William Lazonick: How High CEO Pay Hurts the 99 Percent

By William Lazonick, professor of economics and director of the UMass Center for Industrial Competitiveness. His book, “Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States” (Upjohn Institute, 2009) won the 2010 Schumpeter Prize. Cross posted from Alternet

Corporations are not working for the 99 percent. But this wasn’t always the case. In a special five-part series, William Lazonick, professor at UMass, president of the Academic-Industry Research Network, and a leading expert on the business corporation, along with journalist Ken Jacobson and AlterNet’s Lynn Parramore, will examine the foundations, history and purpose of the corporation to answer this vital question: How can the public take control of the business corporation and make it work for the real economy?

While most Americans struggle to make ends meet, the CEOs of major U.S. business corporations are pulling eight-figure, and sometimes even nine-figure, compensation packages. When they win, the 99 percent lose. We rely on these executives to allocate corporate resources to investments in new products and processes that, in a world of global competition, can provide us with good jobs. Yet the ways in which we permit top corporate executives to be paid actually gives them a strong disincentive to invest in innovation and training. The proper function of the executive is to figure out how to develop and use the corporation’s productive capabilities (business schools call it “competitive strategy”). But that’s not happening.

In effect, U.S. top executives rake in obscene sums by not doing their jobs.

The Runaway Compensation Train

When all the data from corporate proxy statements are in within the next month or so, they will show that 2011 was another banner year for top executive pay. Over the previous three years the average annual compensation of the top 500 executives named on corporate proxy statements was “only” $17.8 million, compared with an annual average of $27.3 million for 2005 through 2007. Yet even in these recent “down” years, the compensation of these named top executives was more than double in real terms their counterparts’ pay in the years 1992 through 1994.

It might surprise you to learn that in the early 1990s, executive pay was already widely viewed as out of line with what average workers got paid. In 1991 Graef Crystal, a prominent executive pay consultant, published a best-selling book, In Search of Excess: The Overcompensation of American Executives, in which he calculated that over the course of the 1970s and ’80s, the real after-tax earnings of the average manufacturing worker had declined by about 13 percent. During the same period, that of the average CEO of a major US corporation had quadrupled! Bill Clinton took up the issue in his 1992 presidential campaign, and immediately upon taking office had Congress pass a law that forbade companies from recording as tax-deductible expenses executive salaries plus bonuses in excess of $1 million.

Unfortunately Clinton chose the wrong pay target. In 1992 salaries and bonuses represented only 23 percent of the total compensation of the top 500 executives named on proxy statements. The largest single component of executive compensation was gains from exercising stock options, representing 59 percent of the total. The Clinton administration left this so-called “performance pay” unregulated.

Perversely, one reaction of corporate boards to the Clinton legislation was to take $1 million in salary plus bonus as the “government-approved minimum wage” for top executives, and therefore to raise these components of executive pay if they fell short of that minimum. The number of named executives with salaries plus bonuses that totaled $1 million or more increased from 529 in 1992 to 703 in 1993 and 922 in 1994.

The other reaction of corporate boards was to lavish more stock options on their top executives. When the stock market boomed in the late 1990s, these executives cashed in. The average annual compensation of the top 500 named executives reached $21 million in 1999 with gains from exercising stock options representing 71 percent of the total, and $32 million in 2000 with option gains now 80 percent of the total.

From 1982 to 2000 the U.S. experienced the longest stock market boom in its history. Average annual stock-price yields of S&P 500 companies were 13 percent in the 1980s and 16 percent in the 1990s. So it didn’t require any great genius to make money from stock options. In fact, it became a no-brainer. In 1991, the Securities and Exchange Commission waived the longstanding rule that, as corporate insiders, top executives had to hold stock acquired through exercising their options for six months to prevent “short-swing” profit-taking. As before, executives did not have to put any of their own money at risk in being granted stock options. But now they could also pick the opportune moment to exercise their options without any risk that the value of the company’s stock would subsequently decline before they could sell the stock and lock in the gains.

The New Normal of Corporate Greed

The speculation-fueled “irrational exuberance” of the late 1990s brought unprecedented pay bonanzas to top executives, thus establishing a “new normal” for corporate greed. When boom turned to bust in the early 2000s, money-hungry executives had to look for another way to get stock prices up and make their millions. Their favorite “weapon of value extraction” over the past decade has been the stock buyback (aka stock repurchase). Top executives allocate massive sums of corporate cash to repurchasing their company’s own stock with the purpose of boosting their company’s stock price. Stock buybacks and stock options have become the yin and yang of executive compensation.

