A recent congressional proposal would create a tax on those with wealth that is one thousand times the wealth of the median U.S. household. (Getty Images)
A progressive group that has long examined the ways that top executives scheme to pay themselves lavishly while keeping down employee pay last week proposed a number of steps to rein in the problem.
The Washington D.C.-based Institute for Policy Studies and the Congressional Progressive Caucus Center issued the report. It points out that last year, the average S&P 500 company paid its CEO $16.7 million, while it paid its average worker $61,900, according to an AFL-CIO analysis.
Sure, running a large business is highly demanding. But whether it’s worth 272 times what the average worker does for the enterprise is questionable, the report says.
Driving the increasing disparity in compensation between top executives and the rank and file isn’t the blind hand of the free market, according to an August report by the Institute for Policy Studies. Rather, it’s due to a number of self-serving practices by the executives themselves.
One is the stock buyback.
That’s when a corporation doesn’t use profit to reinvest in the company by doing things like buying equipment and awarding raises and improving benefits, but instead uses it to boost stocks by using profits to buy them back. Since a big component of executive compensation typically consists of huge blocks of company stock, CEOs benefit directly by such buybacks.
The increasing divergence between executive and worker pay helps drive income inequality in the United States, and that’s been linked to higher rates of crime, greater consumer debt, and poorer health outcomes. In addition, practices that bloat executive pay such as stock buybacks and awarding them huge bonuses encourage risky conduct, last week’s report said.
“CEO pay practices incentivize reckless behavior that puts us at risk,” the report said. “For example, executives chasing huge bonuses crashed our economy in 2008, leaving millions of Americans homeless and jobless. In the three years leading up to the meltdown, the top five executives at the 20 biggest bailed-out banks averaged $32 million in compensation. The Institute for Policy Studies has documented how the CEO pay system has perversely rewarded executives for other harmful behaviors, including slashing jobs, cooking the books, accelerating climate change, and dodging taxes.”
It also seems likely that merely making top executives so rich adds to the risk-taking. Unlike most of their employees, millionaire executives have a nice financial cushion on which to fall back if their reckless actions end with the failure of the enterprise.
To mitigate the problem, last week’s report proposes several measures:
- Implementing a provision of the 2010 Dodd-Frank law that bans compensation that encourages inappropriate risk taking — One current proposal would ban compensation in the form of stock options, defer bonuses for a lengthy period and put executives on the hook for fines resulting from their risky behavior.
- Stripping stock awards and bonuses after blow-ups — U.S. Sens. Sherrod Brown, D-Ohio, and Tim Scott, R-S.C., sponsored such a measure for bank executives. It passed out of the Senate Banking Committee on a 21-2 vote, but hasn’t been acted on since.
- Higher taxes on stock buybacks — The 2022 Inflation Reduction Act imposed a 1% excise tax on buybacks, but the report supports a Biden administration push to raise that to 4%.
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