Reining in executive pay

Joel Gemunder, the chief executive officer of Omnicare, retired on July 31, almost exactly one year after his company announced a wide array of wage cuts and layoffs. The former head of the nation’s top provider of pharmaceuticals for seniors won’t have to worry much about his own personal economic security. He’s walking off into his golden years with a getaway package worth at least $130 million.

Gemunder’s sweet deal only hints at the excess still pulsing through America’s executive suites. Since 2008, the year the nation collapsed into the Great Recession, 50 major U.S. corporations have each axed more than 3,000 jobs. Yet their CEOs, as our just-released report for the Institute for Policy Studies documents, last year took home 42% more pay on average than the S&P 500 CEO average.

At America’s top 50 companies, CEO pay — after adjusting for inflation — is running at quadruple the 1980s average and eight times the average in the mid-20th century. Is executive pay going to forever trend upward? Or can somebody, anybody, do something?

Actually, Congress has just done something. The landmark financial reform legislation passed in July includes reforms advocated for years by those who believe that empowering shareholders will clean up the executive pay mess. The most notable proposal — shareholder “say on pay” — now stands as the law of the land, not just for financial companies but for all publicly traded U.S. corporations.

All shareholders now will have the right to express their disapproval of executive pay packages. And if directors ignore that disapproval, shareholders will soon have the tools, through new SEC regulations, to get their own director candidates on corporate board ballots.

Point by point, Congress has codified almost the entire shareholder-driven agenda for pay reform. Corporate board compensation committee independence? Check. All members of the committees that set CEO pay must now be independent. Corporate pay consultant conflict of interest? Check. The new law clamps down on consultants who play footsie with CEOs under the table. Pay for performance standards? Check. The law requires corporations to disclose how their executive pay relates to actual financial performance.

These are all positive steps. But will they end the outrageous incentives for reckless executive misbehavior that excessive rewards create? Unfortunately, no.

All these reforms rest on the shaky assumption that shareholders, once suitably empowered, will rise up and end executive pay excess. We don’t make this assumption for other corporate problems. We don’t, for instance, expect shareholders to prevent corporations from poisoning our water or employing child labor. We endeavor, instead, to enact laws and regulations to prevent such practices. So why should we rely on shareholders to fix executive pay?

We’re all stakeholders, after all, in executive pay decisions, either as consumers or workers or residents of communities where corporations operate. In recent years, executives chasing after paycheck jackpots have engaged in actions that have put us all at risk, such as toxic securities and job-killing mergers. Why should we leave the responsibility for executive pay decisions to shareholders and shareholders alone?

Instead, we can start with a different assumption: that our tax dollars must in no way subsidize executive excess. Currently, corporations can deduct from their income taxes all those millions they lavish on their execs. One bill before Congress would deny tax deductions on any executive pay that runs over $500,000 or 25 times the pay of a company’s lowest-paid workers.

Another promising proposal would give a leg up in federal contract bidding to companies that pay their executives less than 100 times what their workers make.

We already deny government contracts to companies that discriminate, by race or gender, in their employment practices because we don’t want our tax dollars subsidizing such inequality.

We need to apply this same reasoning to extreme economic inequality.

Lawmakers in the current Congress, to their credit, have quietly taken some baby steps down this alternate executive pay reform road. The healthcare reform legislation enacted this year lowers the tax deduction that health insurers can take on executive pay to $500,000.

Even better, the new financial reform law includes a provision that requires all U.S. corporations to annually report the ratio between their CEO compensation and the median pay that goes to their workers.

Corporate lobbyists are now working furiously, behind the scenes, to defang this mandate. They have good reason to feel panicked. The first step to limiting the vast pay gap that divides CEOs and workers is disclosing that gap. We’ve now taken that step. Let’s keep going.

Sarah Anderson and Sam Pizzigati are among the coauthors of the new Institute for Policy Studies report, “Executive Excess 2010: CEO Pay and the Great Recession.”