The (Bill) Clinton Team’s Secret Meeting on CEO Compensation

Lambert here: Long-time Naked Capitalism readers will be familiar with the work of the late Outis Philalithopoulos, whose name our poster has adopted as their handle, as an hommage.

Naked Capitalism readers are familiar with the fact that CEO compensation exploded starting in the 90s, and that this explosion was related to a shift towards companies providing compensation in the form of stock options.  A major cause of the shift was Bill Clinton’s 1993 move to make executive comp deductible from corporate income taxes only when given as stock options.

Let’s say that one more time:  a small change in tax law, spearheaded by Bill Clinton, provided the initial impetus for the runaway rise in CEO comp, itself plausibly a significant driver of our own era’s lopsided distribution of economic gains.

The basic history has been described elsewhere, for example here, but new details emerged from a Wednesday article by Robert Reich, who participated in the key meetings.  While running for president, Clinton had promised to end the tax deductibility of executive pay over $1 million.  According to Reich, this pledge led to considerable consternation on the part of Clinton’s economic team.

One worried about the prospect of “social engineering through the tax code” and felt that there was “no reason to declare class warfare.”  Another was concerned about “flak from the business community.”  At one point, the first mused, “Maybe there’s some way we can do this without actually limiting executive pay.”

And so was born the “compromise” idea of exempting CEO pay above $1 million, if it was in the form of stock options.  It was a perfect solution from the perspective of building up Clinton as a new kind of liberal, socially concerned but “smart,” in sync with the latest academic research on “pay for performance.”  And the real world results were also impressive – according to Reich,

When Bill Clinton first proposed his plan, compensation for CEOs at America’s 350 largest corporations averaged $4.9 million.  By the end of the Clinton administration, it had ballooned to $20.3 million.  Since then, it’s gone into the stratosphere.

Did Reich realize what a striking story he was telling?  In the name of eschewing “social engineering through the tax code,” Clinton and his advisors engineered a major shift in corporate culture.  In the name of not “declaring class warfare,” they struck a dramatic blow in favor of… a certain social class.  If they had been Republicans, this story would have entered the canon as evidence for what that party really cares about.  They were liberals, though, and so it is instead a mournful tale of irony and unintended consequences.

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30 comments

  1. allan

    Reich doesn’t name his fellow economic advisors who came up with this, but it’s not heard to guess from the press coverage at the time.

    … Lawrence H. Summers, a Harvard economics professor on leave to be chief economist at the World Bank, will oversee work on economic policy, including tax policy and whether fiscal stimulus is needed. Mr. Summers is often mentioned as a possible future chairman of the President’s Council of Economic Advisers. …

    … several other experts would work with Mr. Summers on economic policy. They include Robert Shapiro, an economist at the Progressive Policy Institute; Robert Rubin, co-chairman of Goldman Sachs, and Roger Altman, a friend of Mr. Clinton’s from their Georgetown University days and now a partner in the Blackstone Group, a New York investment bank.

    Maybe someday someone will write an alternative history, with Ross Perot being hit by a giant meteor and GHWB winning the election. It’s easy to imagine that the world would be a better place.

      1. Art Eclectic

        Sadly, the entire history of the United States of America is a tale of white males making important decisions. Take a look at the founders. This isn’t a new development.

        Then scope back out and take a look at how the entire world works. It’s 99% groups of males of the dominate race in the area making important decisions on behalf of everyone else who happens to live there. an SURPRISE those decisions are based on the needs and desires of that group of males rather than the just welfare of all the citizens.

        1. DarkMatters

          Racism! Non-whites and women can screw up just as incompetently. Wait until Hillary gets in; or not: look at the mess she’s already made of our security and justice system, and what her policies have done to Libya.

          Give credit where credit is due.

    1. Carolinian

      Oh heck yes. Clinton’s election was a great disaster for the country, the left, the Democratic Party. The elites couldn’t have come up with a better Trojan Horse. His personal foibles and Slick Willie slipperiness made it easy to keep him weak and malleable. Now his equally unsuitable wife wants to carry on the good work.

      1. two beers

        The elites couldn’t have come up with a better Trojan Horse.

        Surely you haven’t forgotten Obama already?

  2. flora

    “A major cause of the shift was Bill Clinton’s 1993 move to make executive comp deductible from corporate income taxes only when given as stock options.”

    Which, in turn, led executives to ruthlessly cut costs by any means possible, including offshoring to cheaper labor countries. (Which drove up stock prices to the financial benefit of the CEOs.)

    1. rich

      “Fuzzy Math And Stock Options” 2004 Buffett op-ed

      Equally nonsensical is a section in the bill requiring companies to assume, when they are valuing the options granted to the mighty five, that their stocks have zero volatility. I’ve been investing for 62 years and have yet to meet a stock that doesn’t fluctuate.

      The only reason for making such an Alice-in-Wonderland assumption is to significantly understate the value of the few options that the House wants counted.

      This undervaluation, in turn, enables chief executives to lie about what they are truly being paid and to overstate the earnings of the companies they run.

      http://www.washingtonpost.com/wp-dyn/articles/A29807-2004Jul5.html

      So we’ll lower accounting standards, defund the SEC, offshore labor, co opt Fed, monetize assets and our options, and push everyone out on the risk curve….We have the best minds money can buy. Exceptional.

      1. TheCatSaid

        Great link. It goes on to offer additional helpful suggestions for legislators:

        Or if they are absolutely determined to meddle with reality, they could attack the obesity problem by declaring that henceforth it will take 24 ounces to make a pound. If even that friendly standard seems unbearable to their constituents, they can exempt all but the fattest five in each congressional district from any measurement of weight.

