A new report from the Economic Policy Institute looks into the salary and stock packages of America’s most overcompensated corporate titans and the numbers are staggering. According to journalist Mark Kreidler, who recently covered the report for Capital + Main, CEO paychecks are a huge contributor to inequality. He joins the podcast to share why more people would do better if CEOs were paid less.

We want your questions for another “Ask Me Anything” episode with Nick and Goldy! Call and leave us a voicemail at 731-388-9334.

Mark Kreidler is a California-based writer, journalist, and broadcaster. He’s the author of three books, including Four Days to Glory.

Twitter: @MarkKreidler

For America’s Top-Ranked CEOs, Too Much Is Never Enough

https://capitalandmain.com/for-americas-top-ranked-ceos-too-much-is-never-enough

CEO pay has skyrocketed 1,460% since 1978

https://www.epi.org/publication/ceo-pay-in-2021

Website: https://pitchforkeconomics.com

Twitter: @PitchforkEcon

Instagram: @pitchforkeconomics

Nick’s twitter: @NickHanauer

 


Nick Hanauer:

Hey, Pitchfork Economics listeners. We have another Ask Me Anything episode coming up where we answer your questions about economics and we would love to do that. So leave us a voicemail at 731-388-9334 and we’ll try to get to your questions.

David Goldstein:

The pay of CEOs has absolutely skyrocketed over the past couple of decades to levels that are quite alarming.

Nick Hanauer:

Wages for ordinary people have gone up 18% while the wages for CEOs have gone up 1400%.

David Goldstein:

It doesn’t have to be this way. You can actually run a big company without paying somebody a hundred million dollars a year.

Nick Hanauer:

This is just neoliberalism run amok.

Speaker 4:

From the Home Offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, the best place to get the truth about who gets what and why.

Nick Hanauer:

I’m Nick Hanauer, founder of Civic Ventures.

David Goldstein:

I’m David Goldstein, senior fellow at Civic Ventures. One of the great things about doing an economics podcast with you, Nick, is that we get your insider’s view, the inside the room perspective, on how terribly wrong the economy has gone these past 40 years, because you’ve been in the CEO’s office. You know exactly how all this works. One of the things that’s happened over the past 40 years is this explosion in CEO pay. Tell us. Nick, how do you guys do this? How do you pull this off?

Nick Hanauer:

Well, in the truest sense of the word, it is a rocket and it’s this weird arms race that a few people win and everybody else in the society is losing. It’s always driven me crazy. It is one of these collective action problems that is very hard to battle, but there is this process.

If you’re wondering how CEO pay is set, let me tell you. There will be a committee of the board of directors, usually helmed by another CEO of a big company, called the Compensation Committee. On an annual or semi-annual basis, the Compensation Committee does an analysis of how much the CEO and the executives should be compensated.

What that compensation committee will always do is hire an outside firm, a set of consultants, to do an analysis industry-wide so that they can benchmark the CEO’s pay and the top management’s pay in the industry. Obviously, the consulting firm wants to stay on friendly terms with the folks who are hiring them, the compensation committee.

David Goldstein:

Because they get paid to do this.

Nick Hanauer:

Correct. Obviously, the people who are hiring the consultants are looking for a very particular answer.

David Goldstein:

Right, because they get compensated based on what other CEOs get compensated.

Nick Hanauer:

Exactly.

David Goldstein:

Yeah. Yeah.

Nick Hanauer:

What the compensation analysis will always show is that the executives are never compensated at the top of the range, but rather we’ll be compensated at the middle of the range or below the middle of the range. Because, “We have a great management team,” shouldn’t they be compensated more?

David Goldstein:

Right.

Nick Hanauer:

And so the answer is always, “Well, it’s a great team and as we look around the world at other CEOs, we find lots who are compensated more or compensated the same, and therefore our recommendation is that they should make even more money.” This is transparently dishonest.

David Goldstein:

Well-

Nick Hanauer:

Goldie, here’s how it’s transparently dishonest, because in the history of these comp committee meetings and these consultants, at least in my experience, and I would question if it’s ever happened, these consultants never come back and say, “We should drop everybody’s pay by a third,” ever. Ever.

