Let’s Get Serious About CEO Pay

If we want to make the economy work better for working families, we first need to acknowledge a bit of reality we often overlook. An “economy” can’t do anything.

Economies, that is, only exist as abstractions. Economies don’t make the decisions that hurt or help working families. People do. And the most powerful of these people, in our contemporary American economy, just happen to be CEOs.

Over the past three decades, the CEOs of corporate America and Wall Street have made the decisions that have bludgeoned the Great American Middle Class into meltdown mode.

CEOs have downsized workers and outsourced jobs. They’ve slashed benefits and raided pension funds. They’ve merged companies together and then broken them apart, creating constant workplace chaos, stress, and insecurity. They’ve extorted tax breaks out of communities and, in the process, forced cutbacks in the public services that working families so depend on.

To add insult to our injury, CEOs have stopped making significant investments in the research and development that modern corporate enterprises need, long-term, to succeed. Instead, top executives speculate. And if their gambles don’t pay off, they cook the books.

The obvious question: Why are CEOs acting this way? Why are they behaving so recklessly?

The obvious answer: They have an incentive to do so. CEOs who downsize and extort and gamble — and sacrifice the long-term health of their enterprises for short-term upticks on their quarterly bottom lines — can accumulate staggering personal fortunes.

The jackpots that CEOs can win today have, indeed, become so huge that executives will do most anything to win them. They will even, as the Fannie Mae and Freddie Mac stories so shamefully demonstrate, recklessly endanger the American dream.

The jackpots that tempt today’s top executives, we need to remind ourselves, have been a relatively recent development. Back in the middle of the 20th century, those prosperous decades right after World War II, top executives made far less than executives make today — and behaved, as a group, far more responsibly.

Why didn’t we see more reckless executive behavior back then? Executives a generation ago simply had little incentive to cut corners. In the mid 20th century, high tax rates on high incomes actively discouraged CEO moves to get rich quick. In fact, in the 1950s and into the 1960s, income over $400,000 faced a 91 percent federal tax rate. In the 1970s, the top-bracket tax rate never dipped below 70 percent.

This would, under Ronald Reagan, all start to change. One by one, the checks and balances of the U.S. economy that had kept an informal lid on how much top execs could expect to make eroded way. The top tax rate slid down to 28 percent. And two other key brakes on executive misbehavior — a strong union presence at the bargaining table and consumer-friendly federal and state rules and regulations — withered as well.

In this new economic environment, CEOs suddenly had plenty of incentive to start playing fast and loose. By taking risks to fatten quarterly bottom lines and wow Wall Street, top executives could now make — and keep — spectacular money.

And they did. In the 1970s, top executives made 30 to 40 times what their workers made. Last year, CEOs of America’s Fortune 500 companies averaged 344 times what their workers made.

American workers, meanwhile, are now taking home less in weekly wages — after adjusting for inflation — than they made in the early 1970s.

So what can we do? We need to recognize that outrageously high rewards for CEOs only serve to give CEOs an incentive to behave outrageously. We need to end these outrageous rewards.

Some say that’s impossible. In a private enterprise economy, the argument goes, government can’t set corporate pay scales.

True enough. But government can stop rewarding — with tax breaks and contracts — companies that shower excess upon their executives. By leveraging the power of the public purse, our tax dollars, we can encourage companies to share their wealth with all those who help create it.

As a nation, we’re already leveraging the power of the public purse against gender and racial inequality. By law, the U.S. government denies contracts to companies that discriminate, in their employment practices, by race or gender.

Our tax dollars, Americans overwhelmingly agree, should not subsidize racial or gender inequality. So why should let our tax dollars flow to companies that increase economic inequality — by paying CEOs hundreds of times more than their workers?

One bill now before Congress, the Patriot Corporations Act, makes a modest step in the right direction. This legislation, if enacted, would give a preference in the bidding for federal contracts to companies that meet a series of benchmarks for good corporate citizenship. Among the benchmarks: paying executives no more than 100 times the pay of a company’s lowest-paid employee.

That’s the direction we need to start moving down. Our legislative goal should be clear and firm: no government contracts, no government tax breaks, no government bailouts for companies that pay their top executives over 25 or 50 times what their workers make.

Top corporate executives today make their money by squeezing working families. We need to eliminate that incentive to squeeze — and give them an incentive to share.