The Rich Get Richer...

Surprisingly, President Bush recently spoke on the issue of escalating corporate pay in the United States. As a member of the good ol' boys club, I never thought that I would hear him say a thing about it, except to probably encourage higher pay for executives. Rather, the President stated that pay should be tied to how much executives help their companies' shareholders.

"The fact is that income inequality is real. It has been rising for more than 25 years," the President said.

Now, the President could be paying lip service to the issue, but at least he mentioned it. This issue hit the news recently, when Home Depot CEO Bob Nardelli was forced out of his position. I will allow Gregg Easterbrook, contributing editor for The New Republic, The Atlantic Monthly and The Washington Monthly, and a visiting fellow at the Brookings Institution, to further explain the details regarding Nardelli.

Combining regular income, stock options, pension and a golden parachute, Nardelli received $274 million for six years of work. That's $34,250 an hour. That's about 3,000 times the hourly wage of a Home Depot worker. That's $275,000 per day – five times as much per day as the typical American family earns in a year. Good management is of value to a company's shareholders: skilled corporate officers should be well paid. But there's a difference between "well paid" and something akin to looting. Why isn't Nardelli's $274 million, taken from the shareholders, simply viewed as embezzlement? Home Depot stock fell from $43 to $41 under Nardelli's tenure, a 21 percent drop when calculated for inflation. The CEO cannot control a company's stock price, and excessive emphasis on stock price creates a temptation to cook the books. But it's absurd to think that shareholders can get hosed under a CEO's watch, and for that the CEO deserves $274 million. The Home Depot board offered Nardelli the terms that led to the $274 million. Boards of directors have a self-interest in overpaying CEOs, because many board members are themselves CEOs who know their own pay will rise if other CEOs' pay rises. With Nardelli's $274 million, CEO overpay has reached runaway levels. What the Home Depot board did was perfectly legal, and that in itself is a scandal. The word for what many public-company CEOs and their boards are up to should be: embezzlement.

Easterbrook has also noted, "And please don't tell me the prevailing prices for executives justified Nardelli's huge number, because this requires you to argue that there was not one single qualified manager willing to run Home Depot for less than $245 million. 'You're only offering $244 million? Forget it!'"

Last year, Paul Krugman wrote an article for Rolling Stone magazine on the the increasing divide between executive and worker pay, titled, The Great Wealth Transfer. Krugman noted;

In 1969, General Motors was the country's largest corporation aside from AT&T, which enjoyed a government-guaranteed monopoly on phone service. GM paid its chief executive, James M. Roche, a salary of $795,000 -- the equivalent of $4.2 million today, adjusting for inflation. At the time, that was considered very high. But nobody denied that ordinary GM workers were paid pretty well. The average paycheck for production workers in the auto industry was almost $8,000 -- more than $45,000 today. GM workers, who also received excellent health and retirement benefits, were considered solidly in the middle class.

Today, Wal-Mart is America's largest corporation, with 1.3 million employees. H. Lee Scott, its chairman, is paid almost $23 million -- more than five times Roche's inflation-adjusted salary. Yet Scott's compensation excites relatively little comment, since it's not exceptional for the CEO of a large corporation these days. The wages paid to Wal-Mart's workers, on the other hand, do attract attention, because they are low even by current standards. On average, Wal-Mart's non-supervisory employees are paid $18,000 a year, far less than half what GM workers were paid thirty-five years ago, adjusted for inflation. And Wal-Mart is notorious both for how few of its workers receive health benefits and for the stinginess of those scarce benefits.

Corruption and instability will increase as the gap between the "haves" and "have nots" widens. Since 2001, earnings of workers in the US have not kept up with inflation and fewer people have benefits such as health insurance. For the future stability and success of this country, things need to change. I don't expect Presidnet Bush to do much about it, but at least the topic has been broached.