David Goldstein:

They never suggest a pay cut. Oh, but surely when the economy’s bad and the accompanies in the dumpster, it must. I mean, you’re paid exactly what you’re worth. If your company’s doing poorly, you should get a pay cut.

Nick Hanauer:

No, no, no, no.

David Goldstein:

Wow.

Nick Hanauer:

The answer is never, “This person makes $3 million. They should really make a million half,” ever.

David Goldstein:

And in the rare case, as recently happened actually with Apple, where the consulting firm says, “We actually think a hundred million is too much,” the board ignores it.

Nick Hanauer:

Yeah. They board’s like, “Fuck that.” The thing about this process is that it’s a ratchet that moves upward only.

David Goldstein:

Right.

Nick Hanauer:

Never downward.

David Goldstein:

It’s a racket with a ratchet.

Nick Hanauer:

Ratchet. Yes, and that’s why this happens.

David Goldstein:

Right. Right. Let’s be clear. You’re a CEO who’s serving on the board of another company, which is pretty typical.

Nick Hanauer:

Yes.

David Goldstein:

Not all board members are CEOs, but a lot of them are.

Nick Hanauer:

Oh. Oh. But to be clear, if they’re not CEOs, they’re next in line. They are some senior executives specializing in marketing or whatever it is. Right?

David Goldstein:

Right.

Nick Hanauer:

It is all corporate executives, CEOs, or wannabe CEOs.

David Goldstein:

So you’re a CEO. You’re on this compensation committee. You go and you recommend this big raise for the CEO of this company and then back at your own company when it’s time for your compensation to be evaluated, you’re compared to the compensation of the CEO-

Nick Hanauer:

Of other CEOs.

David Goldstein:

Right. Who just gave [inaudible 00:06:44].

Nick Hanauer:

[inaudible 00:06:45].

David Goldstein:

[inaudible 00:06:45] which will mean that-

Nick Hanauer:

Exactly.

David Goldstein:

You’ll get a big raise.

Nick Hanauer:

Correct.

David Goldstein:

Just to keep you competitive.

Nick Hanauer:

Correct.

David Goldstein:

Yeah. Yeah. Obviously there’s founders, right? There’s your old friend Jeff Bezos, who I’m sure he didn’t take much of a salary.

Nick Hanauer:

No, I’ll bet you Jeff Bezos still takes a $100,000 a year salary.

David Goldstein:

Right. We’re not talking about that.

Nick Hanauer:

No.

David Goldstein:

Because he’s got all this stock from being a founder.

Nick Hanauer:

Yeah.

David Goldstein:

We’re talking about Tim Cook, who clearly has created a lot of value.

Nick Hanauer:

Yeah.

David Goldstein:

I mean, this is a supply chain guy. Apple was very fortunate to have one of the foremost supply chain managers in the world running their company during a supply chain crisis, but he’s not a founder. His enormous. He’s a billionaire based on compensation from Apple, not from founding Apple, but from working for Apple. You see that all across the corporate world. To be clear, it is totally out of whack. We have seen CEO pay increase by over 1400%. Is that the number from the EPI report?

Nick Hanauer:

It is.

David Goldstein:

By the way, we’re talking about numbers from this EPI report co-authored by a former podcast guest of ours, Josh Bivins. But we’re not talking to Josh today. We’re talking with Mark Kreidler who wrote about this for Capital and Main.

Nick Hanauer:

Yeah. And it should be a fascinating conversation. Let’s talk to Mark.

Mark Kreidler:

My name is Mark Kreidler. I am a freelance writer based in California whose work appears in the New York Times, the Washington Post, and many other publications.

David Goldstein:

Mark, so thanks for joining us on this podcast hosted by an overcompensated corporate Titan. You recently wrote about that for capital and Maine. Tell us what you found.

Mark Kreidler:

Well, in sum, what I found was, to me at least, pretty astonishing. The compensation of CEOs at America’s top 350 companies, which is where economists were really doing their research, it’s always run well ahead of what a rank and file worker would make. But that sort of trailing gulf between what an everyday worker makes and what the top paid executives and the company make, although that’s always been in play and understandably so, the gulf between workers and executives has been rising really dramatically, and at the very highest level.

