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Working In These Times

Monday, Jul 27, 2009, 3:36 pm

Perverse Incentives

BY Michelle Chen

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The House may soon vote on legislation that could help level out the economic hierarchy. The “Say on Pay” bill, pushed by Financial Services Chair Barney Frank, wouldn’t directly limit the astronomical sums awarded to top executives. But it would, in theory, act as an internal check.

The legislation would enable public company shareholders to take a non-binding vote on CEO compensation, which might shame CEOs into limiting their own pay. But without altering the basic dynamics of shareholders, corporations and the broader public, would Say on Pay actually change how the corporate hen house is guarded?

While the private sector remains largely insulated from government interference, shareholder activism has emerged as a way to agitate for fairness inside the belly of the beast. The Responsible Wealth project (of United for a Fair Economy) campaigns each year for various shareholder resolutions advocating for Say on Pay policies.

A resolution recently proposed by Alcoa shareholders attempts to straddle diplomacy and class warfare:

An Advisory Vote establishes an annual referendum process for shareholders about senior executive compensation. We believe the results of this vote, combined with dialogue with investors, would provide the board and management useful information about shareholder views on the company’s senior executive compensation.

Activist investors have made some inroads on certain issues, such as environmental responsibility and predatory lending practices. But the process is constrained by regulatory restrictions, not to mention a corporate ethos that is fundamentally antithetical to altruism.

The Troubled Asset Relief Program illustrates the challenges of trying to politely prod firms to change. The TARP contains a Say on Pay provision, along with measures to cap executive compensation and close some tax loopholes.

But so far, the plan has generally failed to either rescue the economy or goad bailed-out firms to be fairer.

In an analysis of the scandal over AIG’s lavish bonuses, Sarah Anderson and Chuck Collins of the Institute for Policy Studies look at the systemic failures that grease Wall Street’s lucre:

We can’t let Congress off the hook. They had ample opportunity to prevent this from happening by putting strict, measurable limits on compensation in the original bailout plans. Instead they backed down to pressure from Treasury officials, first in the Bush administration and then in the Obama administration. Congress’s inaction on excessive compensation over the past two decades has led to an increase in the gap between CEO and average worker pay from 41-to-1 in 1980 to 344-to-1 in 2007.

Moreover, despite regulatory actions, the government continues to hemmorhage billions each year through corporate tax loopholes.

And of course, the TARP strictures apply only to those companies receiving bailout funds—a group that may soon be shrinking as firms rush to pay back the money and wriggle out of federal oversight.

A “referendum” on CEO pay may be an improvement on a rubber stamp, but non-binding shareholder decrees are essentially symbolic. On the other hand, in recent months, the symbolism of public outrage has raised consciousness about a severe maldistribution of wealth. As a target of pitchfork activism, CEO pay is both a symptom and a cause of the corrosive inequality that undermines the country’s financial security, unravels the social safety net, and aggravates structural racism.

The IPS’s Working Group on Extreme Inequality says that while public pressure can influence individual companies, the project of combating inequity calls for concrete command-and-control policies from Washington.

A possible starting point would be passing the Income Equity Act, which would limit executive compensation on a scale relative to the lowest-paid workers. By setting a 25-to-1 ratio pay ratio (or an overall cap of $500,000), the legislation indirectly incentivizes companies to raise all workers’ wages together.

In the long run, reversing the massive theft of the nation’s wealth would require progressive taxation on the richest strata.

Corporate excess isn’t isolated within the confines of the boardroom; it’s enmeshed with institutions that keep wealth concentrated within an ever-shrinking minority. Whether they’re passing resolutions or marching on Wall Street, activists won’t dismantle inequality without pushing to comprehensively restructure the way the country’s resources are distributed.

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Michelle Chen is a contributing writer at In These Times and The Nation, a contributing editor at Dissent and a co-producer of the "Belabored" podcast. She studies history at the CUNY Graduate Center. She tweets at @meeshellchen.

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