The Pay's the Thing: How America's CEOs Are Getting Rich Off Taxpayers

Apr 16, 2014Susan Holmberg

Income inequality will continue to rise unless we close the performance pay loophole and curb the growth of executive compensation. For more, see "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Susan Holmberg and Lydia Austin.

Income inequality will continue to rise unless we close the performance pay loophole and curb the growth of executive compensation. For more, see "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Susan Holmberg and Lydia Austin.

It’s proxy season again, and we will soon be deluged with news profiles of CEOs living in high style as our ongoing debate on CEO pay ramps up. Last week, the floodgates opened when the New York Times released its annual survey of the 100 top-earning CEOs. Lawrence Ellison from Oracle Corporation led the list again with over $78 million in mostly stock options and valued perks, an 18 percent drop in pay from last year. Poor Larry.

Rising CEO pay has been a hugely contested issue in the U.S. since the early 20th century, particularly in the midst of economic downturns and rising inequality (these two often go together). Because the numbers are just so staggering, most of the current debate focuses on the rapid rise in CEO pay over the past four decades. While executive pay remained below $1 million (in 2000 dollars) between 1940 and 1970, since 1978 it has risen 725 percent, more than 127 times faster than worker compensation over the same period.

With any luck, ascendant French economist Thomas Piketty and the English-language release of his book Capital in the Twenty-First Century will build much-needed momentum in D.C. to institute reforms that address our CEO pay problem. This is a major driver of America’s rising income inequality, which is the central focus of Piketty’s magnum opus. One reform in particular that is critical to slowing down the growth of CEO pay and its costly impact on our economy is closing the performance pay tax loophole.

Inspired by compensation guru Graef Crystal’s bestseller on corporate excesses and skyrocketing executive pay, then-presidential candidate Bill Clinton elevated CEO pay as a core issue of his 1992 campaign with a pledge to eliminate corporate tax deductions for executive pay that topped $1 million. Clinton was successful only in part; his policy did become part of the U.S. tax code  as Section 162(m), but it came with a few unfortunate qualifiers, namely the exception for pay that rewarded targeted performance goals, or “performance pay.”

The logic of performance pay comes from Chicago-school economists Michael C. Jensen and Kevin J. Murphy, who published a hugely influential piece in the Harvard Business Review in the early 1990s that argued executive pay should align CEO interests with what shareholders care about, which is higher stock prices. Otherwise known as agency theory, this idea has profoundly shaped the executive pay debate and is arguably the primary reason the performance pay loophole made it into the tax code.

Once Section 162(m) became law, what do you suppose happened next? Predictably, companies started dispensing more compensation that qualified as performance pay, particularly stock options. Median executive compensation levels for S&P 500 Industrial companies almost tripled in the 1990s, mainly driven by a dramatic growth in stock options, which doubled in frequency.

Most of us think of skyrocketing CEO pay as simply a moral problem. However, economists like Piketty and my Roosevelt Institute colleague Joseph Stiglitz have been expounding about the havoc that rising income inequality wreaks on our economy (and democracy). When middle-class wages stagnate, consumer demand diminishes, which has tremendous spillover effects in terms of investment, job creation, tax revenue, and so forth. That particular set of problems relates to how much CEOs are paid. But there are also costly problems with the structure of CEO pay, i.e. what they’re paid with.

Performance pay can (and has) made executives very wealthy, very quickly, which creates incentives for shortsighted, excessively high-risk, and occasionally fraudulent decisions in order to boost stock prices. What kind of effect does this behavior have on the economy at large? Think mortgage crisis and subsequent global financial meltdown. Performance pay also diminishes long-term business investments. According to William Lazonick, in order to issue stock options to top executives while avoiding the dilution of their stock, corporations often use free cash flow for stock buybacks rather than spending on research and development, capital investment, and increased wages and new hiring. 

All this and Americans get the bill. Beyond the innumerable costs we’ve borne from the recent economic crisis, the Economic Policy Institute calculated that taxpayers have subsidized $30 billion to corporations for the performance pay loophole between 2007 and 2010. According to a recent Public Citizen report, the top 20 highest-paid CEOs received salaries totaling $28 million, but had deductible performance-based compensation totaling over $738 million. Assuming a 35 percent tax rate, that’s a $235 million unpaid tax bill. The Institute for Policy Studies calculated that during the past two years, the CEOs of the top six publicly held fast food chains “pocketed more than $183 million in performance pay, lowering their companies’ IRS bills by an estimated $64 million.”

