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Excessive CEO Pay and Job Losses: Are They Linked?

By Carl M. Cannon - November 5, 2011

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The firm that would become “Big Blue” had been a presence in American technology since it won the contract for the 1900 U.S. Census. From the time Thomas Watson took over in 1914 and stressed customer service and company loyalty -- in return for generous sales commissions -- IBM became a place where employees could, and did, spend a career. When they retired, an unstinting pension awaited the loyal IBM man.

That model lasted until the 1990s. IBM was a far-flung global operation that, as 1989 drew to a close, employed some 383,000 people worldwide. Five years later, that number had been drastically cut to about 220,000. Portable pensions were the order of the day, brought in 1993 to Big Blue by former RJR Nabisco executive Louis V. Gerstner Jr. The model of lifelong loyalty, not mention lifelong employment, was suddenly passé.

So was the concept of reasonable CEO pay. For 1995, Gerstner was awarded a total compensation package worth nearly $18 million. “Lord knows what they would have paid him if he had had a good year,” Graef Crystal, a consultant on executive compensation, told the New York Times. “You would have needed an astronomer to see it.”

One of the first analysts to start asking uncomfortable questions was someone named Bob McIntyre, and the question he was asking why it seemed that all the firms paying the most astronomical salaries were also the ones laying off the most workers. McIntyre, running a small progressive think tank called Citizens for Tax Justice, produced a list of the top job-shedding firms in the country, and a chart showing their total layoffs from 1993-1995, along with their profits -- and the CEO’s salary for the year 1995.

The firm that fired the most workers was also the one with the highest profits: It was AT&T. Bank of America, ranked second in both profits and layoffs, had the dubious honor of paying the highest amount to its CEO -- $11.9 million in 1995 alone. Between them, McIntyre’s “Layoff Ten” were responsible for 134,450 layoffs while raking in pre-tax profits of $60.7 billion. The average CEO’s compensation package among the “Layoff Ten” came in at $5.2 million a year.

It wasn’t supposed to be this way. Railing against the “corrupt do-nothing values of the 1980s,” Bill Clinton had vowed during his 1992 campaign to rein in “excessive executive pay” by capping at $1 million the salaries companies could write off as a business expense, spreading bonuses around to all employees, and tying big bonuses to performance.

Three weeks after being inaugurated, in remarks to business leaders in the East Room of the White House, Clinton discussed this issue. “I talked a lot in the campaign about . . . the enormously increased rate of executive compensation in the last 12 years as compared with the compensation of workers,” he said. “I want to make a proposal that deals with the fact that the tax code should no longer subsidize excessive pay of chief executives and other high executives, ‘excessive’ defined as unrelated to the productivity of the enterprise.”

Some of those provisions were put into Clinton’s omnibus budget bill that passed on a party-line vote and was signed into law on Aug. 10, 1993. That bill raised the tax rates on the top earners, while granting a break to the working poor. Clinton hailed it as legislation that would “revive our economy” and “renew our American Dream.” In the years since, Clinton’s budget has been widely adjudged a success, except in one area. When it came to capping corporate pay, it was a spectacular failure.

For starters, one unforeseen development was that the $1 million cap became the de facto floor: No self-respecting CEO wanted a salary below the level that the government had set as a cutoff point. So even without the tax deduction, corporations just blew through the $1 million barrier anyway.
More importantly, by the time the provisions got through the legislative process, they had been watered down. The law applied only to publicly traded corporations. Secondly, the law didn’t include bonuses paid in the form of stock or stock options, which had by that time already emerged as the preferred method for funneling unseemly raises to corporate executives.

Worst of all, with the IRS and the Securities and Exchange Commission now officially keeping an eye on pay, corporate boards began tying their executives’ bonuses to self-serving metrics, usually stock price and profitability -- but not to growth, innovation, plant construction, or new product lines. The result was Kafkaesque: The system had now evolved to its present point, in which corporate executives qualified for huge bonuses by raising profits -- absent growth -- through cost-cutting measures (i.e., laying off workers).

By 1996, the New York Times was running headlines like this: “Head of I.B.M. Has a Better Year Than I.B.M.” In time, this trend would coalesce with several others that did not bode well for employment, especially after the arrival of The Great Recession in 2007-2008.

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Carl M. Cannon is the Washington Bureau Chief for RealClearPolitics. Reach him on Twitter @CarlCannon.

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