friendly Republican Congress, the bill is given little chance of passage any time soon. Concerned workers should write their congressman to support HR 687 and their Senators to introduce a companion bill in the Senate.
Last updated: November 1997
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