Let’s take a look at how it works: The board of directors of Acme Corporation authorizes the CEO to repurchase the company’s own outstanding shares up to a specified value (say $5 billion) over a specified period of time (say three years). On any dates within this three-year period, the CEO then has the authority to instruct the company’s broker to use the company’s cash to buy back shares on the open market up to the $5 billion limit and subject to the SEC rule that the buybacks on any one day can be no more than 25 percent of the company’s average daily trading volume over the previous four weeks. That might permit Acme to do buybacks worth, say, $100 million per day. It may be the end of the quarter, and the CEO and CFO want to meet Wall Street’s expectations for earnings per share. Or they may want to offset a fall in the company’s stock price because of bad news. Or they may want to ensure that the increase in the company’s stock price keeps up with those of competitors, who may also be doing buybacks. Whatever the reason, by the laws of supply and demand, when the corporation spends cash on buybacks, it “manufactures” an increase in its stock price.

Then, with the stock price up, the CEO, CFO and other insiders may choose to cash in their stock options. Presto! They make tons of money for themselves.

Meanwhile, these executives will tend to ignore investments in innovation and training. Some companies actually fund their buybacks by laying off workers, offshoring jobs to low-wage countries, and taking on debt. The top executives’ weapon of value extraction becomes a weapon of value destruction. They are rewarded handsomely by not doing their jobs.

In 1981, 292 major corporations spent less than 3 percent of their combined net income on buybacks. In 1982, however, the SEC passed a rule (10b-18) that gave corporations that did very large-scale stock repurchases a “safe harbor” from charges of stock-price manipulation. Buyback activity then became larger and more widespread, increasing substantially over the course of the 1990s. From 2003 to 2007, buybacks really took off, and by 2007 the very same 292 corporations now spent over 82 percent of their net income repurchasing their own stock.

The financial crisis and the Great Recession forced a slowdown in buybacks. S&P 500 companies repurchased a record $609 billion in 2007 but pared it down to $360 billion in 2008 and $146 billion in 2009. They stepped it back up to about $289 billion in 2010 and an estimated $440 billion in 2011. It is quite possible that buybacks in 2012 will be even higher than in the previous record year of 2007. And look for executive pay to increase as well.

Concentration of Income at the Top

Make no mistake about it. Executive pay is a prime reason why in 2005-2008 the top 0.1 percent captured a record 11.4 percent of all household income (including capital gains) in the U.S., compared with 2.6 percent three decades earlier. In 2010 (the latest Internal Revenue Service data available), this number was 9.5 percent. The income threshold among taxpayers for being included in the 0.1 percent in 2010 was $1,492,175. Of the executives named in proxy statements in 2010, 4,743 had total compensation greater than this threshold amount, with a mean income of $5,034,000 and gains from exercising stock options representing 26 percent of their combined compensation.

Total corporate compensation of the named executives does not include other non-compensation income (from securities, property, fees for sitting on corporate boards, etc.) that would be included in their IRS tax returns. If we assume that named executives whose corporate compensation was below the $1.5 million threshold were able to augment that income by 25 percent from other sources, then the number of named executives in the top 0.1 percent in 2010 would have been 5,555.

Included in the top 0.1 percent of the US income distribution were a large, but unknown, number of US corporate executives whose pay was above the $1.5 million threshold but who were not named in proxy statements because they were neither the CEO nor the four other highest paid in their particular companies. To take just one example, of the five named IBM executives in 2010, the lowest paid had total compensation of $6,637,910. There were presumably large numbers of other IBM executives whose total compensation was between this amount and the $1.5 million top 0.1 percent threshold.

Let’s Put CEOs to Work for Us

Under the Obama administration, virtually nothing has been done to constrain top executive pay. President Obama signaled his unwillingness to take on the issue when, in an interview in February 2010, he was asked about the many millions paid in 2009 to Jamie Dimon, CEO of JPMorgan and Lloyd Blankfein, CEO of Goldman Sachs, in the wake of the financial meltdown and bank bailouts. "I know both those guys; they are very savvy businessmen,” the president said. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system."

The “Say-on-Pay” provision in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act sounds good, but it just reinforces a system of incentives the does not work. This provision gives public shareholders the right to express their non-binding opinion to corporate management on issues related to executive compensation. If Congress had understood what drives executive pay in the U.S., however, it would have recognized that the granting of Say-on-Pay rights to public shareholders is part of the problem, not the solution. Through a combination of stock options and stock buybacks, Say-on-Pay provisions reinforce an alignment between the incentives of top executives and the interests of public shareholders that has been undermining investment in America’s future.