Congress is long overdue to close the performance pay loophole. The Supreme Court just made that harder. Thanks to Citizens United and now the McCutcheon decision, the same CEOs who are benefitting from the loophole are much freer to draw upon the corporate coffers to donate big money to politicians to maintain these loopholes.

Nevertheless, there is potential for getting it done. Senators Blumenthal (CT) and Reed (RI) have introduced the Stop Subsidizing Multi-Million Dollar Corporate Bonuses Act (S. 1476), which would finally end taxpayers’ subsidies to CEOs by closing the performance pay loophole and capping the tax deductibility of executive pay at $1 million. In the House, Rep. Lloyd Doggett (D-Texas) has introduced a companion bill, HR 3970.

There are many policy ideas for how to curb skyrocketing CEO pay. Piketty and his colleague Emmanuel Saez argue for a much higher income tax rate for top incomes. (The growth rate of CEO pay was at its lowest when the U.S. had confiscatory tax rates for the very rich.) In the current political climate, a more viable step toward slowing the growth of CEO pay and the damage it does to our economy is to, at long last, close the performance pay loophole. It should never have been there in the first place.

Susan Holmberg is a Fellow and Director of Research at the Roosevelt Institute.

Image via Thinkstock

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Daily Digest - April 16: The Ideas Generation

Apr 16, 2014Tim Price

Click here to receive the Daily Digest via email.

That '70s Show, Starring Ted Cruz (New Republic)

Despite conservatives' tendency to compare Barack Obama to Jimmy Carter, today's economic challenges are the opposite of those the U.S. faced in the 1970s, writes Roosevelt Institute Fellow Mike Konczal.

Click here to receive the Daily Digest via email.

That '70s Show, Starring Ted Cruz (New Republic)

Despite conservatives' tendency to compare Barack Obama to Jimmy Carter, today's economic challenges are the opposite of those the U.S. faced in the 1970s, writes Roosevelt Institute Fellow Mike Konczal.

When Tax Refunds Aren't Just a Bonus, But a Lifeline (ThinkProgress)

Twenty-eight million low-income families depend on the Earned Income Tax Credit to make ends meet, writes Bryce Covert, but not all poor parents qualify for it, and tax preparers' fees can hurt those who do.

In Many Cities, Rent Is Rising Out of Reach of Middle Class (NYT)

A new analysis finds 90 U.S. cities where the median rent excluding utilities is more than 30 percent of the median gross income, writes Shaila Dewan, and it's putting the squeeze on renters and the recovery.

The Sad, Slow Death of America's Retail Workforce (The Atlantic)

The retail sector's sales and jobs numbers are up, writes Derek Thompson, but as business becomes more efficient and moves online, the workforce is increasingly concentrated in low-paying superstore jobs.

3 big things to look for in Yellen's first monetary policy speech (WaPo)

Federal Reserve Chair Janet Yellen is likely to discuss labor market strength, inflation expectations, and the need for financial regulation in today's address to the Economic Club of New York, reports Ylan Q. Mui.

New on Next New Deal

Millennials Are Shifting the Public Debate with the Power of Their Ideas

Taylor Jo Isenberg, the Roosevelt Institute's Vice President of Networks, introduces the Campus Network's 2014 10 Ideas journals, collecting top student policy proposals on economic development, health care, education, equal justice, energy and the environment, and defense and diplomacy.

The Pay's the Thing: How America's CEOs Are Getting Rich Off Taxpayers

Roosevelt Institute Fellow and Director of Research Susan Holmberg explains why we must close the CEO performance pay tax loophole in order to curb the rise of income inequality in the U.S.

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Daily Digest - April 14: A Business Plan for a Better Environment

Apr 14, 2014Rachel Goldfarb

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MBAs Will Turn Brownfields Into Green—if Investors Help Them Out (Quartz)

Roosevelt Institute Fellow Georgia Levenson Keohane writes that the social venture competitions becoming common in MBA programs could push sustainability and social change, if Wall Street will fund the proposals.

Click here to receive the Daily Digest via email.

MBAs Will Turn Brownfields Into Green—if Investors Help Them Out (Quartz)

Roosevelt Institute Fellow Georgia Levenson Keohane writes that the social venture competitions becoming common in MBA programs could push sustainability and social change, if Wall Street will fund the proposals.