      2. John Wright

        But remember Warren Buffeft’s response to the Coca-Cola executive compensation plan as detailed in http://www.nytimes.com/2014/04/26/opinion/nocera-buffett-punts-on-pay.html

        “As Buffett would later acknowledge, the Winters letter prompted him to take a closer look at Coke’s equity compensation plan. And, sure enough, he came to the same conclusion as Winters: It was excessive — “you can give away too much of a company,” he told Becky Quick of CNBC on Wednesday, in the wake of the annual meeting. But he didn’t divulge his views to anyone on the Coca-Cola board. And when it came time to vote with Berkshire Hathaway’s 400 million shares, he abstained.”

        Here is more Buffett:

        “I love Coke,” he said. “I love the management. I love the directors. So I didn’t want to vote no. I didn’t want to express any disapproval of management. But we did disapprove of the plan.”

        So Warren Buffeft, one of the richest men in the world, could only abstain from the vote (of course he had easy access to the press to tell the world what he really believed).

        It will be very difficult to change excessive executive compensation when people of extraordinary wealth, whose wealth is diminished by the practice, who understand the problem, and “abstain” when called to respond in even a small, almost ceremonial, way.

    2. johnnygl

      Possibly just as bad is the trend it kicked off to have the company borrow in the bond markets to fund stock buyback plans. These are a huge source of inflows which props up the equity markets.

      1. Paul Tioxon

        Hah! Do your republican friends know how familiar you are with Bruce Springsteen lyrics? How much is it worth to ya to keep them in the dark?

        1. ChrisPacific

          Republicans like Springsteen just fine. Here is how a Springsteen song sounds to a Republican:

          “Blah blah blah blah USA! blah blah blah blah USA!”

  3. John Wright

    Reich throws in these HRC friendly statements:

    “Hillary Clinton understands this. “When you see that you’ve got CEO’s making 300 times what the average worker’s making you know the deck is stacked in favor of those at the top,” she’s said in her presidential campaign.”

    “And she’s taken direct aim at executive stock options”

    “Many stock-heavy pay packages have created a perverse incentive for executives to seek the big payouts that could come from a temporary rise in share price,” she said in July. “And we ended up encouraging some of the same short-term thinking we meant to discourage.”

    After eight years of a President who excels in giving heartfelt speeches indicating he understands much while doing little, I expect Reich’s suggestion that HRC has taken direct aim at executive stock options, implies she will aim but not pull the trigger on any reform.

    After all, a HRC previous attempt to reform the financial industry was to speechify to the industry “Cut that out”.

    Reich has been around the block long enough and knows the Clintons well enough, that his attempt to burnish HRC’s executive pay reform credentials seems very sad to me.

  4. RabidGandhi

    Just to repeat what has been said here many times, giving an exemption for executive pay is just half of the perversity. By providing an incentive to pay executives in stock options, the government encourages CEOs to boost their own share prices, to the detriment of making investments in the long-term sustainability of their companies. This perverse system gets even sicker after the GFC, as QE pumps even more froth-juice into the vicious circle, and we get the stock buy-back rage and the predictable asset bubbles.

    Without Team Clinton’s shift to promoting executive pay in stock options, the recovery (as it were) would have been much more sturdy and the next impending financial crisis would have been much less severe.

  5. Chauncey Gardiner

    The stock options provision in the tax code referenced here coupled with the so called trade agreements, “downsizing”/massive US employee layoffs, repeal of the Glass-Steagall Act, central bank policies, predatory lending, control frauds, changes in accounting standards, deregulation, etc. that ultimately led to the 2008 financial crisis and its aftermath, indicate the neoliberal project was well-planned, organized and highly sophisticated.

    So a few hundred vetted CEOs, who direct political contributions of industry associations and PACs, and control the economic destiny and incomes of tens of millions Americans, have rung up trillions of dollars in net incremental debt at America’s largest companies. That they have used the proceeds of that debt to fund massive corporate stock buybacks and push up the stock prices of the companies they control in order to optimize their personal income from their stock options is reflective of not only the pathology of greed that now seems to characterize the highest echelons of our corporations, banks and political organizations, but also a deeply flawed strategic vision in terms of the long-term adverse effects of their actions on American industry and labor, with the declining productivity of the corporations they have managed the predictable product of both a massive misallocation of capital and other resources, and a broken social contract.

  6. christopher murphy

    I love the objection to limiting deductability of CEO compensation as “social engineering”. This guy has apparently zero knowledge of the US tax code and the nature of the US constitution. The entire IRC is composed of social engineering in one form or another because federal government action is limited to enumerated powers, unlike in most countries in which the national government has a general police power. As a consequence much of federal policy has to be implemented through the the IRC.

    It really is astonishing just how stupid are rulers are.

    1. Outis Philalithopoulos Post author

      What is fascinating is the idea that removing deductibility for high executive salaries generally would count as “social engineering” while doing so in a more targeted way, meant to encourage specific kinds of behavior, would not. To make sense of it, one has to assume that, to the Clinton advisor in question, “social engineering” was a half-understood stock phrase which meant not what it seemed to mean, but something like “regulation with moral as opposed to technocratic purposes.”

  7. Praedor

    What IDIOTS the Clintonistas are. The tax code is EXCLUSIVELY for “social engineering”. Taxes at the federal level are ONLY for encouraging some (social) behaviors and discouraging others. Period. It is NOT to pay for government. It is NOT to pay for services. It is to socially engineer only.

    So since that is objective fact, let’s socially engineer properly via the tax code and discourage outsize CEO pay and encourage increased worker pay.

  8. Guy Smarter

    ha ha ha
    how many third rate dictionaries did you go through to find that non-gem of an ‘alternate’ spelling ? ? ?
    bwa ha ha ha haaaaa, AND simultaneously proving my inferred point, smart guy…
    you REALLY are an authoritarian in a personal sense, aren’t you ? ? ?

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