Editore"s Note
Tilting at Windmills

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December 11, 2004
By: Kevin Drum

CLASS WARFARE....I was so excited to receive my weekly copy of the Economist yesterday that I read the whole thing in a single sitting before dinner. It's a Thursday magazine, you see, but I usually don't get it until Tuesday, by which time it's so moldy that I often barely bother to crack it open. Sadly, this problem has gotten so bad that I'm now debating whether to even continue my multi-decade subscription next year.

So what was in this week's issue? One of my favorite topics, thankyouverymuch: executive compensation. As the chart on the right shows, it turns out that "pay for performance" is actually "pay for fogging a mirror." No matter how bad performance is, executive pay just keeps chugging upward:

In 1991 the pay of the average American large-company boss was about 140 times that of the average worker; by last year, it was over 500 times, and growing. Last year's 7.2% rise in the average American boss's total compensation is worth over $400,000nice work, if you can get it.

That's not $400K in pay; that's a $400K raise.

In other news, John Quiggin has been reading Pay without Performance: The Unfulfilled Promise of Executive Compensation and reports the following:

The most telling detail for me is the observation p98, that every single CEO in the S&P Execucomp Database has a defined benefit pension plan. This, while bosses everywhere have been shifting their employees onto defined contribution plans, where they, and not the company, bear all the risk, and while the Republicans in the US are trying to do the same with Social Security.

....Aggregate top-five compensation was equal to 10 percent of aggregate corporate earnings in 1998-2002, up from 6 percent of aggregate corporate earnings during 1993-1997.

Got that? A full ten percent of corporate earnings go to the top five people in the company. The. Top. Five.

Don't you think it's about time shareholders and workers started making some noise about this? I'm guessing that America's senior managers could probably make a perfectly good living on a measly 5% of total corporate profits, don't you?

UPDATE: Matt Yglesias says, fine, but what should we do about this? After all, government regulation of CEO salaries doesn't sound like such a great idea.

I agree, and I'd never suggest such a thing. But there are other options. First, if conservatives actually agreed that this was a problem which I doubt they'd at least speak out about it. That is, they'd try to shame their fellow conservatives into keeping their compensation demands somewhere south of the stratosphere. They'd try to persuade them that gold-plated executive washroom fixtures and salaries that are 500x the median are rather too close to Gilded Age arrogance for comfort.

Second, there's government regulation and then there's government regulation. We might not want to directly regulate CEO compensation, but we can certainly enact policies that motivate companies to pay their executives differently. Transparency of pay plans, stock option accounting, deductibility of perks, tax treatment of capital gains and dividends, and progressive taxation in general are obvious starting places.

Kevin Drum 12:49 PM Permalink | Trackbacks

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