Even As Jobs Numbers Seem Better… (Campaign for America's Future Blog)

Unemployment claims have dropped, and the jobs lost in the recession have been restored, but that's just catch-up. Dave Johnson pulls job creation ideas from a new Roosevelt Institute report, "A Bold Approach to the Jobs Emergency: 15 Ways We Can Create Good Jobs in America Today."

  • Roosevelt Take: Read the full report, produced by the Bernard L. Schwartz Rediscovering Government Initiative.

Low-Wage Workers Pay the Price of Nickel-and-Diming by Employers (LA Times)

Michael Hiltzik points out that wage theft is most common in low-paid, labor-intensive, female-heavy industries. Without sufficient government enforcement, workers are forced to fight back on their own.

What If the Minimum Wage Were $15 an Hour? (The Nation)

Sasha Abramsky looks at the political situation in Seattle, where the push for a $15-an-hour minimum wage is taking center stage. He suggests that if Seattle pulls this off, it will dramatically shift the national conversation.

  • Roosevelt Take: Roosevelt Institute President and CEO Felicia Wong gave the closing remarks at Seattle's Income Inequality Symposium.

Executive Pay: Invasion of the Supersalaries (NYT)

Rising CEO pay is a major contributing factor to today's economic inequality, writes Peter Eavis. But there's disagreement on how to induce companies to pay CEOs less and average workers more.

The Wall Street Second-Chances Rule: Scandal Makes the Rich Grow Stronger (The Guardian)

Heidi Moore writes that on Wall Street, losses, bankruptcies, and even criminal investigations aren't enough to knock top CEOs out of the business. Profits conquer all, so even financiers embroiled in scandal keep their power.

New on Next New Deal

A Millennial’s Case for Fixing Social Security

Brian Lamberta, Northeast Regional Communications Coordinator for the Roosevelt Institute | Campus Network, explains why and how Millennials should try to fix Social Security instead of giving up on it.

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The Simple Solution to Obamacare's Employer Mandate Problems

Mar 3, 2014Richard Kirsch

Requiring employers to offer insurance to all employees or pay an additional payroll tax would eliminate the problems with the employer mandate, and start a shift toward broad tax-based coverage.

Requiring employers to offer insurance to all employees or pay an additional payroll tax would eliminate the problems with the employer mandate, and start a shift toward broad tax-based coverage.

In the last month, two more misleading headlines – one on lost jobs and the other on premiums for small businesses – have further roiled the overheated debate about the impact of the Affordable Care Act (ACA) on business and jobs. The question of how to deal with our employer-based health system continues to provide fodder for attacks on Obamacare. And it has proven to be  – and promises to continue to be – the basis for the most potent attacks against Republican proposals to replace the ACA. But in terms of policy, there is a simple solution, which would rationalize the contradictions in the Affordable Care Act and ease the way for the long-term goal shared on the left and right of separating health coverage from employment.

The general approach taken in the Affordable Care Act was to require most employers to provide coverage. The specific proposal in the final legislation, shaped by compromises with and pressure from both small and big business lobbying groups, required employers with more than the equivalent of 50 full-time workers to pay a portion of health coverage for employees who work 30 hours a week, or pay a fine. This is the employer mandate, which was delayed a year by the Obama administration and will be phased in starting in 2015.

The employer mandate does accomplish much of the prime goal of reform. Most employers have incentives to continue to provide coverage, or expand coverage. New coverage options are available for most people who do not get coverage at work, which was virtually all of the 50 million people who were uninsured when the ACA became law in 2010. People are not locked into jobs just because of health coverage, which was the real finding of the Congressional Budget Office report projecting 2.3 million people would retire or reduce their hours of work. Ending job lock opens up those hours to people who want to work and is a huge boon to entrepreneurship.

But the problems with the structure of the employer mandate are obvious. The law creates incentives for employers to keep workers’ hours under 30. It also establishes the potential for a business with a growing number of employees, when it exceeds the 50-employee threshold, to suddenly have to pay for health coverage.

The existence of incentives to cut hours or limit employees does not at all mean that employers will adjust for them. The accusations that the ACA is creating a part-time economy are belied by the facts: part-time employment is going down as the economy accelerates. In addition, employers that are adding workers rapidly as their businesses grow are not going to stop expanding  – or establish dozens of very small corporations – to avoid paying for health coverage. Still, we are seeing examples of some employers, including public employers and universities, limiting workers’ hours to less than 30. Others, like Trader Joe’s, are establishing different employment tracks for part and full time employees, with health care as a key factor. As this is all new – with the mandate not yet in effect – it is impossible to measure the future impact, but the incentives are certain to shape some business decisions.

