Some new hope for a check on CEO compensation

A Delaware state court ruling has shaken up the pay world for corporate executives.

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SOURCEInequality.org

ould any corporate execs walking our world today be any greedier than the execs who run Big Pharma? Hard to say. But out-grasping Big Pharma, suggests a new report out of the U.S. Senate Committee on Health, Education, Labor, and Pensions, would certainly require some serious greed.

Consider, for instance, the pay record of the Big Pharma colossus Johnson & Johnson.

Two years ago, Johnson & Johnson pocketed $17.9 billion in profits and rewarded its CEO with $27.6 million in compensation. That same year, overall, saw Johnson & Johnson lay out $17.8 billion on stock buybacks, dividends, and executive pay — and only $14.6 billion on R&D.

“In other words,” the Senate panel’s report noted, “the company spent $3.2 billion more enriching executives and stockholders than finding new cures.”

Back in 2022, Bristol Myers Squibb also devoted $3.2 billion more to enriching already rich execs than to helping the hurting. Merck’s chief exec that same year collected an astounding $52.5 million in CEO compensation.

Last year, to keep the good times rolling, Big Pharma execs spent over $351 million on lobbying lawmakers, enough to keep almost 200 lobbyists gainfully employed on Capitol Hill.

But let’s not pick on Big Pharma. Our U.S. economy is overflowing with executive-suite greed, and the Financial Times has just zeroed in on one gang of particularly avaricious souls, the hustlers who run the private equity industry.

Private equity firms typically buy control of existing publicly traded companies, then take those companies private. To get the cash they need to make these initial purchases, private equity execs court deep-pocket investors. To guarantee these investors an attractive return, private equity kingpins squeeze workers at their newly acquired enterprises and shortchange their consumers.

The final step: Private equity firms take their “restructured” firms to Wall Street for “initial public offerings” that reap windfalls above and beyond the dividends they’ve been extracting all along from their privately managed takeover targets.

This classic high-finance wizardry, the Financial Times points out, has over recent years become much more difficult to sustain. “Sluggish demand for initial public offerings” has made offloading “existing investments” at huge profits next to impossible.

How have private equity kings, amid this messy scene, been able to keep their gravy train going? Simple. They’ve borrowed tons of new money. Last month, for instance, a giant contact lens retailer owned by the private equity giant KKR borrowed $565 million in new debt to pay off an existing loan and fund a $250-million payout to KKR.

Some additional context: In fiscal 2021, KKR’s two co-CEOs each pulled in over $523 million in total personal compensation.

How do execs like these rationalize their ongoing grasping? These execs can almost always, no matter how much they pocket, point to someone who’s doing even more grasping than they are. Someone like Elon Musk, the world’s richest individual over most of the past two years.

But Musk’s lucky streak of phenomenal good fortune has just hit a nasty speed bump: an unprecedented dressing down from a most unlikely source, the Delaware Court of Chancery, a state judicial body customized for corporate litigation.

Delaware has been a favorite refuge for grasping corporate execs ever since the early 20th century, and over two-thirds of the Fortune 500 currently make corporate-friendly Delaware their legal home. Delaware’s tax and privacy laws, applauds Forbes, have left the state “internationally recognized as a corporate paradise.”

What’s made Delaware so popular with the executive-suite set? Among the many goodies the state offers: Firms that choose to incorporate in Delaware can operate elsewhere and still avoid paying the state’s corporate income tax.

The Court of Chancery’s Kathaleen McCormick has now upset Delaware’s charming corporate apple cart and delivered Musk’s empire a stinging and costly rebuke. In a 201-page ruling, McCormick has labeled the process that led up to the Musk 2018 Tesla pay deal “deeply flawed” and totally voided the contract that handed Musk “the largest potential compensation plan in the history of public markets.”

The Tesla defense for this over $55 billion deal claimed that all those billions served to give Musk the motivation he needed to lead Tesla to glory. Judge McCormick essentially called that defense nonsense. Musk, she pointed out, already held Tesla shares worth tens of billions before the 2018 pay deal. What more motivation could he possibly need?

“Elon Musk’s compensation came to 89 percent of Tesla’s gross (pre-tax) profits over the years 2019-2023,” observes economist Dean Baker. “It seems unlikely that that the company could not have attracted a competent CEO who would have agreed to work for a sum substantially less than 90  percent of the company’s profits.”

Musk and his Tesla legal team can still appeal McCormick’s ruling, but the Delaware Supreme Court, notes activist economist and former U.S. secretary of labor Robert Reich, “has historically given chancellors like McCormick wide latitude.”

So has the Delaware Court of Chancery now put the kibosh on outrageous excessive executive pay? McCormick’s “incredibly important decision,” points out Institute for Policy Studies analyst Sarah Anderson, certainly does establish the existence of excessive compensation. And that decision, adds Cornell University’s Brian Dunn, will most likely help “reign in” the “extremes” we now see in U.S.-style executive pay.

But the new Delaware ruling, Dunn notes, won’t likely “lower CEO pay overall.” Realizing that broader lowering will require much more than what one open-minded Delaware judge can deliver.

How can we get that much more going? We can, for starters, begin denying tax dollars and tax breaks to firms that pay their CEOs outrageously more than what they pay their workers. Lawmakers in Congress now have on their legislative plate a growing selection of measures that, if enacted, would do just that.

The latest of these measures now pending — the Tax Excessive CEO Pay Act — would link the federal corporate income tax rate to each corporation’s CEO-worker compensation gap. Firms that pay their top execs over 50 times what they pay their typical workers would pay taxes at a higher rate, some 0.5 percentage points higher if those execs make under 100 times their median worker pay and 5 points higher if they pay their CEOs over 500 times their typical worker compensation.

“The American people understand,” notes Senator Bernie Sanders, a lead Senate sponsor of the legislation, “that today we are moving toward an oligarchic form of society where the very rich are doing phenomenally well, while working families continue to struggle to put a roof over their heads, feed their families, and pay for the basic necessities of life.”

“Millionaire and billionaire CEOs at massive corporations are cashing in larger and larger paychecks even as their workers — who make those profits possible — barely see their pay keep pace with rising costs,” agrees Senator Chris Van Hollen of Maryland, another Senate sponsor. “These obscene gaps are grossly unfair to workers and harmful to our economy as a whole.”

“It’s disgraceful that corporations continue to rake in record profits by exploiting the labor of their workers,” adds Rep. Rashida Tlaib from Michigan, one of the legislation’s sponsors on the House side. “Working families deserve to live with human dignity.”

How much of a dollar difference could this legislation’s passage make? If the Tax Excessive CEO Pay Act had been law in 2022, JPMorgan Chase would have paid up to $1.04 billion more in taxes. Google, for its part, would have faced a tax bill up to over $3.07 billion higher.

FALL FUNDRAISER

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