This is what we found and what we reported on. The pay of CEOs has absolutely skyrocketed over the past couple of decades to levels that are, or should be, I think, quite alarming, but are really, they’re going unchecked. I guess I wouldn’t say that ALARM is really registered yet.

Nick Hanauer:

The data that you cite, it’s just astonishing. Their compensation packages have grown. Is it 1460% from 1978 to 2021 while the compensation for the typical worker has grown by 18%?

Mark Kreidler:

Yeah. And look, even trying to place sort of any context on that, if you were heavily invested in the stock market during that time, you would’ve enjoyed a tremendous run up, which would’ve crested over 1,000%. If you’re a top one percenter in the US, your earnings have risen not quite 400%, 385% over that time, so good run-ups. Nothing remotely compared to what we’re talking about with CEOs.

Nick Hanauer:

Yeah.

Mark Kreidler:

The CEO pay, the average pay of a top CEO in one of America’s top three 50 companies, and again, these are larger companies that are churning revenue, it’s nearly $28 million. That’s last year, 2021 figure. $28 million average pay. It raises all sorts of questions. And to me, one of the immediate questions, which is what I was trying to answer you guys when I really set out to work on this piece was what do you get for $28 million? The answer appears to be nothing that you wouldn’t have gotten from a lower paid CEO 10 years ago or 15 years ago or 25 years ago. In other words, the candidate pool isn’t getting any better.

Nick Hanauer:

Right.

Mark Kreidler:

They’re just getting paid higher.

Nick Hanauer:

They’re not working more.

Mark Kreidler:

They certainly are not. No.

Nick Hanauer:

Their IQs are not higher.

Mark Kreidler:

Right.

David Goldstein:

Wait, wait, Nick, Nick. I’ve read the Econ 101 textbook and the market pays you exactly what you’re worth, so surely these CEOs must be getting more productive.

Nick Hanauer:

But they’re not.

Mark Kreidler:

It’s fascinating, isn’t it? I have to say, I’ve got a back step and say I relied really heavily on the research being done at the Economic Policy Institute. They track this kind of stuff. They’ve been watching these sorts of numbers for years. They’re constantly interested in the interplay between compensation and production. It is clear that there’s absolutely no direct link between the rise in what CEOs are being paid and sort of the quality of work they’re delivering.

In general, people who run companies, run companies the way they generally have always run companies. They answer to shareholders, and if it’s a publicly traded company, which almost all of these are, then of course they’re answering to a stock price. That has never changed.

Nick Hanauer:

Yeah. Well, what’s interesting though is, I mean, we brought up the word productivity. Productivity in the country has fallen with the increase in CEO pay.

Mark Kreidler:

Yeah.

Nick Hanauer:

Right?

Mark Kreidler:

It has. Yes.

Nick Hanauer:

I mean, the country’s productivity numbers are actually going down while we compensate the people who are theoretically in charge of creating that productivity more. It’s quite astonishing.

David Goldstein:

To be clear, productivity has increased. It’s the rate of productivity increase that’s declined.

Nick Hanauer:

No, no, no. Right. That’s what I mean.

David Goldstein:

Yeah. Right. Right.

Nick Hanauer:

Productivity has increased, but we used to have big numbers annually and now we have small numbers annually. There is an almost perfect inverse correlation between how much we’re paying the captains of industry and how much true productivity the economy is producing.

David Goldstein:

Let’s be clear. Around the time in the 1970s that corporate, the CEO pay took off, there was a change in philosophy about how to compensate CEOs, how to compensate executives, that we went from making them just managers to part owners. We started compensating them with stock as opposed to salary. Mark, how much of CEO compensation today is in the form of stock and stock options as opposed to good old fashioned wages like it used to be?

Mark Kreidler:

To be that’s a critical point. The answer to your question is that the vast majority of CEO pay is in the form of stock awards. Generally, in the EPI studies, about 80% of CEO compensation is tied up in stock and stock awards.

Salary, if we take that as a term just to mean my wages, salary’s about 10%. Anytime there’s a company that’s in a public crisis and you see an announcement that a CEO has agreed to forego his salary for the coming year as part of the team response to the crisis, it’s important to bear in mind he’s given up about 1/10th, or she, given up about one 10th of what they make. That that’s a dramatic turn.