There is a simple solution, one that was included in the version of the ACA enacted by the House in 2009. Employers that decide not to provide health coverage for their employees would be required to pay a percentage of payroll as a tax to cover health care, just like employers do now for FICA (Social Security and Medicare). Instantly, the cliff impact is gone, both in terms of hours and number of employees. Employers could either provide coverage to all employees, or pay for health coverage in the same manner as FICA, a regular cost of adding an employee, with a marginal increase in cost for each hour someone works. There is no advantage to hiring someone for less than 30 hours or keeping under 50 employees.

Paying a percentage of payroll also has another huge advantage over both the ACA and the current system of employer-provided coverage. Right now, the cost of health insurance premiums does not vary with an employee’s income. This creates a much bigger disincentive to hiring lower-wage workers. For example, a $6,000-a-year policy is 20% of the wages of a $30,000 a year employee but only 5% of the pay of a $120,000 a year employee. Paying a percentage of payroll instead would make it much more affordable to hire low-and-middle income wage earners than it is now. And while it would make it more expensive to employ higher-wage workers, most employers with high-wage workforces already provide health coverage and would be likely to continue to do so, rather than pay the payroll tax. If they did choose to pay, the cost is more easily absorbed for high-wage employees. Besides, that is not where we have an employment problem in the U.S.

This solution mimics the structure of union-employer benefit funds, which are typically found in industries where workers have fluctuating hours. Under these “Taft-Hartley” funds, employers and workers pay into the fund based on the number of hours an employee works. The loudest opponents from the left of the employer mandate in the ACA have been unions whose members get health coverage through such funds now. The unions have said that the ACA encourages employers to stop paying into the funds, now that government will provide subsidies for many workers. But if the current employer mandate were replaced by a payroll tax, the status quo that has worked well for these funds would be maintained.

Historically, the biggest opponent of a payroll tax for coverage has been the small business lobby, which is why the ACA does not require small employers to provide coverage. That is why the House version of the ACA phased in the payroll contribution based on payroll size, with no contributions required for payrolls under $500,000, increasing gradually to an 8% contribution for payrolls over $750,000.  This eases the burden on small employers.

Slowly, the employer-based health coverage system in the United States is dissolving. Over the past 30 years, the share of workers with ESI has shrunk from 70% to 57%. Recently we have seen employers who traditionally have wanted to take responsibility for structuring employee coverage begin to use private exchanges, in which their workers get a fixed amount of money to choose from a choice of health plans. These trends hasten the broadly shared goal of separating employment from health coverage.

As the debate over the ACA turns from repeal to fixing the law, progressives should make the payroll contribution proposal a central focus, our response to problems with the employer mandate. If enacted, as more employers choose to pay into the fund rather than provide their own coverage, we would move closer to ideal of a broad-based tax for coverage, not tied to an individual employer. And while a payroll tax is not progressive – it is proportional – it is much more progressive than the very regressive system we have now of fixed premiums regardless of income. The result would be evolution toward a relatively broadly based tax for health coverage, a key to making health coverage a right. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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The Political Underbelly of the Pensions Crisis: What Broke the System, and How Do We Fix It?

Feb 25, 2014Robert Johnson

Roosevelt Institute Senior Fellow Robert Johnson will join Roosevelt Institute Senior Fellow and Chief Economist Joseph Stiglitz, Roosevelt Institute Senior Fellow Thomas Ferguson, former Lieutenant Governor of New York Richard Ravitch, and others today in New York City to explore the underbelly of the public pensions crisis. The following is adapted from Johnson's forthcoming paper on this topic.

Roosevelt Institute Senior Fellow Robert Johnson will join Roosevelt Institute Senior Fellow and Chief Economist Joseph Stiglitz, Roosevelt Institute Senior Fellow Thomas Ferguson, former Lieutenant Governor of New York Richard Ravitch, and others today in New York City to explore the underbelly of the public pensions crisis. The following is adapted from Johnson's forthcoming paper on this topic.

