Do Top Earners Care?

A couple of weeks ago a New York Times pundit claimed the US economy was so strong Democrats were going to find it tough to defeat Donald Trump in 2020. In the same edition the newspaper printed a list of the top 200 US corporate executives ranked by their 2018 compensation. No apparent connection was acknowledged.

The list, however, makes two things clear: 1) Corporate America’s chief executive officers are profiting robustly from policies already in place before Trump but enhanced handsomely by his administration, and 2) Corporate America cannot be counted on to reduce the income inequality undermining the livelihood of most Americans on its own.

According to the Times list, the 200 highest paid CEOs enjoyed a 6.3 percent pay increase last year, while average workers in the US received only 3.2 percent. Median salary for  CEOs in 2018 was $18,630,000.  Median family income in the US in 2018 was slightly less than $64,000.

Some key corporate CEOs were absent from the list: Warren Buffet (Berkshire Hathaway), Larry Page (Alphabet) and Jeff Bezos (Amazon). Buffet’s modest living style and his commitment to giving away 99 percent of his fortune before his death are well-known. Page receives a salary of $1 per year. Bezos has received the same $81,840 annual salary for ten years.

According to Bloomberg, Page who currently owns 40 million shares of Alphabet has sold shares valued at $9 billion since the company went public in 2004. It’s hard to believe Bezos who controls 16 percent of Amazon has created an aerospace company (Blue Origin) and bought the Washington Post on his humble salary.

Mark Zuckerberg is on the list, but at compensation of only a little over $22,000,000.  The Facebook CEO owns approximately 17 percent of the social media platform, but he holds  over 50 percent of voting rights in the company. According to Investopedia, Zuckerberg sold 240,000 shares of Facebook common stock in 2018 for over $52 million.

Top CEO on the list is Tesla’s Elon Musk, who received nearly $2.3 billion in compensation last year. That is approximately the same amount the company announced in May it needed to raise from capital markets to keep functioning effectively. Tesla has also benefited from a generous federal tax credit, $7,500 for the first 200,000 purchasers.

Concern about the new requirement to publish CEO pay ratios is not evident from data on the list. Calculated by dividing the CEO’s compensation by the pay of the median employee of the company, the CEO pay ratio reveals the income gap between those in charge and those likely doing most of the work.

Ignoring Tesla’s out-of-sight CEO pay ratio, the next two highest belong to Gap’s Arthur Peck, 3,566:1 based on his $20,793,939 compensation, and to Mattel’s Yvon Kreiz, 3,408:1 based on his pay of $16,955,660. Lowest ratio was at Celgene where Mark Alles’ $16,223,923 compensation translated into a CEO pay ratio of 62:1.

Median CEO pay ratio for the entire list was 277:1.

An additional caveat to note: the Times list did not include some of the business world’s most highly compensated individuals, like the CEOs of private equity firms and hedge funds. One of the latter, Kenneth C. Griffin, head of Citadel Investment Firm, paid nearly $240,000,000 for a New York City penthouse in January. Griffin’s firm made $1.4 billion in 2017, but only managed $870,000,000 in 2018.

Nearly two thirds of all hedge funds lost money last year, one of the worst years for hedge fund performance in a decade. Still, the top 25 hedge fund CEOs took home a collective $11.15 billion. One of the managers who fell off the list this year was Appaloosa Management’s David Tepper, who earned $1.5 billion in 2017.  Guess he spent too much time negotiating tax concessions from South Carolina. 

There are occasional glimmers of hope.

Ray Dalio, Bridgewater Associates, had the best performance among hedge funds last year with $2 billion. In a two-part series published on Linkedin in April 2019, the 69-year old investor warned that American capitalism is “producing self-reinforcing spirals up for the haves and down for the have-not. This is creating widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic and international conflicts and weakening America’s condition.”

Another empathetic voice in the corporate world belongs to Nick Hanauer, Seattle venture capitalist. His TED Talk debunking supply side economics caused a stir in 2014.  In the recent issue of The Atlantic, Hanauer continues his plea for our prosperity to be shared:

“…the most direct way to address rising economic inequality is to simply pay ordinary workers more, by increasing the minimum wage and the salary threshold for overtime exemption; by restoring bargaining power for labor; and by installing higher taxes—much higher taxes—on rich people like me and on our estates.”

Dalio may see the reality more clearly:

“My big worry is that the sides will be intransigent in their positions so that capitalism will either a) be abandoned or b) not be reformed because those on the right will fight for keeping it as it is and those on the left will fight against it.”