With Richard Grasso's monster salary still making headlines, Lee Drutman argues that New York Attorney General Eliot Spitzer's attack on the NYSE chairman doesn't attack the heart of the problem. First off, there's nothing illegal about Grasso's pay package. But more importantly, escalating CEO compensation—which rose almost 600 percent in the 1990s—is not a law enforcement issue. Reform that gets at the root causes is needed, and Drutman points the way.
Lee Drutman is the communications director of Citizen Works and the co-author of the forthcoming book: The People’s Business: Controlling Corporations and Restoring Democracy.
When former New York Stock Exchange Chairman and CEO Dick Grasso made headlines last fall for his outrageous $188 million pay package, it seemed the apotheosis of so much that had gone wrong in corporate America.
Grasso’s pay package was clearly outrageous. But was it in itself illegal? Or was it merely a distressing symptom of a broken system of corporate governance in desperate need of reform?
In a lawsuit filed recently, New York State Attorney General Eliot Spitzer contends the former. Spitzer’s lawsuit, filed under New York State Not-For-Profit Corporation Law, which mandates that executive compensation must be “reasonable” and “commensurate with services provided,” argues that Grasso and former NYSE board member Kenneth G. Langone (Grasso’s good friend who was also the former chairman of the compensation committee) duped the rest of the board into supporting Grasso’s salary, which was the equivalent of 99 percent of the Exchange’s net income from 1999 to 2001 (The exchange’s net income comes primarily from member fees, which jumped by $245 million between 2001 and 2003).
Legal experts say that Spitzer’s suit may be on shaky ground, because the NYSE is not a nonprofit in the classic sense. But beyond being a legal gamble, Spitzer’s suit also gives a somewhat misleading impression that executive pay can be addressed as a law enforcement problem.
It can’t. Throughout corporate America, there is plenty that is distasteful about the remarkable rise in executive salaries, which rose almost 600 percent during the 1990s while worker pay barely kept up with inflation. But there is nothing illegal.
The problem, instead, is the system that creates these pay packages, a system of corporate governance bristling with conflicts of interest and a vacuum of responsibility and accountability, where directors sit by idly as managers secure themselves ever-escalating pay packages and grow richer and richer at the expense of workers and shareholders.
Unfortunately, Spitzer’s approach doesn’t dig deeply at this root cause. By only heaping blame on Grasso and Langone, Spitzer is letting off the hook a host of other directors who should have also been responsible, such as Wall Street CEOs James Cayne of Bear Sterns, Henry Paulson of Goldman Sachs and David Komansky of Merrill Lynch The suit also leaves off H. Carl McCall, the former New York State Comptroller and State Democratic Party bigwig who, as a member of the exchange’s compensation committee, first claimed he didn’t know how Grasso got paid so much and then defended the salary. Certainly, it is hard to believe that all these very bright individuals were duped by Grasso and Langone and didn’t at least give a tacit wink and nod to Grasso’s compensation.
All this matters because the problem of outrageous executive compensation goes far beyond Grasso (even through Grasso may be the most egregious example) and despite continued public outrage, continues to rise. A recent study by The Corporate Library found that CEO total compensation among S&P 500 companies rose by a median of 27.16 percent in 2003, from $3.6 million to $4.6 million (the leading earner was Colgate-Palmolive CEO Rueben Mark, who earned $140 million, $131 million of which came in the form of stock options).
Another recent study, this one by Pearl Meyer & Partners, found that the average pay package for a CEO at the 50 biggest companies was $10.3 million for last year. (Many of the biggest winners were also from Wall Street: Sanford Weill of Citigroup was given a $44 million paycheck, while Stanley O’Neal of Merrill Lynch earned $28 million James Cayne of Bear Stearns received $27 million. Henry Paulson of Goldman Sachs earned $20 million, as did Bill Harrison of J.P. Morgan.) On average, the typical big company CEO earns almost 300 times more than the average worker. Put another way, by mid-morning on January 2, the average CEO has earned what the average worker will earn in an entire year.
Not only are such pay packages unfair, they also represent a disturbing transfer of wealth from stockholders and employees to executives. Such pay disparities further skew the increasingly polarized distribution of wealth in this country, which is now at levels equivalent to the period just preceding the Great Depression (even in the current economic recovery, corporate profits have risen 62 percent since 2001, while workers’ take home pay has actually dropped by 0.6 percent, according to the Economic Policy Institute). Most other industrialized countries have a typical CEO-to-worker pay ratios closer to 25-to-1. In 1964, the US ratio was also approximately 25-1; in 1982 it was 42-to-1.
What can be done? A dose of board independence, today’s standard bromide for all that ails corporate America, is obviously needed. Certainly, those responsible for deciding executive compensation should not be in a position where they are also trying to curry favor with management. Meanwhile, the CEO of a company should not also serve as the chairman of the board that sets his or her salary, as 75 percent of CEOs currently do (and as Grasso did at the New York Stock Exchange). More significantly, shareholders need to get more involved. Shareholders should have the right to vote on executive compensation – after all, it is their money.
Today’s epidemic of extravagant executive compensation comes at the expense of economic justice and a sense of shared prosperity. It offends our sense of decency and fairness. But it is not a law enforcement problem. It is a problem of corporate governance and old-fashioned cronyism. And until we can find a way to cut through the conflicts of interest that pervade corporate boardrooms and give shareholders more control, greedy executives will likely continue to have their way.