Since the beginning of the Great Recession, policymakers and reporters have spoken of a growing crisis in public pensions. Many state and local governments are struggling to meet their obligations to retirees, and the easiest explanation is that government workers are overpaid and their pensions are unaffordable. But the evidence suggests that the pensions crisis is both less pervasive and more complex than that. Beyond the economic crisis, which put enormous pressure on state and municipal budgets, a range of factors including poor decision-making and the influence of big money interests has led to the underfunding of some state and city public pensions. With a clearer understanding of the problem, we can begin to take steps to solve it and keep our promises to public workers.

Contrary to public perception, pension underfunding is not a widespread issue. There is wide variation in pension performance across states, and underfunding is concentrated in particular states (for example, Illinois and Kentucky) and cities (Chicago and Providence). Where underfunding does occur, it seems to stem largely from the internal problems of those governments, which existed well before the recent economic crisis put additional pressure on their budgets.

There is also little basis for the conclusion that state and local employees are significantly overcompensated. On the contrary, pay is comparable at lower skill levels, and private-sector employees are significantly better paid at higher skill levels. According to Alicia Munnell, Director of the Center for Retirement Research, “Pension and retiree health benefits for state and local workers roughly offset the wage penalty, so that total compensation in the two sectors is roughly comparable.” There are surely examples of extreme individual pension obligations that warrant scrutiny, but they do not appear to contribute significantly to the total level of underfunding reported by analysts.  

The evidence suggests that pension underfunding is at times associated with choosing an unreasonably high discount rate. The discount rate is the expected rate of return on invested pension funds. A lower discount rate means governments must provision more now in order to meet future liabilities. Politicians tend to prefer a higher discount rate, which reflects a better “expected” yield on assets in the pension fund, since it allows them to justify provisioning less for pensions now. Unfortunately, a higher yield also means more investment risk. If the pension fund loses money, the pension liability does not go away; instead, taxpayers are forced to make up the difference or the government defaults on its obligations. This approach may help to mask the true cost of providing public services, but it is the public financial equivalent of the Hail Mary pass in football: you score a touchdown or you lose.

This may explain why governments are increasingly attracted to investment alternatives that have a record of substantial returns and are not closely correlated with the stock indices. Alternative asset investments (primarily hedge funds, venture capital funds, and private equity) averaged just below a combined 5 percent share of U.S. public pension funds’ portfolios between 1984 and 1994, but they averaged nearly a 20 percent share from 2008 to 2011. These more volatile assets may provide substantial benefit, but in times of stress, it is unclear if “reaching for yield” is a prudent strategy or simply reflects desperation. It also raises ethical concerns due to a lack of transparency and the potential for “pay to play” schemes, in which placement agents offer financial incentives, such as campaign contributions, to the people responsible for making decisions about pension fund allocations. This appears to be a system prone to abuse, and significant reforms must be enacted to realign the incentives of pension officials with the incentives of taxpayers and pensioners. This could include immunizing some pension investment boards with financial compensation, requiring disclosure of all outside income, and prohibiting individuals and firms that manage assets for a particular government from making campaign contributions to local representatives.

Even when there is no direct corruption, big money can have a powerful influence over pension funding decisions. It becomes very difficult for the political process to defend the common interest when ambitious politicians are under pressure from concentrated interests. Policymakers may be reluctant to adequately provision for pensions if doing so requires them to raise tax rates on high-income individuals, cut corporate subsidies, or otherwise drive away capital. Just look at the case of Detroit, where restructuring pension obligations is on the table at the same time the state is approving money to build a new hockey arena. This is not antiseptic technocracy at work; this is politics.

Relief could come from reforms in the political systems to lessen big money's influence and empower small donors. To accomplish this, states could establish systems of public campaign financing. Maine, Arizona, and Connecticut already have such systems, as does New York City, and New York State is on the cusp. Though the mechanics differ, all of these systems would change incentives to make candidates responsive to average people, not just big donors. As a result, policy is more likely to be oriented to the public interest.

The pensions crisis has far-reaching implications for the future of the U.S. economy: the state and local government sector is about 14 percent of the American workforce. Failure to uphold the promises we’ve made to current workers and retirees would create a brain drain in the public sector, drive down private-sector wages, exacerbate inequality, and lead to more economic volatility. The good news appears to be that there are a large number of pension plans that are solvent thanks to prudent management. The real problem rests with the governments of a few states that have historically failed to provision adequately for their pension obligations and are increasingly turning to riskier investment assets. These problems can be solved, but it will require substantial reform and swift and collective action.

Robert Johnson is a Senior Fellow at the Roosevelt Institute.

