The explosion of executive pay and the erosion of American prosperity

Entreprises et Histoire

Volumn 57, Issue 4, 2009, Pages 141-164

  Lazonick, William ^a,b  

^a UNIVERSITY OF MASSACHUSETTS LOWELL   (United States)

^b UNIVERSITÉ DE BORDEAUX   (France)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77958480101     PISSN: 11612770     EISSN: None     Source Type: Journal    
DOI: 10.3917/eh.057.0141     Document Type: Article

References (90)

1. This paper builds on research in W. Lazonick, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States, Kalamazoo, Upjohn Institute for Employment Research, 2009
2. and "The New Economy Business Model and the Crisis of US Capitalism", Capitalism and Society, 4, 2, 2009.
3. The research was funded by the FINNOV project through Theme 8 of the Seventh Framework Programme of the European Commission (Socio-Economic Sciences and Humanities), under the topic "The role of finance for growth, employment and competitiveness in Europe" (SSH-2007-1.2-03).
4. W. Lazonick, Sustainable Prosperity in the New Economy?, op. cit.
5. E. Saez, "Table and Figures Updated to 2007 in Excel Format", August 2009, available at http://elsa.berkeley.edu/~saez/.
6. E. Saez, "Table and Figures Updated to 2007 in Excel Format", August 2009, available at http://elsa.berkeley.edu/~saez/.
7. G. S. Crystal, In Search of Excess: The Overcompensation of American Executives, New York, W. W. Norton, 1991.
8. G. S. Crystal, In Search of Excess: The Overcompensation of American Executives, New York, W. W. Norton, 1991., p. 27.
9. G. S. Crystal, In Search of Excess: The Overcompensation of American Executives, New York, W. W. Norton, 1991., p. 29.
10. AFL-CIO, "Executive PayWatch", at http://www.aflcio.org/ corporatewatch/paywatch/pay/index.cfm. 2009.
11. A stock option award gives an employee the non-transferable right to purchase a certain number of shares of the company for which he or she works at a pre-set "exercise" price between the date the option "vests" and the date it "expires". Typically in US option grants, the exercise price is the market price of the stock at the date that the option is granted; vesting of the option occurs in 25% installments at each of the first four anniversaries from the date of the grant; and the expiration date of the option is ten years from the date of the grant. Unvested options usually lapse 90 days after termination of employment with the company. If the market price of the stock is above the exercise price, an option is said to be "in the money". If the market price of the stock is below the exercise price, the option is said to be "underwater".
12. Economic Report of the President (US Congress, Economic Report of the President, Washington, US Government Printing Office, 2010, Table B-90)
13. W. Lazonick and M. O'Sullivan, "Maximizing Shareholder Value: A New Ideology for Corporate Governance", Economy and Society, 29, 1, 2000, p. 13-35.
14. US Congress, Economic Report..., op. cit.
15. W. Lazonick, "Corporate Restructuring", in S. Ackroyd, R. Batt, P. Thompson, and P. Tolbert (eds.), The Oxford Handbook of Work and Organization, Oxford, Oxford University Press, 2004, p. 577-601.
16. W. Lazonick, "The New Economy Business Model...", art. cit.
17. W. Lazonick, Sustainable Prosperity..., op. cit., ch. 2.
18. W. Lazonick, "The New Economy Business Model...", art. cit.
19. For the distinction between the Old Economy and New Economy companies, see W. Lazonick, Sustainable Prosperity..., op. cit., ch. 1.
20. Microsoft, "Microsoft announces share repurchase program and increases quarterly dividend", 2008 at http://www.microsoft.com/presspass/ press/2008/sep08/09-22dividend.mspx.
21. The announcement also noted that Microsoft had completed its previous $40 billion stock repurchase program.
22. For each company, I treat the fiscal year as the calendar year in which its fiscal year ends.
