Will Congress Reform Wretched Executive Excess?
Excessive pay for top business executives--particularly for poor performers--has outraged millions of Americans and investors and now even Virginia Senator Jim Webb, who criticized the widening gap between rich and poor in his response to President Bush's State of the Union message.
Few people know, and Webb didn't say, that Congress has repeatedly stifled a bill to do something sensible about wretched executive excess: disallow business tax deductions for executive salaries in excess of twenty-five times the salary of the lowest-paid employee in the same organization.
The current furor was set off by Home Depot's disclosure on January 3 that it had fired chairman and CEO Robert Nardelli while easing his pain with a $210 million severance package built into his sign-on contract. It included $88 million in bonuses, retirement benefits and stocks.
In July Pfizer CEO Hank McKinnell walked away with nearly $200 million. In 2005 ExxonMobil chairman and CEO Lee Raymond retired with an even more gargantuan bundle--$398 million.
"The average pay for chief executives rose to 369 times that of the average worker in 2005," Josh Fineman of Bloomberg News wrote on January 4. That was "up from 131 times in 1993 and 36 times in 1976, according to a study by Kevin Murphy, a finance professor at the University of Southern California."
Putting Murphy's numbers into individual terms: Suppose that in 1976 an average worker's annual pay was $10,000 and a chief executive's $360,000. Now suppose that in 2005 the worker's pay was $20,000. The executive's pay would be $7,380,000. A $10,000 raise for the worker, a $7,020,000 raise--702 times larger--for the executive.
Webb drew another stark contrast by using 1968, the year he graduated from college, as his basis of comparison. Then, he said, "the average corporate CEO made twenty times what the average worker did; today, it's nearly 400 times. In other words, it takes the average worker more than a year to make the money that his or her boss makes in one day."
During Nardelli's six-year reign, Home Depot lost market share to rival Lowe's, and share prices fell 7.9 percent, according to initial reports. Actually, Allan Sloan, Newsweek's Wall Street editor, wrote, the stock rose from $38.94 to $40.16. But put this and the $210 million bon voyage severance package aside and focus instead on Nardelli's total compensation of $225 million, an average of $37.5 million annually. The $72,100 he was making every week was far more than the lowest-paid Home Depot employee was earning in a year.
Along with the Home Depot employee, the tax laws compel ordinary taxpayers to offset the loss of revenues that results from letting corporations deduct excesses in executive pay, no matter how extreme, as a legitimate business expense. The stifled bill--which did not address nonsalary compensation such as royalty payments--would have ended the forced taxpayer subsidies while letting corporations go on paying executives whatever they please.
The bill's sponsor was former Minnesota Democratic Representative Martin Olav Sabo, who has just retired after twenty-eight years in Congress. The House stifled the measure again and again. It didn't matter whether Democrats or Republicans were in charge.
"It is difficult to believe one individual can be worth so much that he or she warrants a salary of fifty to 100 times other workers in the same business," Sabo said when he introduced the Income Disparities Act of 1991. "I have proposed twenty-five times because that is approximately the relationship of the President's salary to the minimum wage." Currently, the presidential salary is $400,000. That's thirty-seven times the $10,712 earned by a person working forty hours every week at the minimum wage of $5.15.
"While my proposal would not stop excessive salaries at the top, it would end indirect support of them through the corporate income tax structure," Sabo continued. "It would make a clear statement that the public policy of this country does not support extreme distortions in the incomes people make, and it would reaffirm the fundamental dignity that the government affords to all working people, including those at the lower end of the income scale. The increases in income disparities of the last decade are clearly out of control and must be turned around."
Sabo was speaking nearly sixteen years before CEOs like Nardelli, McKinnell, Raymond and numerous others in the corporate-greed derby made the income chasms of the 1980s look puny. Four years later, in 1995, Republicans gained control of the House. Sabo then expanded his proposal to call for the first increase in the minimum wage since 1989 and reintroduced it as the Income Equity Act.
"Business owners will be forced to take a long, hard look at how they compensate both those at the bottom and those the top of the income ladder," Sabo said at the time. Indeed, his bill would have given an incentive to a CEO to hike the pay of his lowest-paid employees in order to increase his own pay. If the lowest-paid employees would get raises, others higher up the ladder would, too.
The Income Equity Act was referred to the Ways and Means Committee and, of course, quietly died there.
Notably, one of the 1995 bill's thirty co-sponsors was Representative Nancy Pelosi, now Speaker of the House. Two other very important House Democrats, however, were not among the thirty sponsors. They are Barney Frank, the new chairman of the Financial Services Committee, and Charles Rangel, the new chairman of Ways and Means.
