Companies have long justified paying their CEOs obscene amounts of money by noting that these sums are tied to performance. Yet many of the metrics used to measure their performance are skewed, and CEO pay keeps rising. During the height of proxy statement season, the Times reports that bloated executive pay is a major factor in the country's steadily increasing income inequality, with a class of "supermanagers" making "supersalaries" that put them out of touch with reality and the employees on whom their paychecks depend.
French economist Thomas Piketty, through his new book Capital in the 21st Century, is responsible for these terrible new truths: two thirds of the increase in American income inequality over the past four decades can be traced to the rapid increase of executives' salaries.
In the new gilded age, Lloyd Blankfein's $20 million in compensation last year is a joke. Private equity baron Leon Black made $546 million in 2013.
In 1960, the top 10 percent of earners in the United States took in 33.5 percent of all income, which includes wages and investment returns, according to data in Mr. Piketty’s book that is derived from decades of income tax records. By 2010, that share had risen to 47.9 percent. Higher wages were behind two-thirds of that increase, according to his data. Mr. Piketty says that a ballooning of senior executive pay can explain a large proportion of that wage climb.
“The system is pretty much out of control in many ways,” he said in an interview.
As a different study of 195 companies shows, tying a CEO's pay to total shareholder return, as a majority of corporations do, usually means the company underperforms:
Those companies’ shares had an average loss of 0.18 percent, annualized, over the five-year period. That compares with an average gain of 1.15 percent among all 195 stocks, regardless of the benchmark they used.
Even more striking, stocks of companies that did not use total shareholder return as a measure gained an annualized average of 2.67 percent.
As long as employers refuse to offer stock options or higher salaries to their rank and file employees, the rich will continue to get richer. So how does Piketty suggest we solve the problem?
He supports a substantially higher tax rate for top earners. And while he acknowledges that this is an imperfect tool, he rejects the argument that such a tax could dent the morale of executives and cause their companies to underperform.
“It is possible to find hard-working managers who are willing to be paid 20 times the average wage at their company rather than 100 to 200 times,” he said.
Perhaps, but why would politicians vote to lower the number of donations they receive?