At the time that it was sort of conceived and put into place, one of the thoughts, I guess, in support of it was simply we want them to be part owners. We want a CEO to want to drive the stock price as high as possible because they too benefit from the rising stock price. I think what we’re looking at right this moment, again, these are 2021 figures, the most current that we have, is sort of that theory on steroids, where it’s just been taken to the highest extremes. Most CEOs wouldn’t even consider coming into a company unless they were being significantly rewarded with stock and stock options.

David Goldstein:

We have to look at what makes that possible, which is the explosion of stock buybacks we’ve seen over the past couple decades. You can’t reward your CEOs infinitely with stock if you don’t buy it back or dilute by issuing more shares. Since it’s earnings per share that is the key metric that tends to influence stock price, it’s created this bizarre incentive for CEOs to focus on share price rather than the health of the company. It’s very easy to increase your share price, to increase your earnings per share, simply by buying back stock and increasing the earnings per share by reducing the number of shares, which by the way, now gives you more shares to gift to CEOs.

Mark Kreidler:

Yeah, absolutely. We saw a really dramatic example of that in the first couple of years of the pandemic, 2020 and 2021 each, the health insurance behemoths in our country had and have had a couple of amazing years profit-wise. The short explanation for that is that we all kept paying our premiums, but none of us wanted to go to the doctor during the height of COVID fear-

Nick Hanauer:

Or could.

Mark Kreidler:

Or could.

Nick Hanauer:

Yeah. Right.

Mark Kreidler:

Many people lacked the capacity and others just simply would not. They wouldn’t even go for routine care. The health insurance companies pocketed record profits to the point that they even had to issue rebates in some cases to customers because they exceeded the limits of what they’re federally allowed to make.

What a lot of those companies then did with those massive profits, United Healthcare is one, leading insurance company in the healthcare field, is simply buy back their own stock. In fact, they spent billions with a B during the pandemic on buying back their own stock. They can then control those shares and redistribute often to the very top of their management food chain.

Nick Hanauer:

It is just a sign of the neoliberal times that during the biggest healthcare crisis in 100 years, health insurance companies made out like bandits.

Mark Kreidler:

They did phenomenally well.

Nick Hanauer:

It is so well what we deserve.

David Goldstein:

The other thing, Mark, which you pointed out was during the crisis, the COVID crisis, how CEO pay increased while the economy was in the most dramatic recession since the Great Depression.

Mark Kreidler:

Yeah. It may sound a little counterintuitive, but really it’s just about the market.

David Goldstein:

Right.

Mark Kreidler:

If 80% of your compensation’s in the stock market or in market investments, well, the markets, particularly in 2020, were astoundingly great. Market prices took off and so compensation went right up the chain along with it, which is one of way that you get to a figure like, again, $28 million on average per top CEO in America’s top 350 companies.

I live in California and we’re fairly closely attuned to PG&E. It’s the primary utility provider in Northern California and really a dominant provider in California. PG&E brought in a new CEO last year at $50 million a year. Well, that’s a company that’s on the hook potentially for billions and billions in damages related to California wildfires that were in some cases caused by PEE wires and PGE actions or inactions. Yet, that price is booked and is rising and it’s significantly tied to the share of the stock. That’s the system as it’s currently set.

David Goldstein:

It would only be fair, by the way, if the PG&E CEO was on the hook for some of those claims, he should be made libel for that. If you’re going to get the upside, you should get the downside too, right?

Nick Hanauer:

Yeah.

Mark Kreidler:

The whole dynamic’s fascinating because one of the lines of thought behind these sorts of levels of pay is we have to get the best. Certainly, my economics background is completely sketchy, so had to have this explained to me. But this concept of rents, which was a foreign term to me outside of what you pay for an apartment, it comes into play here.

The concept of rents is simply if you take a job at $85,000 that you would’ve gladly taken at 65, you’re getting $20,000 in what are called rents. It’s just a payment above and beyond what would’ve accepted to take the job. It’s a fair question to ask if someone’s being paid $28 million. Would they have taken the job at 20? Would they have taken it at $16 million? Would they have taken it a $14 million?

There’s no functioning system under which these levels of pay are determined for CEOs. It’s like they’re getting paid what they are simply because they are, because the boards vote to approve these compensation packages.