It is about time that we took control of exploding executive pay. It is not just that the sums involved are unfair, and as history has shown, will only become more obscene. These executives control the allocation of resources that represent the well-being of the 99 percent, and the ways in which they bank their booty is doing severe damage to the U.S. economy. The investment strategies of business corporations are too important to be left under the control of those who gain when the 99 percent lose.


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  1. Woodrow Wilson

    William Lazonick, professor of economics and director of the UMass Center for Industrial Competitiveness

    “The Runaway Compensation Train” –

    While corporate compensation is sickening, via 14A filings, this entry screams:

    “Don’t look at us college and universities, as we have no risk in student loans, but we still increase our tuitions and FEES.”

    Six in one, half-dozen in the other, in the end, we’re (or our kids) getting screwed by both. Oh wait, nevernmind, it’s just supply & demand right?

    1. Woodrow Wilson

      While not in the Wall Street/CONgress stratosphere, University of Massachusetts and other public employee entities, don’t do too badly (which don’t include health care costs and “Other Post-EMployment Benefits”):


      That’s sustainable…as long as you have somebody to rob. Guess who?

      Like I stated, we’re getting it from both ends. In this case, someone pretending to be on our side.

      1. hyperpolarizer

        These numbers are *not* typical of the rank and file professoriat, (my spouse for example) who never made anything like those salaries, and surely won’t retire on them. A few highly placed administrative types make out well, however. Also, anyone with the title MD.

        As for private sector business professionals – accountants, engineers, analysts, purchasing agents, training specialists, etc — their pay has been flat for 30 years (not quite keeping up with inflation) while corporate revenues have in many instances (e.g. where I work) experienced double digit increases per annum. In most years out of the last 20 my company has seen over 10 % growth.

  2. Chris Rogers

    I have no issue whatsoever in CEO’s being paid ridiculous sums, even if most do an appalling job to say the least.

    What I have issue with, is that stupid salary & all associated benefits – including stock options – are not taxed at a minimum of 90% – this being what they’d have paid in the 1960’s in the USA.

    Given, most of the wealth now captured by the 0.1% will never actually be spent in any meaningful way – there being only so many luxury items you can purchase with US$100 million per year, tax it would seem is the best method of curbing this excess.

    Do forget all the bullshit about high tax rates for the wealthy causing harm to the economy, given most of these highly paid persons are little more than parasites, the benefits from taxation would be large indeed – maybe to the point where the USA might be able to pay back some of its national debt or implement a proper health care system based on a single-payer principle.

    Tax the buggers to death is what I say.

  3. kevinearick

    income inequality is a natural consequence/symptom of population stupidity, along with corporate malfeasance…

    Repudiation, Independence, & Severability

    Tocqueville abbreviated: Government is a ponzi scheme, legitimized by a majority of one generation taxing future generations with debt, which lasts until a subsequent generation declares independence, which is triggered by mandatory participation, martial law by fiat, ending one cycle and beginning another in the misdirection of war. The only thing that changes is the mechanism of agency that defines the majority, which always devolves into tyranny.

    The empire has racked up $600T, $100T since the crash, in liabilities it cannot meet, and debt jubilees don’t work because they don’t alter the structure, beliefs, and associated habits of the majority that created all that gravity. There are many ways to bid out the solution, but the most effective is to let government do it for you. When the majority gets tired of throwing money down that rat hole, count what it spent in the attempt to prime the pump since the system crashed out.

    The doctors have known the metabolic pathway to the current outcome since the inception of Coke and its replacement of cocaine with sugar, both addictive toxins to humans, which did not consume them in quantities during DNA development. As anyone born before WWII learned in grade school and every pre-med student learns in biochemistry today, carbohydrates burn in the fire of sugar, triggered by muscle activity, and excess sugar is converted to fat for storage in hibernation. You can correct the disease rates of intelligent children in real time, but not those of the majority.

    Take a look at the data. Children not raised in wedlock cannot or will not provide for the retirement needs of previous generations, the entitlement system is already cash negative, the surplus funds have been spent, and the boomer wave is rolling over, which is why the self-serving hippies are more tyrannical than the predecessors they rested leadership from, hence Jerry Brown & his republican mirrors.

    Everything in the universe is a bomb, with exponential diffusion. What keeps nature in check is the relatively permeable, symbiotic system associations. Empires are closed systems. If you want to see where the problem began, travel back down the slope of viral human replication.

    The empire repudiates debt immediately at the legacy level. Take a look at purchasing power and its components in each empire income event horizon. The recognition of repudiation is relative to its misdirection as the Fed translates relative 0 along the number line with relative interest rates in the derivative recognition event horizons, fed with credit in a positive feedback loop to slow time and maintain the status quo.

