Since the Business Roundtable announced its new purpose of business and de-emphasized the role of profits and long-term value to its shareholders, many articles have fostered the reasoning behind it, including my own. In fact, while their new purpose was praised by many, it also received criticism from others, including the Wall Street Journal.
Most boards of public corporations tie CEO pay to the increase in shareholder value. If a CEO does not perform accordingly, that is, raise the value of the company’s stock and assure the company is more profitable during his or her leadership, that CEO will shortly be gone.
CEO pay has long been an item of argument and contention as in most cases the pay ratio of a CEO is so vast compared to the employees of the same company. In many cases CEO’s are rewarded even when they have not performed well.
It was Dodd-Frank that recognized this and required more CEO pay disclosure. In fact, two years ago the Securities Exchange Commission (SEC) issued additional guidance that implemented the pay ratio disclosure requirement promulgated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). Under the act and the SEC guidance, companies are required to disclose, as a ratio, a comparison of the annual total compensation of the chief executive officer (CEO) and that of the company’s “median” employee.
Even with this ratio being more public, CEO pay has increased 940% between 1978 and 2018, while typical worker pay has gone up 12%, according to data from the Economic Policy Institute. Their research shows that in 2018, CEO’s in the country’s top 350 businesses were paid $17.2 million on average. Employees working in those industries — ranging from retail to technology and manufacturing — typically earned a median salary of $64,500.
This means that today there’s a 278-to-1 pay ratio between workers and CEO’s. In 1989, the pay ratio was 58-to-1 and in 1965, it was 20-to-1.
The article goes on to say stock awards and cashed-in stock options averaged $7.5 million of CEO pay in 2017 and 2018. It also noted that some observers claim that incorporating stock in pay arrangements, along with increasing salaries, is needed to incentivize CEOs, to compete in the market for talent in the C-suite.
The authors of this latest study don’t agree with that premise. According to Lawrence Mishel, a labor-market economist and one of the report’s authors, “The escalation of CEO compensation has fueled the growth of top 1% incomes and widespread inequality across the country.”
Mr. Mishel and other analysts are concerned about the growing wealth gap. The country’s richest 10% of households now control 70% of the wealth. And Market Watch adds, the U.S. hasn’t seen this level of concentration of wealth since 1929, just before America fell into the Great Depression.
In an interview for Naked Capitalism, Julia Wolfe, one of the authors of the study, says, “just as the typical worker’s compensation hasn’t risen by that much in comparison to CEOs, other really highly paid wage earners also haven’t experienced that extreme increase that CEO pay has. Certainly, they’ve started earning more in relation to the lower-level workers who are receiving lower compensation, but it’s important to note this because it tells us this isn’t just a matter of a reflection of an increased demand for skills, or an increased demand for a certain type of worker, or added value to the economy.
She believes, “this is about a differential in power dynamics and the ability to set wages, and these are the people who are in power who are making these decisions. It really reflects that difference, rather than just difference in skill.”
According to the study, the increased focus on growing inequality has led to an increased focus on CEO pay. It appears that corporate boards running America’s largest public firms are giving top executives increasingly outsized compensation packages with stock-related compensation making up a large portion of the CEO pay.
CEOs are even making a lot more — about five times as much — as other earners in the top 0.1%. From 1978 to 2018, CEO compensation grew by 1,007.5% (940.3% under the options-realized measure), outstripping S&P stock market growth (706.7%) and the wage growth of very high earners (339.2%). In contrast, wages for the typical worker grew by just 11.9%. And this is in part “because of their power to set pay, not because they are increasing productivity or possess specific, high-demand skills.”
CEO compensation has grown 52.6% in the recovery since 2009!
Some of this trend is certainly related to the stock market growth fueled by stock buybacks. Consider that since 2009 net corporate stock buybacks have accounted for 90% of the total net demand for stocks. And since 2014 this number is 120%, meaning without the stock buybacks there would have been net selling in the market over the last five years. The nearly $5 trillion spent on buybacks since 2009 has artificially inflated earnings per share, “making soaring stock prices appear justified.”
Stock buybacks have soared from approximately $400 billion in 2012 to $806 billion in 2018, with significantly higher levels predicted for 2019.
Is there any irony here between the BRT new purpose and soaring profits going to CEO’s?
In a recent New York Times op-ed, Joshua Bolton, Chief Executive of BRT and Ken Bertsch, executive director of the Council for Institutional Investors praised buybacks as being good for investors and the economy.
Many others disagree. From all reports recently, it does certainly look like it’s making CEO’s wealthier. Not quite what the Dodd-Frank reporting had in mind is it?