David Goldstein:

Weirdly, the boards are often composed of CEOs at other large companies.

Mark Kreidler:

That’s right. In fact, not that the game’s rigged, but if you’re a CEO, you have significant sway over who sits on your board. Well, if you lard that board with friendly faces, then I think we have an answer to the question of why only 3% of proposed CEO packages ever get voted down, because not in every company, but in many, many companies, I might be a shareholder, but I don’t vote on the CEO. That stuff is proxied out to the board. The board decides the CEO’s compensation. You know?

I may ultimately vote by proxy for board members, but I don’t vote on the CEO’s salary. Well, these packages never get overturned. Obviously Apple’s a thriving company, so it’s fair to say their CEO should be well compensated. Right? They had a great year in 2021. Their stock price went up almost 40%. Huge year.

Tim Cook, Apple CEO, was approved earlier this year for a package that traces back to last year of $100 million. Even one of their consumer interest groups, that’s a shareholder group protested them. There’s absolutely no reason to do this. They didn’t like the total, they didn’t like the way it was structured, they didn’t like the fact that it would pay out money to Tim Cook even if he left the job, and it didn’t matter because the board is the one who approves that. It sailed right through, so Tim Cook gets paid $100 million.

David Goldstein:

But Mark, had they given him $50 million instead of a hundred million dollars, surely Tim Cook would’ve gone to work for the other largest company in the world.

Mark Kreidler:

That is paying $100 million. Yeah, exactly, so that’s a fair consumer question to ask. It’s a fair shareholder question to ask and that isn’t a question that gets asked very often. People just sort shrug and say, “Well, I guess that’s what they get.”

Nick Hanauer:

Yeah, so one of the questions I have, I’d love to know if there’s been research done on it, is the way in which these CEO pay packages affect the next 50 or 100 executives at these large companies, right? Because it’s not just Tim Cook that’s making a shit ton of money.

Mark Kreidler:

That’s right.

Nick Hanauer:

There’s a whole group of people at the top who are making not that much, but I suspect significant double digit percentages of it.

Mark Kreidler:

Well, the economists at the EPI have been able to establish that whatever a CEO makes, whatever, just tag the number, that will generally affect, at the very least, the next four or five highest paid executives in that company. That’s sort of the rainmaker money. That’s where the biggest money gets paid.

If you tie together the CEO’s compensation with, let’s say, the next four top executives in that company, at that point, you’re getting to 5%. Again, according to EPI’s research, 5% or 6% of the company’s total profit is being paid out simply to those top handful of executives. One of the examples that I was able to find in support of that, I mentioned the PG&E, the new CEO, she’s being paid $50 million. Her customer top officer then made $7.5 million. The chief operating officer, $6.5 million, chief risk officer, more than a million and a half.

All of those numbers rise, certainly not in proportion exactly to a CEO, but there is a dramatic effect that is set by whatever number the CEO draws on the next handful of people who really, it’s a non-trivial chunk of money. It’s a fair amount of money that’s coming out of a company’s profits.

Nick Hanauer:

Yeah. Let’s turn our attention to why we should care. Is this just sour grapes or is there a substantive social or economic reason to be offended by these differentials?

Mark Kreidler:

Well, I can tell you that the research shows that, sort of historically, up through about the sixties and into the seventies, the leader of a company, CEO generally, their earnings would be about seven times a rank and file pay, about seven times what an average worker would make in that same company. Top executives get paid more than rank and file. That’s a fact. What we’re seeing now is a proportion that’s hard to even explain. It’s hard to even quantify it’s so massive.

If you are an Apple engineer, again, part of one of the most successful companies on earth, and you make a solid six figures, the top executive’s pay has run away from you to the extent that you are functionally working in two different stratospheres. That to me as an employee would be an issue.

As a stockholder I don’t know what stockholders generally think in most of these companies, but I was struck by the fact that one of Apple’s stockholder groups protested their own CEO’s compensation package, as functionally, they protested it as silly and poorly put together and excessive. I don’t know if it’s outraged so much as it is straight up everyday rank and file workers are not living in the same stratosphere as the people who run their companies. That to me probably leads to a detachment in the workforce a little bit.

Nick Hanauer:

Yeah. What should we do?

