Did Obscene Executive Pay Spark the Financial Crisis?
Posted By Adele Stan On December 13, 2011
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You’ve heard all the reasons given for the economic implosion of 2008: the bursting of the housing bubble, the risky investments of financial firms, the use of incomprehensible financial instruments as get-rich-quick-schemes—all of them the result of a massive agenda of across-the-board deregulation pushed by Republican lawmakers since the 1980s.

But at the root of the behavior that led to the 2008 market crash that nearly took down the economy, according to experts who spoke yesterday at a conference at the AFL-CIO in Washington, D.C., is the soaring level of executive pay at the nation’s giant corporations—a system of salary, stock options and bonuses that is not tied to a company’s long-term performance, but rather to the short-term profits that stand to enrich CEOs via the options and bonuses. Consequently, explained AFL-CIO President Richard Trumka at yesterday’s conference, ”Executive Pay and the Dodd-Frank Act,” excessive executive pay led to excessive risk-taking by CEOs and other top officials in corporations and financial institutions.

In 1980, Trumka said, executives at the nation’s largest companies earned about 42 times the level paid the average factory worker, according to an estimate by BusinessWeek magazine at the time. Today, he said, the average CEO at a corporation in the Standard & Poor’s 500 collects a payout that is some 343 times larger than the median paycheck received by the average worker.

As an example of the kind of chaos such extreme pay gaps can create, Trumka cited the case of Angelo Mozilo [2], the former CEO of subprime mortgage giant Countrywide, who cashed out $400 million in stock options while the housing bubble was building, yielding him a windfall before his company collapsed under the weight of the bad loans that fueled the bubble—the very bubble that filled his coffers, while ultimately robbing regular Americans of their homes once it burst.

The conference, keynoted by Rep. Elijah Cummings (D-Md.) and sponsored by Americans for Financial Reform [3], a coalition of labor, progressive and good-government groups, drew together labor leaders, financial regulators and businesspeople to explore the implementation of provisions of the Dodd-Frank Financial Reform Act that are designed to create greater transparency and accountability in the levels of compensation doled out to executives.

Cummings, the ranking Democrat on the House Committee on Oversight and Government Reform, poignantly reminded the audience of the post-crash testimony before his committee by then-Federal Reserve Chairman Alan Greenspan, who admitted, “I made a mistake.”

Quoting Greenspan’s testimony, Cummings highlighted the Fed chairman’s admission that he was in error to “have looked to the self-interest of lending institutions to protect shareholders’ equity.”

But now, Cummings said, the Republican majority in Congress is behaving “as if the 2008 crisis never happened.” While Republicans accuse Democrats of conducting “class warfare” and “redistribution of wealth,” Cummings said, wealth redistribution is actually taking place to the advantage of those who already hold the bulk of the nation’s riches. Citing the $700 billion bank bailout authorized by Congress at the request of then-President George W. Bush, Cummings continued:

Wall Street is back because of the unprecedented [level of] support of the United States taxpayer.

Citing a report from the Pew Research Center, Cummings noted the devastation the economic meltdown wreaked on African Americans and Latinos: African Americans saw their median household wealth depleted by 53 percent, while Latino households suffered a 66 percent decline in median wealth. For whites, the figure is a 16 percent decline.

Amid a panoply of maneuvers by GOP members of Congress to prevent the regulation of financial institutions, and to shield wealthiest Americans from paying comparable levels of taxes as those in the middle class, Cummings singled out for particular condemnation recent moves to prevent the confirmation of Richard Cordray to head the Consumer Financial Protection Board, an entity whose creation Republicans opposed. (You can sign a petition calling for Cordray’s confirmation here.) The AFL-CIO has backed the confirmation of Cordray since his nomination.

After Cummings concluded his remarks, two panels discussed different remedies for the executive pay problem. Panelists included University of Denver professor J. Robert Brown Jr.; Sarah Anderson, global economy project director at the Institute for Policy Studies; Anne Sheehan, corporate governance director of the California State Teachers’ Retirement System; John Keenan, corporate governance analyst at the American Federation of State, County and Municipal Employees (AFSCME); Professor William K. Black of the University of Missouri–Kansas City, and former litigation director, Federal Home Loan Bank Board; Professor Brian Bolton of Portland State University; and Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance.

For more on the pay gap between CEOs and the rest of us, see the AFL-CIO’s Executive PayWatch website. More of our reporting on CEO pay can be found here, here, here and here.

Conference Addresses CEO-to-Worker Pay Disparity
by Vineeta Anand, Dec 12, 2011
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The Americans for Financial Reform Conference on Executive Pay and the Dodd-Frank Wall Street Reform and Consumer Protection Act will discuss this afternoon a provision that would disclose the CEO-to-worker pay ratio to investors and the public for the first time. The AFL-CIO is hosting the conference.

For investors, the CEO-to-typical employee pay disparity ratio is an important gauge of the effectiveness of the board. The pay disparity ratio is also important for investors in assessing the efficiency of a company because a steep gap affects employee productivity, morale and turnover. The SEC is drafting a rule on the CEO-to-worker pay disparity ratio, as it is required to under the Dodd-Frank law.

Meanwhile, Payscale.com, a website that compares wages within companies and between companies based on a sampling voluntarily provided by employees, reported that the pay disparity gap was the steepest in 2011 at UnitedHealth Group, among the nation’s 50 largest companies. At UnitedHealth, the CEO Stephen Hemsley was paid 1,737 times the typical worker at the company.

According to PayScale, Hemsley received nearly $102 million in total compensation in 2011, and the median worker at UnitedHealth made $58,700. PayScale reported that the giant retailer Wal-Mart had the second highest pay disparity gap, with CEO Michael Duke making 717 times the median worker. Duke received $16.3 million in 2011, according to PayScale and the typical worker.

Other companies with a steep CEO-to-pay disparity ratio included United Technologies Corp., where CEO Louis R. Chenevert makes 326 times the median worker at the company, according to PayScale. Chenevert received nearly $24 million and the typical worker makes $73,500, according to the website.