Executive Pay and the 'Market Economy'

[EV_Ares]

It's pretty hard these days to justify astronomical executive pay. In 2007, the average CEO's pay of $10.5 million was 344 times higher on average than the average worker's wage, according to Executive Excess 2008, a joint report from the Washington, D.C.-based Institute for Policy Studies and Boston-based United for a Fair Economy. The top 50 private investment fund managers each took home more than 19,000 times the average worker's earnings.

But never fear, Jack and Suzy Welch -- the former high-flying CEO of General Electric and his wife, the former editor of the Harvard Business Review -- are willing to defend high executive pay by return to first principles and invocation of "the market economy." In a recent issue of Business Week, they write, "Yes, most CEOs make a ton of money, and sometimes they make too much, but in a market economy salaries are set by supply and demand. We also live in a market economy where companies that field the best teams win, and, because of global competition, the best teams tend to be expensive."

There are several decisive rebuttals to this claptrap.

First, there is no plausible market-based story why executive pay should have been bid up so much over the past quarter century. Are executives working harder now? Making better decisions? Has the CEO supply and demand equation changed?

Second, executive pay is not set by the market, but by boards of directors, who frequently are CEO cronies and excuse their behavior by relying on conflicted compensation consultants.

Third, the most super-high compensation packages are typically based on performance standards, with executives cashing in on stock options as share values rise. But this is a system easily gamed, with those same shares sold before short-term thinking leads to medium-term losses. By way of example, consider the massive pay packages obtained by the ousted CEOs of the now-floundering Wall Street firms.

And now comes a new analysis that further debunks the market-based rationalization for ridiculous CEO compensation levels. Executive Excess 2008 shows how taxpayers are helping foot the bill for these outrageous compensation packages.

Executive Excess 2008 highlights five distinct U.S. tax subsidies for executive pay. These are actually market distorting, in that they let top executives and investment fund managers take home more than they would if they played by the same tax rules as regular people. Altogether, Executive Excess 2008 reports, the five tax loopholes heap $20 billion in subsidies on the corporate and hedge fund honchos.

* The hedge fund manager loophole, involving what is called "carried interest," enables investment fund managers to treat most of their salaries as capital gains, and to pay taxes at the capital gains rate, rather than the ordinary income tax rate. Annual cost to taxpayers: $2.6 billion.

* The pensions for the rich loophole. While regular people can place a maximum of $15,500 in 401(k) plans -- deferring taxes until they withdraw the money -- CEOs can place unlimited amounts in deferred pay plans. Annual cost to taxpayers: $80 million.

rest of this article @ the link: http://www.commondreams.org/view/2008/09/13-0