Frank said "he would hold hearings on executive pay and may push for legislation to give shareholders greater say over what CEOs make," Fineman wrote in his January 3 article.
"The justification for these really very, very large amounts of money being given has been that they are performance-driven," Frank said of Nardelli's package after a January 3 speech at the National Press Club in Washington. "When it's given as a consolation prize for bad performance, then the whole justification is called into question." More than that is called into question:
•Whether a co-sponsor of Martin Sabo's proposal for income equity or other House member--or Senator Jim Webb--will introduce it in the new Congress.
•Whether Chairmen Frank and Rangel would give the proposal a full and fair hearing.
•And whether Speaker Pelosi would fight for passage of the bill she co-sponsored in 1995.
The stakes were raised immensely by two late-breaking developments, coincidentally disclosed on Jan. 25:
The first was the example set for corporate America by Home Depot's move to mend the horrendous public-relations image created by Nardelli's pay package. It "may pay its new chief executive, Frank Blake, $8.9 million this year"--a whopping $30.8 million less than it had paid Nardelli in 2006--Bloomberg News reported. "Mr. Blake, who took over on Jan. 2, received a base salary of $975,000. He will get the rest if he meets the board's profit and stock performance goals."
The second came from the annual World Economic Forum in Davos. Leaders of the Swiss Federation of Protestant Churches "are challenging top corporate earners" "to cut their salaries," the Wall Street Journal reported. They "launched a round of closed-door discussions with business leaders," hoping "to bring the dialogue into the open...'The church association has taken a very clear position that the top salaries have gotten out of hand proportionately,' said [spokesman] Simon Weber."
Thus did the Federation's leaders at least implicitly challenge US religious leaders to do here what they've done in Switzerland: "bring the dialogue into the open."
Meanwhile, however, corporate America was shocked by news that the Senate Finance Committee, newly led by Democrat Max Baucus of Montana, was considering a modest reform.
The proposal would "sharply limit the earnings corporate executives and other highly paid employees can place tax-free into deferred compensation plans," the Washington Post disclosed on January 17. "An individual taxpayer could defer no more than $1 million annually in compensation, beginning this year." Over ten years, the estimated tax increase would be $806 million.
The reform was part of a package approved by voice vote the same day. It provided more than $8 billion in tax breaks for small business, which would be offset by new taxes on corporations, their CEOs and highly paid employees.
Patrick McGurn, executive vice president of Institutional Shareholder Services, told the Post that limiting deferred compensation would be "earthshaking" to American executives. "A lot of executives are deferring the lion's share of their compensation these days," McGurn said. "And the typical executive at a Fortune 100 company makes well over $1 million. So there is a huge amount of compensation that would go into deferral accounts that could not be deferred if the tax code were changed."
The provision "appears likely to generate alarm among business leaders," the Post said. Some business lobbyists "were surprised at the measure, saying they had not even known it was under discussion."
Reporters Lori Montgomery and Jeffrey H. Birnbaum wrote in a follow-up article: "About 95 percent of Fortune 1000 companies offer deferred-compensation packages in some form, said Jeff Varblow, senior vice president of the Cochlan Group, a Chicago firm that specializes in designing and administering the plans.
"The plans allow the executives to put part of their income, sometimes several million dollars a year, into a special account without immediately paying taxes," the article continued. "The money earns interest, which isn't taxed right away, either. After retirement, the executive withdraws the money and pays taxes on it, but the earlier tax deferrals mean an account may have grown millions of dollars larger than an ordinary savings account would have.
"The practice allows executives to 'retire in the same type of lifestyle they were used to living,' Varblow said."
The estimated $806 million increase in tax revenues "would be used to help cover tax breaks for small businesses hurt by a proposed increase in the minimum wage, a top Democratic priority," the Post pointed out. "The result is a grab-bag bill that contains 13 tax breaks worth $8.3 billion over 10 years--and 14 provisions aimed at raising taxes by a similar amount on corporations, their chief executives and other highly paid workers. The tax package is to be merged on the Senate floor with a minimum-wage bill that has already passed the House."
Baucus called the proposal a declaration that "more Americans should be treated equally." But many House Democrats oppose the tax breaks for business coupled with it, the Post reported. House majority leader Steny Hoyer was "disappointed," he said in a statement. "The choice to tie a bill raising the minimum wage to tax breaks for businesses will cost taxpayers $8 billion and complicate and delay the passage of an increase. Eighty-nine percent of the American people support an increase in the federal minimum wage, and they should not have to spend $8 billion in order for Congress to do the right thing."
If a proposal for modest reform shakes the earth, the Sabo proposal for fundamental fairness would make it positively quake.