Overpaying CEOs

by Linda Beale
crossposted with Ataxingmatter

Overpaying CEOs

The Wall Street Journal reports today on a study by three academics on CEO pay. They are Streedhari Desai (Harvard), Jennifer George (Rice) and Arthur Brief (Utah), and their study is “When Executives Rake in Millions: Meanness in Organizations” (available on SSRN). Here’s the abstract:

The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies – an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem.

Trends in this country are ominous.

1. Wages for the middle class have stagnated, especially with the waning power of labor unions to demand an adequate share of corporate revenues (a result of the decades-long effort of neocons and multinational corporations to kill labor unions and make new unionization efforts in previously nonunionized industries very difficult through generous provisions for employer control and significant hurdles for union approval).

2. The middle class has therefore depended more on debt than it should, a dependency that has been encouraged by the financialization of the economy and the hunger of the financial institutions and shadow banking system for “product” from which it can reap multiple layers of fees and excess profits. That easy flow of credit led directly to the financial crisis that caused the Great Recession.

3. Meanwhile, those at the top have done well and those at the very top–the ultra rich in the top tier of corporate status and in the finance (and shadow finance) industry and its related hangers-on–have done exceedingly well by being able to keep a much larger share of the business profits for themselves.

4. That inequality then has created a feedback cycle of disrespect for ordinary workers and greed for more profits and status and power that also led directly to the financial crisis that caused the Great Recession.

5. And now we learn the capping blow (which common sense tells us anyway, given what we know about human nature and its frequent inability to handle the struggle between self-interest and altruism in ways that benefit all) those at the top who have been paying themselves exceedingly well (and their buddies when they serve on their boards of directors) are likely to treat their employees exceedingly poorly. Greed at the top goes along with meanness towards those considered “beneath” them.

From my perspective this is just one more reason (i) to ensure that ALL compensation income is subject to payroll taxes (removing the Social Security cap) and (ii) to increase the tax rates on the income of the top by adding more rate brackets. We should go back to the type of system we had before Reagan, when there were many more “rate brackets” under the income tax. It’s really not reasonable in a progressive tax system to fail to distinguish between incomes of a quarter million and incomes of $10 million–they should not be taxed at the same marginal rate. And the hedge or equity fund or real estate partnership manager who makes more than a million a day as his compensation for managing (paid, of course, part as fee and part as “carried interest”) should be taxed at a rate considerably higher than the CEO who makes “only” 10 million a year. The wacky system we have right now lets that equity fund manager pay the preferential capital gains rate under a realization system–meaning with deferral as well as lower rates!

So why is it that Congress–even in a period of high deficits and lots of talk about having to change the benefits under Social Security because of the GOP and blue-dog Dems’ worries about the deficits (even though Social Security has actually been running a surplus) –couldn’t bring itself to pass a bill that would treat carried interest as the ordinary compensation income that it is, so that fund managers would pay tax the same way that their firm’s janitor does? Talk about meanness.