Bush Takes Stand Against Outrageous CEO Salaries

President Bush visited the financial center of New York today to deliver his "State of the Economy" speech, where he called upon U.S. corporations to behave more responsibly when determining executive compensation.

It is refreshing to hear President Bush acknowledge the existence of a growing wealth gap in the United States. "The fact is that income inequality is real. It has been rising for more than 25 years.... The earnings gap is now twice as wide as it was in 1980," Bush said.

However, Bush framed his comments mainly in the context of how executive compensation impacts shareholder confidence and value, with little mention of its impact on American workers. But then again, he was not speaking to millions of hard-working, low-paid Americans. He was speaking to an assembly of well-to-do businessmen at Federal Hall. So perhaps the focus on shareholders can be forgiven in this instance.

It is interesting to note that this assembly of fine, upstanding American businessmen remained silent as Bush encouraged them to behave responsibly. Does this mean he would have received cheers and a standing ovation had he encouraged them to continue behaving irresponsibly instead? Or did they silently agree with him, and were simply too afraid to make their feelings known among their peers?

Does it really matter, since this means our American business leaders are either ruthlessly selfish, or cowards? In either case, we all lose.

President Bush made it clear that he does not support government intervention in determining CEO salaries. "Government should not decide the compensation for America's corporate executives... But the salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders," he said.

The question is, what does it mean to "improve their companies" and to "bring value to their shareholders"?

When an American corporation announces massive layoffs to cut costs, their stock value rises.

When 60 Minutes did a segment on Sallie Mae and the student loan racketeering industry, Sallie Mae's stock price rose the next day.

But what happens when the hard-working employees who make a company successful at every level--while the CEO gets all the credit and compensation for that success--unionize to protect themselves? It doesn't "bring value to their shareholders". I can tell you that much.

So Bush is generally on the right track in this case, and it really is good to hear the President of the United States take a stand against a corporate obscenity that brings shame and instability to the entire nation. Unfortunately, there is one fatal flaw in his call to have shareholders determine CEO compensation.

To illustrate the problem, imagine that President Bush was held to that same standard, and America's "shareholders" were allowed to vote on his compensation, based on his performance as chief executive of the nation.

The question is, exactly who are these "shareholders"? If we are talking about the people President Bush has devoted himself to serving the most--corporate America--then I would expect them to raise his annual salary from $400,000 to around $400,000,000. But if we are talking about the American People--voters, and their families--whom President Bush has effectively ignored for six years at their expense while pursuing war profits for his corporate friends, well, I suppose they'd reduce his annual salary to around $40. And he'd only receive that much because he hasn't caused Armageddon. Yet.

The idea that corporations exist to increase shareholder value one of the fatal flaws that is leading America into decline. When a corporation first goes public, those who buy IPO stock are infusing the company with capital, and that initial capital is what allows it to do business. But from then on, as those shares are traded dozens, hundreds, and thousands of times, those stock transactions do not provide capital to the company. All that buying and selling of stock is little more than legalized gambling at that point, which can benefit or harm shareholders, but does nothing for the company itself (apart from driving the perceived "value" of the company up and down like a roller coaster, while the company itself might be maintaining a steady course in terms of revenue, etc).

Yet it is the company--not the shareholders--that employs hundreds or thousands or tens of thousands of American workers, providing them with the means to survive in exchange for their labor.

To illustrate this in a different way, imagine that a company goes public. Bill, Warren, and Donald buy all the stock, so they are the original shareholders, and the money they pay for that stock goes directly to the company as capital. The company uses this money to pay salaries, earn revenue, and get the ball rolling.

But then Bill sells his stock to Martha, and Warren sells his stock to Oprah, and Donald sells his stock to Paris. How much of the money that Martha, Oprah and Paris paid for that stock actually goes to the company? None of it. Zero.

Not only that, but Martha, Ophrah, and Paris don't even have to pay taxes on those stock purchases!

Yet the company is now obligated by its commitment to "shareholder value" to ensure that the value of Martha, Oprah, and Paris's stock keeps rising. It is not in any way obligated by a commitment to serve the employees who actually did all the work to make the company successful. Instead, the company is obligated to serve the individuals who had the very least to do with the company's success--the later generation "shareholders", who never gave a penny to the company itself.

So President Bush's call for shareholders to determine CEO compensation doesn't make much sense, because shareholders will be happy to raise CEO salaries to outrageous levels if the value of the stock they own is rising--even if that stock is rising not because of the CEO's actions, but because of a generally improving economy, or because the hard-working employees at that company do a good job at every level.

In other words, having the shareholders determine CEO salaries will have no impact on the wealth gap whatsoever. Conceivably, it could even increase the wealth gap.

The only way America's decline will stop is when every employee of a company benefits or suffers based on the company's overall performance--when the employees themselves are the only shareholders, rather than trading those shares thousands of times until they reach people on the other side of the world who have nothing to do with that company's operations, apart from cashing dividend checks.

When that happens, if a company is wildly successful, it won't matter much if the CEO is paid a $50 million annual salary, because the employees who made the company so successful will also enjoy excellent compensation and increased "shareholder value". It's difficult to criticize Bill Gates for being worth half a trillion dollars when he made many of his original employees millionaires in the process. Compare that to Home Depot, whose CEO accepted a $25 million annual salary, and then quit the company to enjoy his $210 million golden parachute--while Home Depot employees generally earn wages fit for a pauper.

There will always be a wealth gap in a hierarchical system. That's what a hierarchy is. The problem isn't the gap, it's the exponential growth of that gap which, over time, boosts CEOs from being merely rich, to being extraordinarily wealthy, while leaving workers living paycheck to paycheck, just as they always did before.

So I appreciate President Bush taking the time to chastise corporate America for the outrageous CEO salaries we see today. Yet a closer look at Bush's proposed solution of giving shareholders the power to decide CEO compensation fails to address the problem. A real solution can only come from focusing on the needs of millions of American workers, not the desires of a handful of executives and shareholders.

All the best,
Paul