Kim Lehmkuhl on Excessive CEO Pay and Stock Buybacks

With the Democrats in charge of the House, a coalition of public interest groups is pushing to get hearings on excessive CEO pay, with a focus on limiting or eliminating stock buybacks.

Kim Lehmkuhl
Center for Study of Responsive Law
Washington, D.C.

Polling shows Americans believe that CEO’s make on average thirty times what the median worker in the United States makes and that the ratio should be much lower – 7 to 1.

But data collected under a new Securities and Exchange Commission rule shows that in fact the average CEO makes $14 million – which is 361 times the pay of the median worker.

The management consultant Peter Drucker famously advocated a pay ratio of no more than 20 to 1.

Kim Lehmkuhl works on CEO pay and stock buybacks for the Center for Study of Responsive Law in Washington, D.C. She works with a coalition of public interest groups pushing for hearings in Congress to address the issue of excessive CEO pay.

“There was a rule from the Securities and Exchange Commission (SEC) that requires public companies to disclose your CEO pay,” Lehmkuhl told Corporate Crime Reporter in an interview last week. “That information has been available to shareholders for some time. The additional piece in this rule requires companies to disclose pay for a median employee. And the definition of employee is a definition that the business community fought very hard against.”

“The definition now includes seasonal workers, part time workers and workers overseas. They did not want that definition, because for the corporations that have offshored much of their work, the ratios between CEO pay and median workers starts to look really bad. There is an optional part of that rule that allows companies to make cost of living adjustments for workers overseas – to show what the worker would be paid if they were living in the United States.”

What kind of ratios are we looking at?

“There are two online tools which allow you to check individual company ratios and get sector wide ratios. One is from Bloomberg and one is from the AFL-CIO. The average CEO compensation is almost $14 million. The average pay ratio is 361 times the median employee. There are some ratios that go up to 2500 to 1. And there are many companies who didn’t report at all.”

“We are entering the proxy season for this year and the filings are due this spring. This will be the second year of these numbers. And we will see what has changed since last year.”

One of the key reforms you are looking at is an excise tax on excessive pay. One way to define excessive pay is a 20 to 1 pay ratio. Is this a new idea?

“It’s a new idea in the sense that no legislation has yet been introduced to limit CEO pay to 20 to 1. There have been related pieces that have tried to do something like this in a more opaque, more complex and less effective way. Some of these pieces are likely to be introduced in this Congress.”

“Based on the pay ratio, you can try and drive different corporate behavior. One way to introduce it is to drive it with procurement reform.”

The idea is to say – if your pay ratio is above say 20 to 1, you can’t do business with the government?

“Either straight up you can’t do business with the federal government or your pay ratio was under 20 to 1, you would get some level of preferential treatment. There is also talk about tying corporate tax rates to pay ratio.”

“For us, an excise tax is more straightforward. Corporations are incredibly skilled. They have the time, the money, the expertise on retainer to figure out how to game the system.”

The average pay ratio is now 361 to 1. Polls show that Americans believe the pay ratio to be 30 to 1. And the same polls show that they would want more like 7 to 1. But you think it should be 20 to 1.

“The argument is that anything above 20 to 1 makes it difficult for the workers to come into work – just to make your boss even richer?”

“Bernie Sanders last year introduced the Stop WalMart Act. The legislation would bar stock buybacks for firms that fail to pay a minimum wage of $15 an hour, provide workers seven days of sick leave, and cap CEO compensation at 150 times the median employee pay.”

“There is a lot of value in the Stop WalMart Act, which is the bill introduced last year by Senator Bernie Sanders. It draws public attention to this issue. Stock buybacks get mentioned only vaguely in the press. I was aware of it because I’m from the Bay Area and follow a lot of tech press. It always gets mentioned when it comes to Apple stock buybacks.”

“We have a lot of education to do to bring the issue of stock buybacks to the public attention. Stock buybacks have such a tremendous impact on the economy — not only your take home pay. Look at the housing crisis, as one example. That happened because people at the top are buying up so much real estate as investment properties and for speculation.”

“But stock buybacks need to be banned. Stock buybacks were not legal until the Reagan administration. Fundamentally, they are stock price manipulation. That’s how they are being used now. That’s why they exist. They balloon CEO paychecks. When the CEO leaves, whether or not they did a good job, regardless of whether workers are laid off or factories are shuttered, they sell the stock back, the company repurchases it and gives it to the next CEO.”

Those are the two front burner issues. The excise tax on excessive pay and stock buybacks. Let’s look at the players.On the public interest side there is Americans for Financial Reform (AFR).

“Americans for Financial Reform is a coalition. We are part of it. There are consumer and worker advocates. They got a lot of shine working on reforms at the Consumer Financial Protection Bureau. They looked at the causes of the financial crash. They produced some Dodd-Frank work. This comes out of that. Not all coalition workers work on all issues. Executive pay has its own AFR task force — it’s a lean and mean fighting machine. We are focusing on the House Financial Services Committee.”

Bart Naylor of Public Citizen is on the task force. How many people are on the AFR CEO Pay Task Force?

“Some of the other members are Sarah Anderson at the Institute for Policy Studies. Sam Pizzigati. Brandon Rees at the AFL-CIO. Louis Malizia at the Teamsters.”

Who is representing the companies on the Hill?

“It is primarily a Business Roundtable project. Marco Rubio wrote a piece in the Atlantic recently about stock buybacks. He lays out the problem correctly and then comes to the wrong conclusions. His conclusion is that we should have a zero percent corporate tax rate and maybe in exchange for controlling buybacks.”

“Senator Tammy Baldwin (D-Wisconsin) has a bill that would ban stock buybacks outright.”

What is the outlook in the House of Representatives for CEO pay legislation and stock buyback legislation?

“There are quite a few different bills. Most of them have only a handful of co-sponsors. It’s not clear that there is a lot of support for one proposal. But there is appetite for doing something. And there is space to have discussion about what would actually be effective.”

“There are a lot of co-sponsors for a bill by Congressman Lloyd Doggett (D-Texas). That would limit corporate deductibility of executive pay for any executive making over $1 million.”

Are there going to be hearings on the excise tax and stock buybacks?

“We are pushing for hearings. We have a list of targets and are starting to have meetings with staff. We think Doggett could be a good ally on this. He has been a proponent of proposals put forth by the Institute for Policy Studies. He is sympathetic.”

“There is a study from Dean Baker at the Center for Economic and Policy Research that shows that the deductibility cap for health insurance CEOs that was part of the Affordable Care Act really didn’t do anything to reign in CEO pay in that industry. We don’t have a lot of hope that that approach is the silver bullet for the CEO pay problem, although we do think it’s part of a good package of things that we like. But it’s not what we are going to be focusing on.”

[For the complete q/a format Interview with Kim Lehmkuhl, see 33 Corporate Crime Reporter 4(14), Monday January 28, 2019, print edition only.]

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