CEO Pay

CEO PAY….The Wall Street Journal reports on Democratic plans to rein in skyrocketing executive pay packages:

The Senate’s likely passage this week of legislation raising taxes on executive pay is just the beginning of a tough look by the new Democratic Congress at big corporate compensation packages.

….It would cap at $1 million a year the amount an employee could place in certain tax-deferred-compensation plans. Currently, there is no limit on how much compensation can be deferred into the plans, allowing executives to put off taxes for years on millions of dollars in pay.

The legislation also would limit the income-tax deductions companies can claim for high-paid executives who left the firm during the year.

I’m a consistent critic of outlandish CEO pay packages, but I doubt that this legislation is going to do much good. It will increase tax revenues a bit (about $100 million a year, according to estimates), but it’s not really likely to have a serious impact on the size of executive compensation packages. It’s like sticking your fingers in a dike: if you don’t do something about the pressure on the other side, eventually you’re going to run out of fingers and the dike is going to blow.

In this case, the pressure comes from stagnating wages for the working and middle classes, who have seen their bargaining position in the workplace deteriorate over the past several decades. The rest is just arithmetic: stagnating middle class wages in a growing economy translates to bulging corporate coffers, and that in turn translates to a gigantic pool of money available to bid for top executives. It’s a lot like the sports world: Barry Bonds isn’t a better athlete than Babe Ruth, but he lives in an era when TV and merchandising rights generate far more revenue than in the past — and as long as this money is there, it’s going to be used. In a free market, nothing can stop this. The same thing is true in the corporate world.

Unfortunately, this is a hard problem, and not one that Congress is anxious to tackle. But it’s the core issue, of which growing income inequality and skyrocketing CEO pay is only a symptom. The question isn’t how to put our fingers in this dike — as long as the ocean of money is rising, we’re always going to find that we don’t have enough fingers to do any lasting good — but how to increase the bargaining power of ordinary workers. This will increase middle income wages (the main thing we ought to be concerned about anyway) which in turn will lower the sea level of money sloshing around in corporate treasuries and automatically rein in CEO compensation. Unions can’t really do this job anymore, and so far nothing has taken their place. Until we find something, though, all we have are fingers in the dike.