23. H. Louis and H. White, "Do Managers Intentionally Use Repurchase Tender Offers to Signal Private Information?: Evidence from Firm Financial Reporting Behavior", Journal of Financial Economics, 85, 1, 2007, p. 205-233.
24. T. Vermaelen, Share Repurchases: Foundations and Trends in Finance, Hanover, MA, Now Publishers, 2005, ch. 3.
25. M. O'Sullivan, "What Drove the U. S. Stock Market in the Last Century?", INSEAD Working Paper, 2004.
26. Many countries do not permit stock repurchases, while others place restrictions on them. See G. Grullon and R. Michaely, "Dividends, Share Repurchases, and the Substitution Hypothesis", Journal of Finance, 57, 4, 2002, p. 1649-1684.
27. D. M. Chance, R. Kumar, and R. B. Todd, "The 'Repricing' of Executive Stock Options", Journal of Financial Economics, 57, 1, 2000, p. 129-154.
28. B. R. Ellig, The Complete Guide to Executive Compensation, New York, McGraw-Hill. 2007, p. 434-435.
29. E. Lie, "On the Timing of CEO Stock Option Awards", Management Science, 51, 5, 2005, p. 802-812.
30. C. Forelle and J. Bandler, "The Perfect Payday. Some CEOs reap millions by landing stock options when they are most valuable. Luck - or something else?", Wall Street Journal, March 18, 2006, p. A1.
31. G. Bernile and G. A. Jarrell, "The Impact of the Options Backdating Scandal on Shareholders", Journal of Accounting and Economics, 47, 1-2, 2009, p. 2-26.
32. J. M. Fried, "Insider Signaling and Insider Trading with Repurchase Tender Offers", University of Chicago Law Review, 7, 2, 2000, p. 421-477.
33. J. M. Fried, "Open Market Repurchases: Signaling or Market Opportunism", Theoretical Inquiries in Law, 2, 2, 2001, p. 1-30.
34. L. Bebchuk and J. Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation, Cambridge, MA, Harvard University Press, 2004.
35. In the United Kingdom, the Cadbury (1992), Greenbury (1995), and Hampel (1998) reports subjected the income that executives could reap from stock-based compensation to performance criteria that reduced the gains from speculation and manipulation
36. (cf. B. G. M. Main, "The Rise and Fall of Executive Share Options in Britain", in J. Carpenter and D. Yermack (eds.), Executive Compensation and Shareholder Value, Dordrecht, Kluwer Academic Publishers. 1999).
37. See also Financial Reporting Council, "The Combined Code on Corporate Governance", June 2008, 23 available at http://www.frc.org.uk/ documents/pagemanager/frc/Combined-Code-June-2008/Combined% 20Code%20Web%20Optimized%20June%202008 (2).pdf. 2008.
38. A restricted stock option was non-transferable, had an exercise price of at least 85% of the fair market value of the stock at the time it was granted, and could expire up to ten years from the date of the grant. To be eligible for capital gains treatment, the stock acquired through the exercise of the option could not be sold for at least two years from the option grant date and for at least six months from the exercise date. For a comprehensive documentation of changes in the tax laws relating to stock options
39. see B. R. Ellig, The Executive Guide..., op. cit., ch. 8 and Appendix B.
40. See "Top Federal Income Tax Rates on Regular Income and Capital Gains since 1916", at http://www.ctj.org/pdf/regcg.pdf.
41. J. A. Livingston, The American Stockholder, Philadelphia, J. B. Lippincott, 1958, ch. 16.
42. W. G. Lewellen, Executive Compensation in Large Industrial Corporations, New York, Columbia University Press, 1968, p. 137.
43. For an initial critique, see AFL-CIO, The Stock Option Scandal, Industrial Union Department AFL-CIO, 1959.
44. E. N. Griswold, "Are Stock Options Getting Out of Hand?", Harvard Business Review 38, 6, 1960, p. 49-55.
45. E. D. Campbell, "Stock Options Should Be Valued", Harvard Business Review 39, 4, 1961, p. 52-58.
46. D. M. Holland and W. G. Lewellen, "Probing the Record of Stock Options", Harvard Business Review, 40, 2, 1962, p. 132-150.
47. G. E. Lent and J. A. Menge, "The Importance of Restricted Stock Options in Executive Compensation", Management Record, June 1962, p. 6-13.
