In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank legislation is supposed to protect us against future financial excesses that might lead to another Great Recession.
Dodd-Frank has created a new Bureau of Consumer Financial Protection and rearranged the deck chairs of the government’s bank supervision agencies, but it has done little to rein in executive excess at the top of America’s financial system.
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One of the few tangible ways that Dodd-Frank has helped damp down financial excess had been the introduction of shareholder “Say on Pay” votes on the remuneration of top corporate executives. Starting last year, corporations have had to hold shareholder votes on executive compensation at least once every three years.
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Of course, these votes are nonbinding. Despite all the business school rhetoric about corporations single-mindedly pursuing shareholder value, real-world CEOs adamantly refuse to be ruled by their shareholders. Nonetheless, at least now shareholders can say just what they think of CEOs’ inflated pay packages.
In many cases, what they are saying is “daylight robbery.” The wave of investor anger hit shore in April when Citigroup’s shareholders voted 55-45 against CEO Vikram Pandit’s $14.8 million pay package. Then in May, shareholders of Knight Capital voted against the remuneration of their CEO Thomas Joyce.
So far, only a handful of US companies have had CEO pay upsets, but Crain’s New York Business reports that many Say-on-Pay votes have been uncomfortably close for management’s comfort. Crain’s reports that the CEOs of Bank of New York Mellon, NYSE/Euronext and Lazard all faced “no” votes in excess of 40 percent of shareholders.
At Lazard, the no vote was 47 percent in 2011 and 49 percent in 2012. Apparently, Lazard’s board of directors hasn’t gotten the message. Given how many shares in financial companies are owned by senior management, a 49 percent vote against really represents an absolute majority of independent shareholders.
The mother of all Say-on-Pay votes, the shareholder vote on the pay of Goldman Sachs CEO Lloyd Blankfein, is coming up later this month.
Say on Pay effectively pits the top 1 percent of the population against the top .01 percent. The top 1 percent of the population holds the bulk of the nation’s financial wealth. The top 1 percent of Americans hold nearly 40 percent of the nation’s stock market wealth, according to a 2011 report from the Economic Policy Institute. The remainder of the top 10 percent holds the bulk of the rest.
On the other hand, the top .01 percent of earners represent a tiny slice of American society, about 15,000 people. Membership in this club starts with an annual income of $5.5 million, according to the World Top Incomes Database. These are America’s CEOs, top bankers and top investors. They’re not just rich. They’re superrich.
Say on Pay thus gives the shareholders who own America’s corporations (the top 1 percent) the opportunity to vote on the pay packages of the people who run America’s public corporations (the top .01 percent).
By all accounts, America’s corporations are doing better than ever. Corporate profits are at all-time record highs. Corporate taxes are at record lows. So, why are the top 1 percent so angry?
It may be because America’s ever-rising inequality has finally caught up with them.
America’s economy last hit absolute rock bottom in 1932. In the forty years following the Great Depression, the average American worker’s income more than doubled in real terms (adjusted for inflation). Growth benefited everyone – except for those at the top.
Amazingly, between the 1930s and the 1970s, average CEO pay hardly increased at all. In fact, the average American CEO in the 1970s earned about 4 percent more than the average CEO did in the 1930s (adjusted for inflation) according to a 2010 report in the Review of Financial Studies. Inequality fell dramatically.
The 1970s saw a shift in how the benefits of American economic growth were distributed. From the mid-1970s through the mid-1990sm most of America’s economic gains went to the top 20 percent of earners. College-educated professionals flourished while working-class America stagnated.
After 1998, the gains were even more concentrated. Census Bureau statistics show that, between 1999 and 2007, average incomes stagnated for every group below the top 5 percent. Anecdotal evidence suggests that, since 2007, gains have become even more concentrated, with only the top 1 percent continuing to maintain income growth through the current recession.
Now, it seems like even the top 1 percent are struggling to keep up. The economy as a whole is growing at around 2 percent per year. If that growth were distributed equally throughout the economy, everyone’s pay would grow at a rate of around 2 percent.
But executive pay in the United States rose an average of 22.8 percent in 2010 and 13.9 percent in 2011, according to a tally from the AFL-CIO. There are no reported statistics for top banker and investor pay, but hedge fund and private equity managers make even more than most CEOs. They’re certainly not getting by on 2 percent.
With overall income growth fixed at 2 percent, the earnings of the top .01 percent can only rise at double digits if someone else’s raises gets squeezed down to zero. For years that “someone else” was someone else: the working poor. Then it was the college educated. Then it was middle managers and professionals.
Now it’s the top 1 percent feeling the squeeze.
The Guardian UK newspaper has dubbed it the “Shareholder Spring” – a wave of shareholder protest against outrageous executive pay. As in the US, shareholder Say on Pay is nonbinding in the UK. But at least some British executives are more old-fashioned than their US counterparts.
Andrew Moss, the now-departed CEO of British insurer Aviva, resigned after losing a Say-on-Pay vote. Among nonfinancial firms, publisher Trinity Mirror’s CEO Sly Bailey resigned after losing a Say-on-Pay vote and pharmaceutical firm AstraZeneca’s CEO David Brennan resigned pre-emptively in anticipation of losing a Say-on-Pay vote.
No one seriously expects American CEOs to have the honor to resign when their shareholders vote against their pay packages. No one even expects them to accept lower pay levels, whatever their shareholders may say about their pay. About the best we can hope for is a little false humility.
But the top 1 percent are angry. They’re not used to making sacrifices. As the top 1 percent start to share at least some of the indignities suffered by the other 99 percent, it is likely that their quiescence about rising inequality will start to change.
From the other 99 percent to the top 1 percent: welcome to the club.