No One is Worth $1 Million a Year

In 1930, an obscure lawsuit against Bethlehem Steel unearthed a piece of corporate data that would quickly outrage Great Depression-era America. Bethlehem CEO W. R. Grace, Americans learned, had grabbed $1.6 million in personal compensation the year before. That revelation would soon help fix a variety of new regulations on America's corporate executive suites, including a mandate that required companies to annually reveal — for the first time ever — the pay of their top executives.

Over the next four decades, executive pay in America would essentially stagnate. In effect, points out historian Harwell Wells, corporations observed an unofficial $1 million limit on annual CEO compensation.

From No Man can be worth $1,000,000 a Year:

"With the nation in an economic tailspin, unemployment rising fast, and the financial system teetering, executives’ compensation was at the top of the news. Americans were stunned by revelations about enormous paychecks and bonuses going to corporate leaders while shareholders suffered from dropping stock prices and employees saw wages reduced and jobs lost. Especially provoking, some of the firms giving their leaders generous pay packages were simultaneously accepting aid from the federal government. With every new disclosure, public outrage built and legislators seethed. Attempts were soon made to stop the flood of money to corporate leaders. Shareholders sued the directors of their corporations, accusing them of wasting money on poorly performing executives. Regulators promised to require new disclosure of executive pay. Senators threatened to tax outrageous pay packages out of existence. Congress demanded that firms receiving government aid slash the salaries of their leaders. It was, of course, 1933."

Since then, no major firms dared exceed that limit — and risk the public furor exceeding the limit would surely bring.

But CEO pay would start rising again, slowly in the 1970s and then much more rapidly in the 1980s, as some of the dominant pressures that had restrained excessive compensation — most notably, a strong trade union presence and high federal tax rates on high incomes — began to melt away.

By the 1990s, million-dollar executive paychecks would be commonplace. By the early 2000s, CEOs were regularly busting the $10 million barrier. Now a new analysis from GMI Ratings has revealed that Corporate America has obliterated still another barrier. In 2012, GMI reported last week, the nation’s ten highest-paid CEOs all pocketed more than $100 million each. Before 2012, that had never happened before.

Researchers at GMI track “realized pay,” a yardstick that offers, many observers believe, the clearest sense of how fabulously lucrative executive stock awards have become. These stock awards currently come in various forms. Stock “options,” the most lucrative of them all, give executives the right to buy shares of their company’s stock at a future date at the current stock price. If a company’s shares gain in value, the executive can buy low at that future date and sell high.

But stock options present problems for researchers trying to tally up exactly how much pay in a given year top executives are grabbing. How should researchers value these options? Should they estimate, in the year an executive receives the options, how much the options will be worth down the road? Or should researchers wait and not record options as compensation until executives “exercise” these options and realize actual value from them? So the GMI researchers waited, and that patience helps us see vividly how mammoth today’s largest executive rewards have become.

In 2012, according to the new GMI data, Sirius XM Radio CEO Mel Karmazin collected $255.4 million in total realized compensation. Of that sum, $244.3 million came from exercising stock options he had received in earlier years. But Karmazin only rates third on GMI’s top-paid ten for 2012. The year’s first-place finisher, Facebook CEO Mark Zuckerberg, pulled in an astounding $2.3 billion. In second place was the chief exec at the energy pipeline giant Kinder Morgan — Richard Kinder with $1.1 billion.

America’s top-paid CEOs, all these totals show, now reside comfortably in nine- and ten-digit annual pay territory, a level that once upon a time only hedge and private equity fund kingpins called home. And they also pay a lesser tax rate on their capital gains on unearned income than do those who earn regular wages with earned income.

So have we hit the ultimate party time for America’s CEOs? Not really. Today’s top CEOs don’t appear to be celebrating. A deep sense of apprehension, not joy, seems to have invaded America’s executive suites. What’s going on? America’s CEOs appear deathly afraid that their gravy train may soon derail.

That fear is driving the massive — and borderline hysterical — lobbying campaign that corporate power suits are now waging against a provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. One particular provision, the law’s section 953(b), requires corporations to annually reveal the ratio between what they pay their top execs and what they pay their most typical workers. (Are the CEOs too ashamed to publicly admit that they've been ripping off their employees?)

The U.S. Securities and Exchange Commission, after long delays, last month proposed regulations to enforce this Frank-Dodd mandate. Top execs (and their underlings on the board-of-directors) have been bombarding the SEC with overheated complaints ever since. By law, the SEC must invite “public comment” before finalizing any new regulations. The comments Corporate America’s power suits are now filing come full of ludicrous doomsday claims. Corporate human resource executives are even predicting that the proposed new SEC regulations will create “chaos.”

The National Investor Relations Institute, the trade group that speaks for the corporate officials who handle disclosure issues, is specifically charging that the pay ratio disclosure the SEC seeks to enforce will “confuse most investors” and impose “exorbitant” compliance costs on corporations.

One corporate consultant goes further. He's claiming that shareholders at corporations that show only modest gaps between their CEO and median worker pay might well demand pay cuts for workers!

The organizations that actually represent workers, America’s trade unions, couldn't disagree more. They're lining up solidly (see the AFL-CIO petition) for a robust enforcement of the Dodd-Frank pay ratio disclosure. And they’re finding support from business leaders who understand how corrosive wide pay gaps have become.

One small business leader from Colorado, Laurie Norton, reminded the SEC last month that an “inequitable distribution of income” is threatening our democracy.

"The inequitable distribution of income in our country has reached obscene levels and seriously threatens our democracy. NOT revealing the absurd ratios of CEO pay to that of average workers is equivalent to sweeping and leaving our dirt under the rug. Only when it is out in the open will people see it and clean it up."

FYI - The U.S. Securities and Exchange Commission will be accepting comments on its proposed pay ratio disclosure regulations through December 2. Interested citizens can read online the comments so far submitted and submit comments of their own, either directly to the SEC or via the AFL-CIO's petition. Also visit Too Much online for more info on income inequality and subscribe to their weekly newsletter.

* Originally posted (without my edits) at the Washington Spectator as Why CEOs Aren't Celebrating on October 28, 2013 by Sam Pizzigati