Mark Kreidler:

That’s a great question. One of the things that research has indicated, the economists who’ve looked into this pretty carefully, have noted this, is that in companies that have union representation, the numbers tend to hold the line a little bit better than some of the examples we’ve been discussing. One of the reasons for that is come up for negotiations every couple years and the CEO’s salary gets dragged out in the public square as a debate point.

Companies that have union representation do tend to have a little bit more tamped down cap on what CEOs make. Beyond that, one of the ways in which this could be sort more directly addressed, assuming you want to address it, is to restructure board vote construction so that the board just doesn’t simply rubber stamp such a critical notion as what a CEO should be paid.

Right now, I mean, again, the boards make those decisions and the boards are generally handpicked, or huge chunk of them are handpicked by the CEO whose salary’s up for negotiation. If stockholders had greater direct representation there, you might see some different results.

David Goldstein:

I’d also suggest progressive taxation. I mean, getting back to Tim Cook, if the top marginal tax rate went back to 91%, let’s say, on incomes over $50 million a year, there wouldn’t be much purpose in giving somebody compensation over $50 million a year. There’s not much gain there for the CEO-

Mark Kreidler:

That’s right.

David Goldstein:

… at that point.

Nick Hanauer:

Yeah. Another thing you could do is you could simply, for public companies, legislate a maximum ratio of CEO pay to median worker peg. You could just say …

Mark Kreidler:

You could.

Nick Hanauer:

… 50 times, which doesn’t limit CEO pay. Right?

David Goldstein:

Yeah. That’s right.

Nick Hanauer:

I mean, you’re not limiting CEO pay, you’re just saying it has to be in some reasonable proportion to whatever else makes right?

David Goldstein:

Right.

Mark Kreidler:

Yeah. Yes. Some economists have suggested tying the corporate tax rate to that very theory, to sort of have an established ratio. If you’re outside of that established ratio, then you pay a higher corporate tax rate. The idea is simply to reign in a sort of pointlessly out of control cost.

Again, I think we probably wouldn’t be talking about this if there were some empirical evidence that said, “But wait, look at the vastly superior performance you’re getting from your CEOs for offering this higher rate.” I mean, just generally companies are avaricious. They act in their own best interest. They generally spend money where they think it leads them to make money. There’s just no empirical evidence that anything like that is happening. They’re just getting paid more because they are.

David Goldstein:

If it’s good enough for major league baseball, I mean, they’ve got a luxury tax.

Mark Kreidler:

That’s right.

David Goldstein:

You can go over. You can go over the cap if you want. You just have to pay a tax on it, so it doesn’t prevent the New York Yankees from having this huge payroll. It just means they have to pay a tax to essentially to the other clubs in the league.

Mark Kreidler:

That’s right.

David Goldstein:

And that’s what Apple would have to do. If you want to pay him $100 million, you just have a higher tax rate than the other, than your competitors, allegedly.

Nick Hanauer:

Yeah. Yeah.

Mark Kreidler:

That’s exactly it. You that going in and you make that decision consciously.

David Goldstein:

Right. Right.

Mark Kreidler:

You know, there’s one other little fallout from this that sort of does fall under this, to your point, so sort of follows under the category of why should we care. There’s a little bit of a trickle-down effect if we assume that top CEOs are generally in demand and that they also work in their careers in jobs other than the CEO of the company they’re currently in.

One of the things that happens is that non-public institutions and higher education and foundations find themselves struggling because their idea of what a CEO should make is so completely out of line with what a top CEO makes in the United States that if you are, for example, a thriving university somewhere in the United States, and you would love to have a former top corporate executive coming in to run your business, essentially, your chances of hiring that person are incredibly low unless you pay at a scale that’s completely out of proportion to everything else about your operation.

Nick Hanauer:

Yeah. Yeah.

Mark Kreidler:

That becomes a difficulty. Again, not arguing that there aren’t other wonderful candidates. Just arguing that the price of everything rises when the price at the top rises.

Nick Hanauer:

That’s the problem with inequality is that it creates an arms race that no one wins except the person at the very top. Right?

Mark Kreidler:

That’s what we’re seeing in action right now. Yeah.

Nick Hanauer:

Yeah.

Mark Kreidler:

That’s what’s happening.