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AOL's CEO Proves Women and Children Make Easy Scapegoats in the Workplace

Feb 14, 2014Andrea Flynn

The law has put maternity care on an equal footing with other health benefits for decades -- but some executives still haven't caught up.

The law has put maternity care on an equal footing with other health benefits for decades -- but some executives still haven't caught up.

AOL CEO Tim Armstrong recently ignited a firestorm of criticism when he announced the company would be restructuring its retirement benefits. Armstrong explained that the financial burden of Obamacare and the deliveries of two “distressed babies”, which cost the company $1 million each, had forced the company to reduce 401(k) matching contributions:

We had to decide, do we pass the $7.1 million of Obamacare costs to our employees? Or do we try to eat as much of that as possible and cut other benefits? …Two things that happened in 2012. We had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were OK in general. And those are the things that add up into our benefits cost.

Sorry, AOL employees: you can either get your expensive babies or your retirement benefits, but you can’t get both.

Armstrong has since issued a public apology and, amidst uproar from his employees, reversed the benefits decision. But his remarks remain significant, illustrating the readiness of employers to use maternity costs and the new health law as scapegoats for other business decisions that affect company profits. His comments also reflect the extent to which pregnancy, childbirth, and childcare are considered lower priorities in the workplace than other health benefits.

In an era of ever-rising health costs, it is certainly reasonable for AOL to seek ways to reduce health spending. But why single out premature births instead of, say, cancer or diabetes cases? Apparently in American corporate culture maternity coverage is still considered a “bonus” benefit that employees should feel lucky to have. You’d think this wouldn’t be the case at AOL, whose decade-old Well Baby program provides education and support for employees throughout the pre-natal and post-partum stages. Armstrong’s comments run counter to AOL’s public persona of being a company truly invested in the health and wellness of its parents and their families.

Maternity coverage should be considered a routine component of employee benefits, especially since they have been mandated in employer health plans for more than three decades. In 1978, Congress passed the Pregnancy Discrimination Act (PDA) – an amendment to the 1964 Civil Rights Act – in an effort to end pregnancy-based discrimination in the workplace. Benefits required by the PDA are both ethically sound and financially prudent. Research has shown that every dollar spent on prenatal care saves employers $3.33 in postnatal care expenses and $4.63 in long-term morbidity costs.

Based on Armstrong’s comments one might assume $1 million births a commonplace occurrence, but they aren’t. It’s true that one in every eight infants in the United States is born pre-term, but the average cost of care for the majority of those babies doesn’t come close to seven figures. Approximately 70 percent of infants admitted to the NICU stay for longer than 20 days, which typically costs between $40,000 and $80,000. The high costs associated with the two pre-term births to which Anderson refers are not the norm.

Why should the economic security of employees be first on the chopping block? Armstrong might have been a bit more introspective before publicly pointing his finger at his employees’ pre-term babies. After all, shortly before his gaffe went viral, he was in the harsh glare of the media spotlight for the overwhelming failure of Patch, a media venture he championed that lost AOL $300 million (last month the company cut its losses and sold its majority stakes in the site).  Two million dollars in NICU expenses seems quite reasonable by comparison.  

AOL, like many large companies, is self-insured.  As such, it directly pays employee health costs and assumes that the risk of catastrophic health events is worth the expanded choices in health benefits and the increased savings that results when income from premiums exceeds health costs. It’s unfair for companies to sacrifice the economic security of their employees when those bets don’t pay off.

It is simply dishonest to lay the blame for such losses of maternity care and Obamacare expenses. After all, the new law will improve the health of employees and generally lower employer costs in the long run by mandating the full coverage of family planning, women’s preventive health care, and extended coverage for children of employees. These measures will reduce unplanned and mistimed pregnancies (which still account for nearly half of all U.S. pregnancies) and enable women and their families to prevent and treat health conditions long before they become emergencies.

We must not regard maternity coverage as a bonus benefit. It is indeed a benefit central to employee health coverage and essential to the economic security and overall wellbeing of American workers and their families. The inherent value in such coverage was enshrined in laws passed more than 30 years ago, and has been reaffirmed by Obamacare. It’s long past time for executives like Armstrong to live and speak those same values when making decisions that affect the health and security of their employees. 

Andrea Flynn is a Fellow at the Roosevelt Institute. She researches and writes about access to reproductive health care in the United States. You can follow her on Twitter @dreaflynn.

