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CEO Performance Pay Is Bad For Everyone Except CEOs

Economy Memo Pad

CEO Performance Pay Is Bad For Everyone Except CEOs


Executive compensation is soaring while workers and taxpayers feel the squeeze. A new Roosevelt Institute white paper explains why.

Americans hate the fact that CEOs of big corporations keep raking in millions while the incomes of most American households are sinking. Now a new Roosevelt Institute white paper by University of Massachusetts economist William Lazonick adds to the growing case that soaring CEO pay is not just unfair, but harmful. It’s bad for businesses, workers, and taxpayers, and it’s one of the reasons that the economy remains sluggish.

Lazonick details the myriad ways by which CEOs pump up their wages, painting a picture of crony capitalism in the boardroom and at the SEC. CEOs pad their boards of directors with other CEOs, who are all eager to hike each other’s pay. They hire from the same pool of compensation consultants, who then recommend to all of their boards why each of them deserves to be paid more.

Almost all executive pay, which was back to its pre-recession average high of $30 million a year by 2012, is delivered in the form of stock. This exploits a policy loophole that taxes compensation of more than $1 million unless it falls into the category known as “performance pay.” Meanwhile, the CEOs and their teams of lobbyists and lawyers have gotten a compliant SEC to issue a host of rulings that invite stock price manipulation. The resulting higher prices are considered proof of better performance, and also instantly deliver millions to the CEOs through their stock options. Very neat.

Lazonick explains that corporations’ favorite method of boosting stock prices is buying back their own stock. While a firm is required to notify the public of its intention to buy back its stock, it doesn’t have to say when it will do so, which fuels price-boosting speculation and allows the firm to time its repurchases to maximize the CEO’s gains.

The justification given by economists for stock-based performance pay is that corporations should be run to maximize shareholder value, and paying CEOs in stock aligns their performance with the purpose of their firm. But as my business school finance professor told a shocked classroom of my fellow students, the economic purpose of the firm does not have to be maximizing value for shareholders. The firm could just as easily be dedicated to maximizing the value for workers or communities or society at large.

Lazonick’s version of this fundamental critique of corporate capitalism is that it is not only shareholders who have an investment in a corporation. Taxpayers invest in corporations through the public infrastructure and educated workforce corporations depend on. Workers invest through their contributions to corporate innovation. Taxpayers and workers lose if the corporation’s core economic performance – as opposed to the price of its stock – declines. The result is fewer people working, less tax revenue, and diminished community life. But CEO pay just keeps going up regardless.

Lazonick argues that the CEO focus on stock buybacks has distracted them from investing in innovation to sustain their companies over the long run. It may also be true that in the absence of consumer demand, the CEOs see no better use for excess cash than to reward themselves and shareholders. But in fact, the stock market focus of U.S. industrial corporations, which has eroded middle-class wages and employment, is a big reason for lower domestic consumer demand. In contrast, Lazonick points out that Apple, which did minimal buybacks from 1994 through 2011, found no lack of consumer demand for its innovative products.



  1. ExRadioGuy15 June 7, 2014

    Of course. But, the GOP sold this stuff as “Trickle-Down Economics” instead of what it really is: upward wealth redistribution and Vampire Capitalism.

  2. Douglas Johnson June 7, 2014

    High CEO bonuses are a way to avoid taxes and shift the tax load down. Meanwhile, those with the highest paid executives are also the highest recipients of government subsides, frequently in the form of “entitlement” payments to destitute underpaid employees.

  3. Allan Richardson June 8, 2014

    In the real world of actual workers, “performance” means meeting numbers set by managers who want to prevent workers from actually getting paid for their performance (the Sysiphus Syndrome). In the slap-on-the-back good buddy world of CEOs and board members, “performance” means automatic judgement as excellent, unless one’s incompetence is so obvious that the public takes their sales revenue away (in which case it is “below expectations” and the golden parachutes open up).

  4. idamag June 9, 2014

    In a few years this practice will destroy the economy. The simple facts are: Business needs consumers and consumers need money. With that money, the consumers pay taxes to decrease the national debt. The consumers drive the economy. When we do what we are doing to the consumption end of the spectrum, we will destroy the economy eventually. Also revolutions have started because of the disparity between haves and have nots and have not enough.

  5. Theodora30 June 10, 2014

    None of this will happen until there is a shift in our national values back to what they were before the Ayn Rand loving, free market worshippers convinced so many that unregulated greed is what is best for our society. Economists like Milton Friedman gave the intellectual underpinnings and Reagan sold this mean-spirited ideology to a gullible media who put him on a pedestal while Democrats wrung their hands and whined. (At the very least they could have debunked Reagan’s lie that tax cuts paid for themselves – something that they never do.)
    Prior to the Reagan era influential groups like the Business Roundtable acknowledged that corporations have a duty to their customers, workers, and community as well as to shareholders. Now they explicitly say that the only obligation is to maximize profits for their shareholders.
    Even though there is ample evidence that unbridled capitalism undermines democracy it has been elevated to the ultimate good. One way this undermining happens is through the destructive effect unregulated capitalism has on the middle class. A large, flourishing middle class is essential for a healthy democracy and this never exists without deliberate government policies to curb the excesses of the rich and powerful yet Americans have been told for years that free markets always function better than government and that allowing them to run everything in our society as unregulated, for-profit ventures will cure all of our ills.
    I keep waiting for the Democratic Party to wise up and make this fact their explicit rationale for policies rather than relying on the appeal of social justice – an appeal that falls flat in a society that has been sold Ayn Rand’s worldview for over 30 years. Forget the appeal that policies like health care for all or living wages are the right, just thing to do and start telling people it’s about preserving our democracy. To paraphrase James Carville “It’s our democracy, stupid.” That will start a discussion that is long overdue.

  6. FAMULLAR June 10, 2014

    1The United States Department of Defense (DoD) has added five Samsung Galaxy smartphone and tablet devices to its list of approved products, despite often voiced concerns that the Google Android operating system is insecure.However, that hasn’t stopped the DoD from adding Samsung’s Galaxy S4, Galaxy S4 Active, Galaxy Note 3 smartphones to its list of approved devices, along with two Galaxy Note tablets. All of the Samsung smartphones and tablets will run Android 4.4.

    2The devices will also be equipped with Knox, Samsung’s own enterprise security platform for Android devices, featuring encryption, VPN and application containers designed to securely protect documents and files.

    3The announcement that the Google Android devices have been approved for use comes as Samsung looks to drive its way into the enterprise mobility space with devices designed to be secure enough to use in even the most secretive environments.

    4″The addition of these five devices to the APL with the Knox Platform, brings together the holistic B2B vision of Samsung to lead the market in hardware and software integrated based secure mobility and user experience for the benefit of the US government in delivering on their mission,” said Injong Rhee, senior vice president of Knox Business, IT and mobile communications division at Samsung.

  7. Al Baniya June 11, 2014

    Since liberty was not consciously designed, but rather discovered and unleashed with Western civilization, its benefits were mostly unknown until they were recognized and studied.


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