Nick Hanauer:

You know? It’s bad for the society generally and good for a couple of people particularly.

Mark Kreidler:

Yeah.

Nick Hanauer:

Anyway, well, this is a fascinating topic and one we have discussed before, but the research just … it’s so vivid and disturbing.

David Goldstein:

Well, people should be angry and appalled by this, the idea that for average wages, median wages, have risen 18% over the past 40 years, and CEO pay has risen. What’s the number?

Nick Hanauer:

It’s 1400%.

Mark Kreidler:

1460%? Yeah.

David Goldstein:

Well, yeah. There’s a bit of a difference between 18% and 1400%. Productivity increases by 60%. Wages increase by only 18%, not even close to keeping up with productivity, while CEO pay increases 1400%. You can see where that money’s coming from. It’s not coming from being more productive.

Nick Hanauer:

It’s coming out from wages.

David Goldstein:

It’s coming out of wages share of the economy. We know that broadly, that we’ve seen wages, labor share of GDP, fall in line with the incomes of the top 1% going up.

Mark Kreidler:

Yup. Certainly so. I think there’ve been multiple studies that have suggested that if worker minimum wages had stayed in line with productivity, the minimum wage in the country right now would be around $25 an hour. Clearly, productivity has increased. The CEOs generally and specifically are not responsible for that. Their compensation is, at this point, wildly out of line with the value they’re actually bringing to their companies.

Nick Hanauer:

Yeah, absolutely. One final question, Mark. Why do you do this work?

Mark Kreidler:

Well, I think if you don’t shine a light on these sorts of topics, you can’t have a conversation. I think that living in California especially, I’m increasingly aware with each year that I live here of the sort of staggering levels of inequity and inequality in the state. These are problems that they can be remedied. They can be. This is a really extreme example of inequality in a way that needs to be discussed so that it can be, at some point, managed. Again, if you don’t raise consciousness about this stuff, you can’t have the conversation. You can’t have a conversation, we can’t take a step forward.

Nick Hanauer:

Fabulous. Well, thank you so much for being with us.

Mark Kreidler:

Absolutely.

Nick Hanauer:

And great work.

Mark Kreidler:

Thank you guys. Thank you very much.

Nick Hanauer:

I do want to defend myself though, Goldie, because I’ve never been an overcompensated CEO, just so you know.

David Goldstein:

No, you’ve been a founder.

Nick Hanauer:

I have.

David Goldstein:

Yeah. And also you had a family business. I know you’ve told me. Your father, I think you’ve complained, he was notoriously cheap in terms of compensating himself, but that was a strategy, wasn’t it?

Nick Hanauer:

Yeah, I mean, it was a strategy and it was a moral framework. Right? My dad felt strongly that the people who worked in our factories created virtually as much value as we did, and we shouldn’t make much more than they did. I doubt I ever made more than, working for the family business, five, six, seven times more than our median worker. I doubt it. I mean, plus or minus, maybe less. He made the same as me. You know? We never overcompensated ourselves.

We believed that, if there were excess profits, we should put them back in the business. That’s how we kept our tax burden low. That’s why we had a successful enterprise. I just think that all of this, this is just neoliberalism run amok. The idea that the more you make, the more you’re worth, and the more you’re worth, the more you make.

We didn’t talk for a long time about in the interview why we should care, why our listeners should care. There’s a couple of, three reasons, they should care. The first is that above some reasonable threshold, every dollar more than that threshold the CEO and the top managers make is just money straight out of the pockets of ordinary workers.

David Goldstein:

Right. There’s a tendency to think that it’s actually coming from shareholders, but it’s not. The shareholders always get their due. It’s coming out of workers. They’re paying workers less so that they can make more.

Nick Hanauer:

That they can make more. Right?

David Goldstein:

Mm-hmm.

Nick Hanauer:

The idea that wages for ordinary people have gone up 18% while the wages for CEOs have gone up 1400% has nothing to do with economics. It has to do with power.

David Goldstein:

Right. Right, and the reason why CEO pay has gone from around 30 times the median workers’ pay to about 400 times, that’s got to do with power.

Nick Hanauer:

Yeah. I mean, there’s nothing to do with anything economic.

David Goldstein:

Right.