 

Images via Thinkstock

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Move Over, Shareholders: Let Workers Have a Say in Corporate Governance

Jan 15, 2014Azi Hussain

A model of corporate governance that brings in employees and other stakeholders alongside shareholders could ensure corporations make decisions based on more than stock prices.

A model of corporate governance that brings in employees and other stakeholders alongside shareholders could ensure corporations make decisions based on more than stock prices.

At this point, saying that inequality in the United States is a problem is almost cliché. There is plenty of data illustrating the extent of inequality. Proposed solutions range from education reform and minimum wage increases to tax and spending reform and public employment programs. Yet there is one area that has been largely neglected in policy discussions around inequality: corporate governance.

Corporate governance may at first seem like a marginal (and boring) issue, but it is in fact the opposite. Our corporate governance laws create the power structures of some of the most formidable economic forces on the planet. These laws are key to how economic and political power is distributed across society, and as such we should pay much more attention to them.

Currently, the U.S. has a shareholder corporate governance model. There are two major implications of such a model: practically, the shareholders are the ones who “own” the company and elect the board. Philosophically, the purpose of the corporation is to maximize value for shareholders. There are problems with this model. Because the corporation represents shareholders, there are incentives in place to externalize costs onto other groups. For example, in an effort to increase stock prices, corporations may dump waste into rivers, lay off workers, or engage in illegal accounting schemes.

However, there is an alternate model that could change how corporations function and what their purpose is: the stakeholder corporate governance model. In the stakeholder model, stakeholders are the “owners” of the corporation and elect the board of directors. The corporation’s purpose becomes maximizing value for stakeholders. Who exactly are these stakeholders? There are many, and definitions vary. But for our purposes, let’s focus on one particular stakeholder: employees.

In a stakeholder corporate governance model, employees would elect board members along with the shareholders, so the employees’ interests would be represented in business decisions. Employees would have much more bargaining power over their own wages and management’s wages, in a way that echoes unionized workplaces. However, this system would not be based on the antagonistic arrangement between unions and management, but rather on a cooperative, insider relationship between employees and shareholders. With symmetrical information between employees and shareholders, decisions could be made without misunderstandings and outrage.

When companies are doing well, employee representation in decision-making processes would ensure employees also benefit from the company’s success through increased wages. In companies that aren’t doing so well, employee representation can ensure cost-cutting measures don’t disproportionately affect employees while executives continue to get bonuses. Additionally, if a corporation is doing poorly and needs to lay off workers, there will be fewer tensions if workers understand they are properly represented in decision-making processes. For a real-life example of a successfully implemented stakeholder model, check out Germany. There’s also evidence that corporations that follow the stakeholder model outperform ones that follow the shareholder model.

This is just the tip of the iceberg for what stakeholder governance could achieve. There could be even greater impact if other stakeholders, such as communities and customers, could be represented. With this expanded definition, the interests of these various stakeholders would be strongly represented in the corporate decision-making process. Thus, corporations would not impose potentially damaging costs (such as dumping waste into rivers or producing poor quality goods) on to communities and customers. External costs would be effectively “internalized” into corporate decision-making. Under the stakeholder model, maybe, just maybe, corporations could save the world.

Azi Hussain is the Roosevelt Institute | Campus Network Senior Fellow for Economic DevelopmentHe is a junior in the School of Foreign Service at Georgetown University majoring in International Political Economy.

Image via ThinkStock.

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Daily Digest - November 27: Protesting For Living Wages, Black Friday and Beyond

Nov 26, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Walmart Workers Plan Protest on Black Friday (NOW with Alex Wagner)

Click here to receive the Daily Digest via email.

Walmart Workers Plan Protest on Black Friday (NOW with Alex Wagner)

Roosevelt Institute Fellow Dorian Warren discusses how Walmart protests fit into the larger labor movement. Walmart workers have been holding strikes for a year, and they need public support year round to achieve policy change, not just on Black Friday.

How to Waste a Crisis (The New Inquiry)

Roosevelt Institute Fellow Mike Konczal reviews Never Let a Serious Crisis Go to Waste, by Philip Mirowski. He critiques Mirowski's examination of neoliberalism for not engaging in theories of how the crisis happened, and what could happen next.

Report: Social Entrepreneurs Innovate Solutions To Big Problems (Forbes)

Devin Thorpe interviews Roosevelt Institute Fellow Georgia Levenson Keohane about the ways that social entrepreneurs are creating change. Their focus on "entrenched social, economic, and environmental problems" is leading to new and innovative solutions.

