In early 2017, no executive in North America struck investors as more attractive and valuable than Hunter Harrison. This veteran corporate chief demanded—and won—a $230-million four- year pay package to take the reins at the railroad giant CSX. What made him worth that windfall to the CSX board of directors? Harrison, as the CEO at Canadian Pacific, had “turned around” a lackluster operation. The secret to his success? He slashed the workforce—over 17,000 employees at the start of his CEO tenure—by 34 percent.
Cutting jobs can be strenuous work. Harrison made sure he received adequate compensation for it. During his Canadian Pacific tenure, he collected $89 million over four years, more than double the pay his CEO predecessor at Canadian Pacific had received for the same length of service.
Corporate boardrooms today are overflowing with executives like Hunter Harrison—and corporate directors eager to reward them. Between 1978 and 2015, the Economic Policy Institute calculates, major corporation CEO compensation increased about 941 percent, a rise “substantially greater than the painfully slow 10.3 percent growth in a typical worker’s compensation over the same period.”
In 1965, major CEOs in the United States averaged 20 times more compensation than typical American workers. They now average over 300 times higher. Their annual jackpots have emerged as the single largest contributor to the skyrocketing income share of America’s top 0.1 percent. All told, the rewards corporate and banking power suits rake in have accounted for two-thirds of the top 0.1 percent’s outrageously good income fortune.
Executive compensation has essentially become the locomotive of our contemporary inequality. To “predistribute” wealth more rationally, we would need to slow that engine down.
Who could do that slowing? Many corporate pay reformers look to shareholders for salvation. They seek to give shareholders a “say on pay,” the right to take annual votes on executive pay packages, and also call for changes in corporate governance rules that would give dissident shareholders a better shot at unseating CEO-friendly corporate board incumbents.`
Other reformers question the viability of any strategy that relies on shareholders—and shareholders alone—to restore common sense to executive compensation.
“Why should we let shareholders be the ultimate arbiter on the size of CEO rewards,” an Institute for Policy Studies report asks, “when these rewards can and do create incentives for CEO behaviors that hurt people who aren’t shareholders?”
Consumers, workers, and communities all have a stake in how corporations pay CEOs. Shareholders count as just one stakeholder among many, and their interests may not necessarily align with the interests of other stakeholders.
In developed market economies, we already recognize this divergence of stakeholder interests. We do not, for instance, leave to shareholders the responsibility for making sure that corporations refrain from fouling the environment. Instead, we legislate into law rules on how corporations can behave environmentally.
By the same token, we do not expect shareholders to monitor the fairness of corporate employment practices. We deny government support, for instance, to companies that discriminate by race or gender in hiring. In the United States, such companies cannot gain government contracts. Tax dollars, Americans have come to believe, should not subsidize enter- prises that increase racial or gender inequality.
Stakeholder-oriented corporate reformers are extending this analogy to executive compensation. Tax dollars, they maintain, should also not subsidize enterprises that widen economic inequality. Tax dollars today undeniably do. Hundreds of billions of them annually flow—as government contracts or tax breaks or outright subsidies—to companies that pay executives hundreds of times more than their workers. Executives at these companies have no incentive to change this status quo. They benefit too much from it. They win when workers lose. Their victories make inequality ever worse.
We need a new reward structure. Top executives need an incentive to share the wealth their enterprises create. A “maximum wage”—a ceiling on executive pay—could provide that incentive. The “public purse” could make that maximum wage practical.
In the United States, private-sector firms currently take in about $500 billion every year in federal government contracts, for everything from manufacturing military aircraft to serving food and drinks in national parks. Over a fifth of the U.S. workforce, 22 percent, labors for a company that holds one or more federal contracts. Millions of other Americans work for firms with state and local government contracts.
Governments at all levels in the United States also bestow economic development subsidies on private corporations. Corporate welfare from state and local governments alone had accumulated to at least $110 billion in 2014, with an estimated three-quarters of that total going to fewer than 1,000 large corporations. By 2014, Boeing had pocketed nearly $13.2 billion in state and local subsidies, a total that exceeded the company’s total pre-tax profits between 2012 and 2013.
Imagine if all this taxpayer largesse came with strings that tied top executive compensation to worker pay: no contracts, no subsidies, no tax breaks for corporations that pay their top executives—in salary, bonus, and incentives—over 25 or 50 or 100 times what their workers are making.
Such strings would be politically popular. No nation on earth has taxpayers who want to see the taxes they pay enrich the already rich. In a 2016 Reuters/Ipsos poll of over 1,000 Americans with stock market investments with a top asset manager, a survey sample that tilts conservative, just under 60 percent felt CEOs were making “too much,” double the share who felt corporations had CEO pay “about right.” Political campaigns to deny tax support for corporate executive pay excess would find publics ready—and even eager—to listen.
And if those publics successfully ushered links between corporate executive pay and government outlays into law, the consequences would be far-reaching. Corporate executives would suddenly have an incentive to raise long-stagnant worker wages and less of an incentive to squeeze consumers or cook the books or do any other dastardly deed that subverts the overall public well-being. What would be the point? A move to outsource jobs or cut corners on product safety still might, of course, increase corporate profits. But those higher profits would translate into executive pay windfalls only if corporations turned their back on government contracts, tax breaks, and subsidies. No major corporation could thrive without this government support. No rational corporate board would risk losing it.
A predistributive approach to public policy could also reward corporations with the most modest pay differentials between executives and workers. Governments could offer these firms lower tax rates. Or give them preferential treatment in the contract-bidding process. Steps like these would, over the long term, privilege enterprises with pay patterns that help narrow inequalities and place at a competitive disadvantage those enterprises that continue to compensate executives excessively.
The competitive advantage, in this environment, would go to nontraditional enterprises that embrace equity as a central core value. Cooperatives and worker-managed firms would have a better chance of prospering—and proliferating—if tax dollars no longer subsidized corporations that lavished excessive compensation on top executives. Leading egalitarian thinkers like political economist and historian Gar Alperovitz see these alternate enterprises as the key to creating an equitable and sustainable “New Economy.” Placing a “maximum wage” pay ratio at the heart of the intersection between public and private sectors would give these alternate enterprises a powerful leg up—and help “level up” lowly incomes.
That same pay ratio would, over time, depress executive compensation. In 2016, CEOs at America’s top corporations averaged $16.6 million, nearly 340 times the average U.S. worker take-home. Executive paychecks at that exorbitant level would start shrinking immediately if governments at all levels began rewarding enterprises that maintain a reasonable pay ratio maximum and penalizing those firms that do not.
Any paycheck erosion at the corporate executive summit would, in turn, begin deflating the income and wealth of the 1 percent. But huge concentrations of income and wealth would, to be sure, most certainly remain. If pay ratio maximums swept across the corporate landscape, already accumulated billion-dollar fortunes would continue to throw off tens and even hundreds of millions in annual investment returns. Hedge and private equity fund managers would still be wheeling and dealing their way to massive windfalls.
The super rich would remain with us in societies that leveraged the power of the public purse to cap corporate CEO compensation. But this super rich, without a steady infusion from the ranks of corporate executives, would stand more isolated and less politically potent. Their declining political influence would open the door to broader initiatives that seek to address the vast incomes that come from the ownership of assets. Societies could, for instance, begin to restructure income taxes along maximum-wage lines. Personal income above specific benchmarks—starting perhaps at 25 or 50 or 100 times the minimum wage—could be subject to strikingly higher tax rates than incomes below those ratios.
Into our sights would soon begin to creep a world without a super rich. And a dandy world that would surely be.