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.