    The monetarists reward backwardization right up until nature revolts against viral human replication. That’s History. Now, every corporation is issuing debt (and their leaders are paid), in a shell game to hide the 800lb pea. California is just better at it than most.

    You push a boulder up a hill to a cliff, and drop it on a seesaw (or wind the spring incrementally in a catapult) where another boulder or rock awaits lift-off. The boulder is a battery, stored energy, just before it goes over the cliff. You need a battery, divine providence, to issue currency.

    Apple is not going to pick $600T. Apple destroys wealth. Take a look at the subsidies in its supply, distribution, and finance channels. Where is energy coming from and where is it going relative to the demographic currency problem?

    What you know is that the universe has more than ample current to solve the problem, but it has a price. You need a motor that will pick that $600T gravitational depression, the universe and the earth for that matter are infinitely bigger than the empire, and it is the limits of false assumptions in the rule of human law, in the form of government preemption over individual sovereignty to drive its gravity that prevents recognition of a natural solution.

    The solution is always to provide a neutral path for nature to take its course, but which course depends upon where you want to go. Democracy is both the problem and the solution, because it is a fusion/fission reactor. Because the majority is stupid enough to consume 2 cups of sugar daily means that everyone else must subsidize their stupidity?

    The Internet makes the building revolve around the elevator. Employ it to build the next system. If the next bridge is not complete and the one to follow designed by the time tyranny gets its grip, you have no one to blame but yourself. Legacy and its majority cannot exist without relatively free money. Feed it to the extent you require gravity to place your development into orbit.

    The looking glass is the vortex. If money is your bag, place a gate in each event horizon just beyond the perception of the empire and wire them up.

    Never, never be afraid to do what’s right…Society’s punishments are small compared to the wounds we inflict on our soul when we look the other way. MLK

  4. jake chase

    Well, here is the crux of the problem. There is a legal fiction that corporations are managed by their directors and that the directors are independent of management. The reality is that directors are stooges hired by management and chosen to conform to stereotyped metrics than include a sufficient number of pinup minorities and women and are filled out by retired executives, defrocked politicians, retired generals and admirals and other resume peddling foozlers all of whom are compensated by cheap stock and service on multiple boards in exchange for acceeding to CEO pay and option and bonus demands. Their job really has no other function except attending a monthly lunch and exchanging secret handshakes and well dones, which is why directors have no problem serving half a dozen or more corporations in exactly the same capacity. Incidentally, if any of these directors should get religion about the obscentiy of CEO compensation, the only effect would be to put him or her out of a job, because there is an endless supply of similar characters out there clammoring for the same gig. You must understand that all of this is sanctioned by the laws of Delaware which has been the home sweet home to corporate predation since it was acquired by the Duponts at the turn of the Twentieth Century. Because nearly all the corporations are chartered in Delaware, it is the laws of Delaware that matter in corporate affairs. Delaware caves in to corporate predation and executive looting, and in exchange Delaware supports its entire state government on the franchise taxes paid by the corporations, so the only way out of this crony back scratching is a federal law requiring public corporations to have federal charters, and to meet federal standards of executive compensation, and of course this can only be passed by a Congress which is itself not on the corporate take, so the whole thing is mission impossible. This guy can write angry press releases about executive looting and maybe get a Nobel prize in dogooding, but nothing will change in our current political climate.

    1. J.


      I think collusion between the directors and the management to pay each other buckets of money is the real issue. It’s sucking all the wealth out of the economy, and they can pay politicians for laws to facilitate the process.

      I don’t really agree with the prior post on this topic fingering shareholders as part of the problem – dividend yields are pretty low at the moment, and many/most stocks don’t even pay a dividend, which means the shareholder is really just placing a bet that the stock will go up. Shareholders are getting ripped off by executive salaries too. For example Eisner used to get paid more by Disney than the stockholders did.

      1. jake chase

        I agree. Stockholders have no say on CEO pay. Corporations are managed by their Boards of Directors. Stockholders could reject stock option plans which require the stockholders’ approval, but those ‘qualified’ plans are not a primary source of executive wealth. What is happening is that the corporations are simply being looted by the executives with the complicity of the directors, and this is the reason why the equity markets have been stagnant (apart from notable collapses) for more than ten years. Revenues and earnings may grow, but stock awards to executives dillute the per share results which support the stock price growth through which ‘investors’ obtain their only significant rewards. The whole thing amounts to legalized theft and it is justified only by notstop public relations cant. Some clown appears on CNBC with his sleeves rolled up wearing a year round tan tan and all the network toadies crow about his ‘performance’. There is simply no limit to the bullshit Americans are expected to swallow. You can watch that network all day and all night and never hear a single word of truth. Nor is anyone employed on any of these programs even mildly embarrassed about their participation in this worship of the emperor’s new clothes.

