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CIETC Director and Most CEOs Have Quite a Bit in Common

Richard Doak

Des Moines Register

April 16, 2006

[Note: This material is copyright by the Des Moines Register, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]

The crime committed in the CIETC scandal if there was a crime is that director Ramona Cunningham seems to have had the ability to all but set her own salary and didn't hesitate to accept far more than the job was worth.

So here's the question: How is that any different from what the average corporate CEO does?

Cunningham raked in nearly $800,000 in pay and bonuses over a 30-month period for running a public job-training agency.

CEO Ralph Hake presided over the demise of the Maytag Corp. and was rewarded with a package worth $19 million.

Which is the bigger outrage?

One difference is that Cunningham was paid with public money.

The other difference is that the overcompensation of corporate CEOs makes the CIETC greed look like penny-ante stuff.

Technically, CEOs can't set their own salaries, but the system is rigged to almost guarantee that top executives are paid more than a free market in executive talent would provide.

CEO salaries are set by boards of directors that tend to be made up of other CEOs. They have a self-interest in keeping overall executive compensation high.

And board members are often hand-picked by CEOs. How cozy getting to choose the person who sets your salary.

Boards sometimes turn to consultants to recommend executive pay, but the New York Times reported last week that these consultants often have contracts with the companies and could suffer financially if they get on the wrong side of the CEO.

Boards also compare their CEO's salary to that paid by other companies, so compensation becomes a mindless game of "I can overcompensate my CEO more than you can overcompensate your CEO!"

The behavior of corporate boards strikes me as a perfect parallel to the way an inattentive and/or in-cahoots CIETC board chairman Archie Brooks signed off on Cunningham's lavish bonuses.

Everyone has seen the shocking numbers: how CEOs on average are paid 431 times what their employees make; how executive compensation has exploded while that for average workers has stagnated or even declined.

The widening gap has a corrosive effect on morale, on the sense of America being a land of fairness and maybe on democracy itself.

The outlandish compensation of American CEOs might be justified if they were outperforming the competition, but they routinely get clobbered by foreign firms whose CEOs are paid far less. How can that have any rational explanation?

Reformers demand that corporate boards take charge and bring some common sense to executive compensation, but that will never happen as long as board members live in the same cushy world of privilege that CEOs do. They all belong to the same insider club.

A better solution might be to restore the progressive income tax.

It's probably no coincidence that CEO pay began to explode about two decades ago, about the same time as the Reagan tax cuts began taking the progressivity out of tax rates.

In the 1940s through the 1970s, high marginal tax rates acted as a damper on excessive salaries. There was little point in seeking an outlandish salary because, above a certain point, the government would tax most of it away. The top marginal tax rate hit 98 percent during World War II and remained above 90 percent in the '50s. The tax code was a disincentive to excessive pay.

The greed-dampening effect of high marginal tax rates began declining in the '80s and has continued downward. One perhaps unanticipated effect has been to allow CEOs, sports superstars and movie stars to shoot for the moon in their salary demands with the assurance that the tax code will allow them to keep most of what they get.

It could be argued people should be allowed to keep whatever the market for their talent provides them. That would be true, if the market were free. But it's clear in the case of CEOs that the system is rigged. It might take some outside force, like a progressive income tax, to unrig it.

The CIETCs of the world can be reined in with better oversight of public agencies. Corporate greed is a tougher challenge.