Here’s an example of how American Capitalism has been distorted: compensation for Chief Executive Officers of public companies. If you go back a few decades, the average corporate CEO made about 20 times what his or her workers made. By 2010, the average CEO made 200 times what the average worker made, an increase of 1,000%. The average CEO went from being paid hundreds of thousand dollars a year to being paid tens of millions of dollars a year.
Have you ever wondered why that happened? Why CEO’s got a 1,000% increase in compensation? There wasn’t any economic reason for it. Company profits didn’t go up 1,000%. Company return on equity didn’t go up 1,000%. Why did it happen?
It happened because of a second set of rules for corporate CEOs. Because CEOs of a public companies, NOT the company’s shareholders, get to indirectly name the person that sets the CEO’s compensation. And for a period of fifteen years, CEOs didn’t even have to tell the owners of the company how much money they were getting paid. Yes, you heard that right – for fifteen years the CEO didn’t even have to tell the shareholders, the owners of the company, how much money they were being paid.
In the 1980s, corporate compensation specialists, the people that recommend compensation for CEOs and board members, started recommending that CEOs be issued stock options in addition to their salaries and bonuses. CEOs loved the approach. Not only was it a way for CEOS to increase their compensation, but the best part was, because the options weren’t a cash payment to the CEO, the cost of the options didn’t get added to a company’s profit and loss statement. The CEOs and boards of directors didn’t have to tell the shareholders, the owners of the company, how much money they were getting paid.
Yes, you heard that right. The CEOs’ didn’t have to tell the shareholders how much money they were making.
The number of stock options issued to senior executives started exploding in the 1980s. The Accounting Board that sets standards for public companies was alarmed at the explosion of options and proposed that companies be required to add the cost of the options to the profit and loss statement – the accounting board made the very reasonable recommendation that the owners of a company, the shareholders, should get to know how much money their CEO is being paid. But the rule didn’t get implemented. CEOs and their supporters in Congress pushed back, hard, and eventually the Accounting Board withdrew the proposal. It wasn’t until 2006, when a company called Enron collapsed because of fraud, that the Accounting Board was finally able to push through a rule requiring companies to disclose the full cost of their CEO’s compensation.
So, literally, for a period of fifteen years, CEO’s didn’t have to tell shareholders how much money they were making. It’s during that time period that CEO salaries increased 1,000%. And, son of a gun. As soon as CEOs had to start telling shareholders what they were getting paid, CEO salaries stopped going up.
We need to fix American capitalism. We need to get back to one set of rules. CEOs now have to tell shareholders how much the CEO is getting paid, which was half the problem. But CEOs still effectively control who gets named to a company’s board of directors, and still effectively get to pick who sets their salary. This needs to end, and it can end. We can change the rules to allow the shareholders, the owners of the company, to actually decide who gets to run their company, and how much they get paid. And it we do this – if we actually give control back to shareholders, CEO salaries will start coming down. If we get back to one set of rules, American Capitalism will start healing itself.