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Saturday, June 20, 2009

Compensating Failure

by digby

Chris Hayes has a very interesting article posted at The Nation on the subject of CEO compensation. Considering what's happening with health care and financial system reform, this subject should be getting a lot more attention:

Bloated CEO salaries aren't exactly new, but why they persist is harder to explain than you might think. Every dollar paid to an executive above his or her actual worth comes from the pockets of the shareholders. And while workers may be too beaten down to fight back, investors aren't exactly a powerless class in America. Why, then, do they allow clubby compensation committees and consultants to pick their pockets?

Part of the problem is the raw difficulty of figuring out how much value a particular CEO adds to a company. There's also a legal structure that attenuates shareholder power. But there's a deeper issue. CEO pay is to corporate governance what farm subsidies are to the federal government: the benefit accrues to a small group (CEOs or big agricultural concerns like Monsanto) while the cost--whether to shareholders or taxpayers--is shared widely.


Against this backdrop, what you end up with is a whole lot of corrupt, elite self-dealing, which is the emerging through line of our benighted age. "The boards tend to be dominated by CEOs and other high corporate executives of other firms, who have an interest in keeping executive compensation high," wrote Judge Richard Posner on his blog last year. They are "abetted by compensation consultants who naturally recommend generous compensation packages to directors who are recipients of generous compensation and therefore believe that the CEOs of the companies on whose boards they sit should be paid top dollar."

Hayes goes on to discuss the various reforms that the administration and other have proposed. But this gets to the heart of the situation:

As needed as many of these reforms are, whatever rules are put in place, CEOs will have massive incentives to skirt them. Which is why, finally, much of the solution must be found in the tax code. In 1980, before Ronald Reagan inaugurated the supply-side counterrevolution in taxation, the top rate for individuals was 70 percent. When taxation took 70 cents of every dollar made above a certain amount, there was far less incentive to game the system for giant payouts. By 1988, though, the rate was 28 percent. It has fluctuated between 30 percent and 35 percent under the past two presidents, while capital gains and other wealth taxes have steadily declined.

During the financial services hearing, as Republican after Republican railed against the specter of government bureaucrats micromanaging pay--down to "secretaries and janitors" in the fevered imagination of Illinois Representative Judy Biggert--part of me wondered if perhaps they had a point. Regulating executive compensation might have the same balloon-squeezing effect as bonus caps. And besides, it's easier for executives to game the compensation committee and shareholders than the IRS. So maybe we should let executives make as much as they can wrangle. We just need to make sure we then tax the hell out of them.

That sounds like heresy to Americans who have been indoctrinated in the conservative movement's low tax dogma of the past 30 years. But it's long past time to think about different ways to break this absurd Randian propaganda that says whatever these Masters of the Universe do is, by definition, good and therefore cannot be be restricted in any way. The financial meltdown and the obscene CEO salaries in the health insurance industry show that something is terribly wrong with the incentives in our system and people are beginning to realize that.

It's not only necessary for the health of the economy to make some big systemic changes --- it's a political opportunity to challenge this free market, CEO worshipping fundamentalism as well. It doesn't appear that the Democratic party is interested in doing that, at least not yet, since they are as wedded to the system as the rest of the ruling elite. But it's an opportunity for someone.