by Robert Reich

[elleng]

In early1993, I had a meeting with the late Lloyd Bentsen, then Bill Clinton’s Treasury Secretary, and Bob Rubin, who then headed the National Economic Council, to decide what to do about Clinton’s campaign promise to stop corporations from deducting from their taxes executive pay in excess of $1 million. Bentsen and Rubin argued Clinton’s promise would be met if corporations retained the deduction as long as executive pay in excess of $1 million was related to corporate performance – for example, if tied to stock options. I argued the $1 million cap should have nothing to do with corporate performance because the goal was to hold down executive pay. I was outvoted. The rest is history: Stock options exploded, as did CEO pay. Corporations are now deducting more than $5 billion a year for executive stock options. Since a tax deduction is the economic equivalent of a government handout, you and I and every other taxpayer are subsidizing widening inequality by providing corporations with at least $5 billion a year for executive stock options. Clinton’s original campaign proposal – no deduction of any executive pay in excess of $1 million -- should have been implemented. It still should, even if it is more than 20 years late.

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[merrily]

1. Making the deductions illegal is one way to go. Taxing the income of the

executive at a much higher rate than we tax it now--and maybe even also subjecting all of the income to FICA--is another way to go.

Or, we could just keep taxing Buffett's secretary at a higher effective rate than we tax Buffett, even though he's a job creator and she simply fills one of the jobs his wealth creates, making no contribution to him or to society in her own right. And nothing she buys with the money she earns creates any jobs either.

[unblock]

2. vast options grants are a sickness, causing many ills.

just one example. say i'm made ceo of a large supplier of an important commodity. oil or whatever.

as ceo, with a bonus based on my performance, or the performance of my company relative to an index of the entire industry, i might have a big incentive to run the company efficiently, invest in profit-generating new ideas, etc. generally, make my company the best it can be.

but with stock options, my main goal becomes making the stock price zoom up, lots.

but isn't that pretty much the same thing, you say? isn't stock price essentially the same as ceo performance? i mean, isn't the ceo's job to make the stock price go up?

no!

certainly, ceo performance can have a strong influence on stock price, but it's by no means the only determinant of stock price, and why should be ceo benefit from those other factors? interest rates, the global price of oil, the global supply of oil, etc., all affect company price.

so as a ceo i could have a lousy year, do nothing useful. maybe even do some damage to the company. but if war breaks out in the middle east and oil prices boom, the stock price zooms and i'm stupendously rich for doing nothing.

not only that, but then my *incentive* becomes these other things. i'm no longer so interested in the actual company, but i'm obsessed with war breaking out in the middle east and such. so i now spend my time in washington beating the war drums instead of actually working at the company because the influence i can have on these "external" forces is more lucrative to me than actually running the company better.


all of which is crap.

what a screwed-up system we have.