  5. starburns

    do compensation professionals take into account the value of prestige, extensive personal staff, well-appointed and coveted office space, personal transportation, etc. when they are trying to figure out how to best attract and retain good executives? for that matter, is there even an analytic framework for determining what these companies should expect to pay senior management?

  6. Hugh

    I agree with Chris Rogers and have advocated something similar. Do away with capital gains. Treat all revenue from whatever source as income and establish a 90% marginal rate. I am flexible on where that rate kicks in, but between $500,000 and $1 million seems more than reasonable.

    1. ECON

      You are dead on target. As an aside in Canada a royal commission on taxation in early 1970s directed by an accountant came to your solution among other solutions. That is a dollar received whether by earned income, dividends, stock options, or a number of other sources were to taxed the same. It would have simplified tax filing greatly. At that time the 1% could not see their way to survive in the opulence expected.

  7. calabi

    I think this sort of thing will have to be confronted eventually if everything doesnt collapse first.

    Its simple logic if there getting all their money then where is it coming from?

    There is only a finite amount of money within the economy or company at any one time.

    There obviously getting more money at the expense of everyone else in both the economy and company.

    Its idiocy to say that they are so much cleverer and worth so much more that their allowed to suck up all the wealth. Just remove these people and see what happens, or remove everyone else and see what happens.

    Everyone is stupid for letting them become so rich that they feel like they can do what they want and arent a part of society anymore. There just going to trash our whole planet.

  8. Marquis de Sod Lawn Maintenance

    “While most Americans struggle to make ends meet, the CEOs of major U.S. business corporations are pulling eight-figure, and sometimes even nine-figure, compensation packages…”

    Dear one percent, keep increasing your salary and bonuses while mocking us and pouring champagne on our heads from your New York Stock Exchange balcony.

    One of these days we might surprise you with a secret weapon:


    1. Rcoutme

      As has been said before, history shows that when the elite mock the rabble from their high towers things rarely end well for the elite.

  9. Glen

    I’m sure that soon the Federal government will catch up with state of the art corporate governance and pay the President a bonus when he wrecks the country by bailing out Wall St so CEOs can get their bonuses.

    Well, it looks like the Wall St is making sure they reward their boy toy President:

    So much for the quiet life… George W Bush rakes in staggering $15million on speaking circuit: http://www.dailymail.co.uk/news/article-1389307/George-W-Bush-rakes-staggering-15million-speaking-circuit.html

    1. Chris Rogers


      Who in there right mind would wish to pay Bush speakers fees?

      Maybe the same CEO audience that demands US$100 million in salary and perks for doing a job a monkey could!

      Yves on this site makes it clear that the actual percentage of business income/costs swallowed by shop floor workers is some 12-15% of the overall cost structure, basically, its senior management where costs should be cut – obviously, many of these are in the top 5% of earners, so thats a no. no.

      All I can say is that neoliberal economic orthodoxy is one big lie aimed at cementing the elites position – that the electorate allows this is the major concern.

      The only silver lining in all of this, is the fact that as our kleptocracy continues to impose austerity on the vast majority, whilst at the same time extracting an even greater percentage of the wealth pot, sooner or later facts will catch up with them – although this may take another 20-30 years if we use pre-revolutionary France as a yardstick.

  10. Kunst

    “..most of the wealth now captured by the 0.1% will never actually be spent in any meaningful way – there being only so many luxury items you can purchase with US$100 million per year…”

    Money has value on three levels:
    1) Survival through comfort: being able to afford the things one needs and (up to a point) wants.
    2) Luxury
    3) Power.
    The last is where the problem come from. Money = power = the ability to manipulate the system to favor those with lots of money. At that point, the system is not fair and the government is not democratic. The only method for changing the system is revolution.

  11. terri smetana

    how is it that Ian’s one of the chosen few…?…what makes one man worth so much more than another man? Is it the hatchet he’s yielding? The one he uses to end another man’s dreams…or take away another one’s livelihood??

    How can he sleep at nite knowing everyone around him is struggling???? And, to add insult…give himself an outlandish raise…right in front of those whose life he’s ruined??? I don’t get it. Maybe someday the rug will be yanked right under HIS feet…and who will be there to catch him?? Nobody gets a free ride. We all pay sooner or later.

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