48. J. C. Baker, "Stock Options at the Crossroads", Harvard Business Review, 41, 1, 1963, p. 22-29, 164-166.
49. Washington Post, "Gore bill would end stock option plans", Washington Post, April 15, 1961.
50. B. R. Ellig, "The Evolution of Executive Pay in the United States", Compensation & Benefits Review, January-February 2006, p. 55-61 (p. 57).
51. A. Gore, "How to be rich without paying taxes", New York Times, April 11, 1965, p. 29.
52. G. S. Crystal, Executive Compensation: Money, Motivation, and Imagination, New York, American Management Association. 1978, p. 145.
53. G. S. Crystal, In Search of Excess..., op. cit.
54. B. R. Ellig, "The Evolution...", art. cit., p. 58.
55. Meanwhile Congress lowered the capital gains tax rate to 20% in 1982, raised it to 28% in 1987, and lowered it again to 20% in 1997. The Job and Growth Tax Relief Reconciliation Act of 2003 (that is, the "Bush tax cuts") further reduced the capital gains tax rate to 15%.
56. When an employee exercises a non-qualified stock option, the company withholds the estimated tax and receives a dollar-for-dollar tax credit known as the "stock-option income tax benefit", which is typically reported on the company's cash-flow statement. In 2000, for example, at the peak of the Internet boom, Cisco Systems had a stockoption income tax benefit of $5.5 billion, more than offsetting its actual 2000 federal and state income tax liability of $4.7 billion
57. (cf. K. Pender, "Giant Cisco didn't pay any federal income tax: Businesses get break on employee stock options", San Francisco Chronicle, October 9, 2000).
58. In 2003 the SEC amended Rule 10-18b "to simplify and update the safe harbor provisions in light of market developments since the Rule's adoption". The amendments also required that in their 10-Q filings with the SEC companies report the number and value of shares repurchased in the previous quarter and the average price paid per share. See http://www.sec.gov/rules/ final/33-8335.htm.
59. R. L. Hudson, "SEC eases way for repurchase of firms' stock: Agency assures it won't file charges of manipulation if certain rules are met", Wall Street Journal, November 10, 1982.
60. A. Rappaport, "Selecting Strategies that Create Shareholder Value", Harvard Business Review, 59, 3, 1981, p. 139-149.
61. A. Rappaport, "Corporate Performance Standards and Shareholder Value", Journal of Business Strategy, 3, 4, 1983, p. 28-38.
62. E. F. Fama and M. C. Jensen, "Agency Problems and Residual Claims", Journal of Law and Economics, 26, 2, 1983a, p. 327-349.
63. E. F. Fama and M. C. Jensen, "Separation of Ownership and Control", Journal of Law and Economics, 26, 2, 1983b, p. 301-325.
64. M. C. Jensen, "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers", American Economic Review, 76, 2, 1986, p. 323-329 (p. 323).
65. M. C. Jensen, "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers", American Economic Review, 76, 2, 1986, p. 324.
66. M. C. Jensen and K. J. Murphy, "Performance Pay and Top Management Incentives", Journal of Political Economy, 98, 2, 1990, p. 225-264.
67. W. Lazonick, "The New Economy Business Model", art. cit.
68. W. Lazonick, "Controlling the Market for Corporate Control: The Historical Significance of Managerial Capitalism", Industrial and Corporate Change, 1, 3, 1992, p. 445-488.
69. W. Lazonick, "Corporate Restructuring", art. cit.
70. C. Baldwin and K. Clark, "Capabilities and Capital Investment: New Perspectives on Capital Budgeting", Journal of Applied Corporate Finance, 5, 2, 1992, p. 67-87.
71. W. Lazonick, "Entrepreneurial Ventures and the Developmental State: Lessons from the Advanced Economies", World Institute of Development Economics Research Discussion Paper dp2008-01, 2008.
72. National Research Council, Funding a Revolution: Government Support for Computing Research, Washington, National Academies Press, 1999.
