The Rise of Corporate Dominance and the Rise of Income Inequality (Part II)
22 August 2017 | Pago Pago, American Samoa
III. Corporate CEO’s are paid much more than people realize because of an SEC rule
There was a day when CEOs of large corporations made a few million a year, but not obscene multiples of the average wage of the worker they do now. That was back in the days when income inequality was not a problem. Most CEOs then and now are paid a base salary in cash and stock and an incentive pay in addition, also in cash and stock but not in the same ratio; usually more stock. CEOs receive grants of at-the-money call options, that is, options to purchase company stock in the future at a price equal to the stock price on the day the option is granted.
According to the AFL-CIO labor union the average S&P 500 CEO in the United States in 2016 earned 331 times more per hour than the average worker last year or $11.7 million; the average worker earned $35,347.
But these data are wrong. CEO earnings are way understated. Here is why
The SEC allows use in SEC filings of the EFV or “estimated fair value” of all stock options in stating CEO compensation but that number is biased much to low as it is computed. The better figure by far is “actual realized gain” or ARG
Data on these executives’ actual take-home pay, which is published, as required by law, in companies’ annual filings with the Securities and Exchange Commission (SEC), show that in 2014, senior executives made 949 times as much money as the average worker, far higher than the AFL-CIO’s ratio of 331:1.
In 2014, the latest year for which ExecuComp has full data, the average ARG compensation of the 500 highest-paid executives was $34.3 million, with 81 percent of that coming from stock-based pay, a far cry from the $11.7 million figure of the AFL-CIO in 2016 and compensation rose in the interim.
Talk about loaded dice. The SEC won’t respond.
IV. The real divide is not between the 1% and the 99%, but between the 99.9% and the 0.1% which is gaining.
The bottom 99.9% are merely workhorses and have not materially gained.They are merely workhorses for the top 0.1%. The income shares of the bottom 99,9% have not materially gained over the years. This was my sense and my understanding during my working career when I was mostly in the top 1%. I was simply a workhorse. Unlike those in the lower brackets, the top 0.1% have seen their incomes rise hugely. And they are in a different league altogether.
They can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the U.S. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends and lucrative business. It was a joke in the legal profession that as clients we could not afford ourselves. The odds of getting into that top 0.1% are very slim and the door is kept firmly shut by those within it.
You can see that in CEO compensation. The compensation of CFOs and COO are usually about a third of CEO’s compensations. They are work horses in service, too. Only the CEOs of the DOW 30, S&P 500 and many of the NASDAQ listings and a very few of the Russell 2000 have a real shot at the top 0.1%. The door is closed to others.
Again, without the top 0.1% and the CEOs that dominate it, income inequality would not be much of a problem in the US. No one else is seriously hogging the ball or grabbing for more. If the top 0.1% were removed from the picture, the problem of excessive income inequality in the US would largely disappear. Yet we know those top 0.1% families are mostly those of CEO’s, and some banker’s and a few invention or venture capital entrepreneurs.
(to be continued)