One of the great strengths of the American economy is that organized labor has historically not been opposed to profits. As the American Federation of Labor once put it, "We have learned the lesson that when opportunities for profit diminish, opportunities for jobs likewise disappear." This contrasts with European labor unions, which have always had a Marxist orientation and viewed profits as unjustified in principle.
European workers tend to view profits as something like taxes that come out of their pockets. Abolishing profits, therefore, will increase workers' incomes, in their view. American workers, by contrast, understand better than their European counterparts that capital and management contribute significantly to the growth of jobs and wages. They generally don't begrudge the dividends paid to shareholders or the high salaries paid to CEOs as long as they get their share.
However, there is also another important element to this social contract that has been so important to America's economic success. It is that economic rewards should be commensurate to risk. Those who earn the highest rewards should not be able to obtain them without taking an equally large risk. Those who achieve such rewards without risking anything don't have the same moral claim as those who lay it all on the line.
Thus, there is a fundamental difference between the entrepreneur, who takes a chance and risks his own capital in the pursuit of great rewards, and the corporate manager, who risks little, puts none of his own capital into the enterprise and may achieve great rewards through manipulation, rather than by maximizing shareholder value.
To be sure, there are still many entrepreneurs who achieve great wealth by creating value for those who risk their capital and good jobs for those who labor for them. But one also hears, increasingly, about corporate CEOs who make massive salaries while doing neither. It is not uncommon to hear about CEOs who make record pay in years when sales and profits fall, when stock prices nosedive, and workers are laid-off or forced to give back wages and benefits.
The AFL-CIO has begun highlighting egregious examples of such cases on its website. Recent cases include William Esrey of Sprint, who received $218 million in compensation over the last 5 years while his company's stock lagged the S&P 500 Index, a common benchmark, by 34 percent. Stephen Hilbert of Conseco received $146 million, even though his company's stock trailed the S&P 500 by 50 percent.
Graef Crystal, an expert on CEO compensation, says that the AFL-CIO exaggerates its figures. But his own numbers still show a widening gap between CEO compensation and that of ordinary workers. Whether this is right or wrong is not really a matter for workers to decide. CEO pay doesn't come out of their pockets -- ordinary workers wouldn't necessarily be paid more if CEO's were paid less -- but it does come out of shareholders pockets. They are the ones who should be complaining.
The reason shareholders haven't complained is that they have bought the argument that tying CEO compensation to stock prices, through stock options, encourages corporate management to act in the best interest of shareholders -- the corporation's owners. As long as stock prices rise, shareholders don't care if CEOs make millions. The question is, what happens when share prices fall, as they have for the past year?
The answer, unfortunately, is that many CEO's take care of themselves and let workers and shareholders suffer while they continue to prosper. A common technique is to get corporate boards to reprice their stock options, so that they make money on them even though the stock price has fallen. Boards rationalize this by the need to attract and keep good managers, but it makes a mockery of the idea that rewards should be tied to risks. For many corporate CEOs, it seems, it is "heads I win, and tails you lose."
This situation is fundamentally unjustified and severely undermines the moral case for capitalism itself. It is essential that corporate boards take seriously the tying of CEO compensation to changes in shareholder value. If large bonuses are justified in years when sales and profits are high, there should be negative bonuses in bad years, forcing poorly performing CEOs to pay a real price when they don't deliver.
Sadly, corporate boards, which exist solely to protect shareholder interests, sometimes don't do their jobs very well. They reward failure as well as success, with callous disregard for the interests of the shareholders they are supposed to represent. One reason for this is that boards are often stacked with members picked by or beholden to CEOs. Directors may serve on many corporate boards, leaving them little time to fulfill all their responsibilities. Or they may represent large institutional stock owners, such as mutual funds, whose CEOs benefit from the same deals, and thus are unlikely to rock the boat.
It is unreasonable to expect CEOs not to try to get the most compensation they can, regardless of circumstances. It is up to corporate boards to ensure that their pay is tied to performance. Sweetheart deals with CEOs not only violate directors' fiduciary responsibility, but undermine the very foundation of capitalism.