Nick Hanauer:

It’s just egregiously unacceptable for the people who decide what other people should make giving themselves these ridiculous raises while the people who actually do the work get nothing. You should be about that. There’s no reason for that. There’s no justification for that. There’s just stealing by another name.

David Goldstein:

Yeah. To harken back to a recent episode, it violates the social contract.

Nick Hanauer:

And people should be angry and demand better.

David Goldstein:

Right. It is undermining our economic and democratic norms.

Nick Hanauer:

That’s right.

David Goldstein:

Obviously, changing norms can be done because it has been done. The norms used to be one thing. Now it’s another. It’s a more difficult problem to approach, but there are some things we can do to address overcompensation. Some of them we mentioned in our conversation with Mark. One is it’s clear that higher rates of unionization would help bring this back in line because it’s harder for these companies to negotiate low wages for their employees when they’re being so lavishly compensated.

Nick Hanauer:

Correct.

David Goldstein:

There’s definitely data showing that unionized companies have lower CEO to worker pay ratios than non-unionized companies and there’s a lot of other reasons to support increasing rates of unionization in the private sector. Clearly that’s a goal we should be pursuing nationally.

Another one, and I believe in this, I think we need higher top marginal tax rates. We’re not talking about 91% on incomes over $200,000 or $500,000 or $1 million, but you know what? 91% top marginal tax rate like we had in the Eisenhower administration, in a Republican administration, during the greatest spurt of economic growth and the greatest spurt in the growth of the middle class ever, I think, yeah. You want to make over $25 million a year? Tax that at 91%. That would totally take away the incentive.

A luxury tax, like we talked about. You know? If you want to pay your CEOs more, a higher ratio than is the set norm, okay. Fine. You do that, but you pay a higher tax rate. But I want to bring up something which we’ve been talking about since the very beginning of this podcast decades ago.

It feels like decades ago now, Nick. That is stuck buybacks, because if you are compensating executives with stock, you can’t keep doing that unless you’re buying back stock. That’s what feeds this cycle in the end, stock buybacks which used to be illegal before 1982. If these companies could not continuously buy back stock instead of taking their profits and raising wages or investing it in expanding production, instead just throwing it away, buying back their own stock so they can give it away again to their executives, they wouldn’t be able to keep up this stock-based compensation at such an outrageous rate.

Nick Hanauer:

Yeah, no. That’s true. I propose a slightly different approach, which is legislation which makes a ratio above 50 times the median wage for top executives illegal, that basically you cannot do that. You simply cannot compensate yourself more than 50 times your employees.

David Goldstein:

We change the incentive of CEOs from maximizing shareholder value to maximizing the welfare of their workers.

Nick Hanauer:

Correct. You know? I’m more and more attracted to this principle, which is tying the top and the bottom together. I’ve mentioned this before. You know? The best way to address inequality would be to raise the minimum wage back to where it should be, 24, 25 bucks an hour, and then tie it, not to inflation or productivity, but to the wages of the top 1%.

If the wages of the top 1% of Americans rise a lot, so will the wages of the folks at the bottom, so we all rise and fall together. Right? That construct, I think is to me, more and more attractive, and it’s a way to align incentives that I think is very healthy and productive.

David Goldstein:

And it’s a very middle out principle too-

Nick Hanauer:

It is.

David Goldstein:

… in that if the wages of the vast majority of Americans are rising, the incomes of the top 1% will rise with them.

Nick Hanauer:

Yeah, absolutely.

David Goldstein:

Because we all do better when we all do better.

Nick Hanauer:

Exactly. Well, it’s a fascinating subject and that EPI report was really stark.

David Goldstein:

Yeah.

Nick Hanauer:

Not the first time I’d seen the data.

David Goldstein:

No.

Nick Hanauer:

But definitely a very compelling recapitulation of it. It was great to have Mark on. Really cool.

David Goldstein:

Yeah. As always, there’s links in the show notes to both the EPI report and to Mark’s piece in Capital and Main, so we encourage you to click through and read them.

Speaker 4:

Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer, follow our writing on Medium at Civic Skunk Works and peek behind the podcast scenes on Instagram @pitchforkeconomics. As always, from our team at Civic Ventures, thanks for listening. See you next week.