73. In an important contribution to the corporate governance debate, Margaret Blair (1995) argued that, alongside a firm's shareholders, workers should be accorded residual-claimant status because they make investments in "firmspecific" human capital at one point in time with the expectation - but without a contractual guarantee - of reaping returns on those investments over the course of their careers. Moreover, insofar as their human capital is indeed firmspecific, these workers are dependent on their current employer for generating returns on their investments. A lack of interfirm labor mobility means that the worker bears some of the risk of the return on the firm's productive investments, and hence can be considered a residual claimant. Blair goes on to argue that if one assumes, as shareholder-value proponents do, that only shareholders bear risk and residual-claimant status, there will be an underinvestment in human capital to the detriment of not only workers but the economy as a whole. M. M. Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, Washington, Brookings Institution. 1995.
74. See, however, Blair 2009, where she seems to accept the "free cash flow" argument that when corporate executives decide to do buybacks it must be because no superior alternatives to corporate resource allocation exist. She also takes issue with my characterization of stock repurchases as instruments of manipulation by making the specious argument that, since repurchases are legal, they cannot be used to manipulate the stock market. In fact, as exemplified by the SEC's Rule 10b-18 that provides corporate stock repurchasers with a safe harbor from manipulation charges discussed above, the deregulation of stock repurchases reflects the rise of shareholder-value ideology.
75. Cf. M. M. Blair, "Comment on 'The New Economy Business Model and the Crisis of U. S. Capitalism'", Capitalism and Society, 4, 2, 2009.
76. A. A. Berle and G. C. Means, The Modern Corporation and Private Property, New York, Macmillan, 1932.
77. R. B. Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life, New York, Vintage Books, 2008, p. 105-114.
78. For example, in their articles on the concentration of income at the top, Thomas Piketty and Emmanuel Saez (2004 and 2007) do not raise, let alone analyze, the impact of the distribution of income on the performance of the economy.
79. Cf. T. Piketty and E. Saez, "Income Inequality in the United States, 1913-2002", in A. B. Atkinson and T. Piketty (eds.), Top Incomes over the Twentieth Century: A Contrast between European and English-Speaking Countries, Oxford, Oxford University Press, 2004.
80. T. Piketty and E. Saez, "The Evolution of Top Incomes: A Historical and International Perspective", American Economic Review, 96, 2, 2007, p. 200-205.
81. I am currently engaged in ongoing studies of the relation between executive pay and innovative performance in these sectors.
82. W. Lazonick "The New Economy Business Model...", art. cit.
83. W. Milberg, "Shifting Sources and Uses of Profits: Sustaining U. S. Financialization with Global Value Chains", Economy and Society, 37, 3, 2008, p. 420-451.
84. "US could lose race for nanotech leadership, SIA panel says", Electronic News, March 16. 2005.
85. In 2008 the NNI budget was $1, 554 million with an estimated budget for 2009 of $1, 657 million, and a proposed $1, 640 million for 2010 (www.nano. gov/html/about/funding.html).
86. W. Lazonick and Ö. Tulum, "US Biopharmaceutical Finance and the Sustainability of the Biotech Boom", University of Massachusetts Lowell Center for Industrial Competitiveness, paper presented at the Sloan Industry Studies Conference, Chicago, May 29 (revised July). 2009.
87. US Congress, "Democrats tell big oil: Spend more on production and renewable energy, less on stock buybacks before making demands for new drilling leases", US Congressional Documents and Publications, July 31, 2008, at http://menendez.senate.gov/newsroom/record.cfm?id=301639.
88. US Congress, ibid.
89. J. A. Byrne, "That's some pay cap, Bill", Business Week, April 25. 1994.
90. J. A. Byrne, "CEO pay: Ready for takeoff, Business Week, April 24. 1995.