Why CEO Pay Matters So Much

Progress in the battle for economic justice will require action on two fronts: Bringing up the bottom and bringing down the top.

And in bringing down the top, knocking down CEO pay is a must win battle, for two reasons. First, it lies at the heart of where the system is broken, and must be fixed. Second, the ripple effect of outsized CEO pay is a huge factor in the bloated income share of the top one percent.

A recent Dean Baker piece,  CEO pay and performance link? For Coke, zero, illustrates this well. Baker, regarding the ripple effect:

But pay for top managers in corporate America also has a spillover effect in other sectors. As a result of the exorbitant pay going to CEOs, top management at universities, hospitals and even charities can count on pay packages that run into the high six figures and even seven figures. Their top assistants have their pay scaled accordingly. In other words, excessive CEO pay is a big part of the story of growing inequality that we’ve seen over the last three decades.

Consider the math. When CEO pay is 200 to 300 times worker pay, instead of the 20 to 30 times worker pay range that prevailed in the pre-Reagan era, it pulls the pay of other top executives with it. 

So, for example, the Chief Financial Officer (CFO) might make 100 times the pay of the average worker. Yes, it’s a whole lot less than what the CEO is being paid, but it’s still absurdly high. And, as Baker explains, the pay in other sectors (for example, universities and non-profit hospitals) gets pulled along as well:

Unfortunately, the system on this front is broken badly. As Baker explains, Warren Buffet has been an outspoken critic of CEO pay levels. But in a situation where Buffet was in a position to act consistently with the strong views he has expressed, he did nothing. Baker:

It turns out that the CEO and other top executives at Coca-Cola have been giving themselves lavish bonus packages. According to the calculations of investment adviser David Winter, the bonuses issued last year had a value of $13 billion, which could rise to $24 billion over a two-year period. These bonuses would be shared among 6,000 managers, coming to an average $2 million per person per year.

This is a considerable chunk of money, even for Coca-Cola. With profits of about $9 billion a year, these bonuses are comparable in size to the company’s profits. In other words, they should be of real concern to its shareholders, since there is enough money at stake to hugely affect their earnings from the company.

This is why David Winter was happy that Warren Buffett, through his company Berkshire Hathaway, is one of the largest owners of Coke stock. Buffett has publicly condemned excessive CEO pay on many occasions. For this reason, Winter assumed that Buffett would be supportive of his effort to clamp down on the pay packages that the top management at Coca-Cola had awarded itself.

Winter was wrong. Buffett apparently decided that he did not want to have a public spat with Coke’s management. He indicated that he was raising the issue privately with the management and would presumably persuade them to reduce the size of future bonuses. But this meant that they would effectively get away with stealing billions of dollars from Coke by getting pay that was so large relative to total profits than there’s no way their performance could justify it.

This episode is striking because if there was ever a company where it should have been possible to rein in excessive CEO pay, it was Coca-Cola. In most companies, stock ownership is diffuse, so there is no single person who controls as large a share of stock as Buffet does with Coke. Furthermore, Buffett sees excessive CEO pay as a problem, so he should presumably have been more willing to take steps to limit compensation than most investors, who don’t seem to have the issue on their radar.

Yet when given the opportunity to take a strong stand against a pay package that he viewed as excessive, he did not want to have a public fight.

Coca-Cola is just one example, but it’s a situation where all the stars were aligned to take a chunk out of CEO pay, and nothing happened.

This needs to be as prominent an issue in the public discourse as the minimum wage. Here’s hoping.