  • Roosevelt Take: Georgia wrote a policy note on social impact bonds, in which public-private partnerships work to solve some of these problems.

Shopping on Thanksgiving Kills Poor Workers’ Holidays (CJR)

Ryan Chittum points out that much of the media is doing a terrible job covering the workers' side of the story when they report on Thanksgiving Day shopping. The workers who have to sacrifice their holiday deserve news coverage too.

With New Agreement, N.Y.U. Would Again Recognize Graduate Assistants’ Union (NYT)

Steven Greenhouse and Ariel Kaminer give context to this decision with a history of the school's fight over graduate assistant labor organizing. The union said that this agreement will allow things to move along much faster than their complaint to the National Labor Relations Board.

$15 Minimum Wage: Today SeaTac, Tomorrow America (Seattle Post-Intelligencer)

Joel Connelly reports that SeaTac's new minimum wage has passed on the finest of margins: 77 votes. Some opponents are asking for a recount, and others are already anticipating challenging the will of the voters in court.

Food Stamp Costs Are Decreasing Without The GOP's Cuts (MoJo)

Stephanie Mencimer points to a new study from the Center on Budget and Policy Priorities, which shows that SNAP enrollment has plateaued. The projected decline should be enough to bring costs back to 1995 levels in five years - but the GOP wants cuts anyway.

New on Next New Deal

North Carolina Students Push Past Bad News For Good Policy Proposals

Wilson Parker, Co-President of the University of North Carolina at Chapel Hill chapter of Roosevelt Institute | Campus Network, introduces a new policy journal from North Carolina students, in which they push for positive change despite the difficult news coming out of their state.

There will be no new Daily Digest on Thursday, November 27 and Friday, November 28. The Digest will return on Monday, December 2. Have a happy Thanksgiving!

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Courageous Boeing Workers Say No to Corporate Extortion

Nov 18, 2013Richard Kirsch

By rejecting a contract that amounted to corporate extortion, the Machinists Local 751 at Boeing have taken a stand for middle-class workers all over the country.

In a remarkable act of courage and solidarity with the next generation, last week Boeing workers in Seattle soundly rejected corporate extortion, by voting down a contract which traded job guarantees for concessions that would severely erode the pay and benefits of younger workers. In doing so, the members of the Machinists are risking their jobs to save an America built on the middle class.

By rejecting a contract that amounted to corporate extortion, the Machinists Local 751 at Boeing have taken a stand for middle-class workers all over the country.

In a remarkable act of courage and solidarity with the next generation, last week Boeing workers in Seattle soundly rejected corporate extortion, by voting down a contract which traded job guarantees for concessions that would severely erode the pay and benefits of younger workers. In doing so, the members of the Machinists are risking their jobs to save an America built on the middle class.

The dramatic fight of fast food workers for a minimal living wage, risking their jobs every time they take a day off to demonstrate, is one end of a corporate economy based on low wages, no benefits and no unions. That corporate strategy, aimed at maximizing profits, is destroying America’s middle class, wrecking the engine that powered the U.S. economy.

On the other end of the middle class are workers like Boeing’s, who have fought together through their union for the good pay, pensions, health benefits and job security that characterized the increased prosperity and lowered income inequality of America in much of the second half of the 20th Century. But despite being a hugely profitable corporation, with dominance in the world aerospace market, Boeing is eager to follow the Wal-Mart/fast-food model of the 21st Century economy.

Boeing is the aerospace and defense industry’s largest company, with its highest profits. In 2012 just the increase in Boeing revenues alone, $13 billion, would be equivalent to the 15th largest company in the industry. With a $319 billion backlog of orders  - about 3,700 planes – the company is set for years and is outpacing its only competition, Airbus. Last year, Boeing made $6.3 billion in profits and rewarded its CEO $27.5 million in compensation, a 20% hike from the previous year.

Historically, Boeing’s Seattle workforce has shared in that wealth. With a 100-year history in the Puget Sound region, Boeing is still the area’s largest employer, its 70,000 employees dwarfing the 40,000 who work for Microsoft. Boeing workers are anchors of Seattle communities, both economically and civically.  And with good schools and colleges, transportation, and stable communities, the Seattle area has provided key public structures that have enabled Boeing to prosper. 

But none of that matters – the high profits, the educated workers, the civic history – to a modern corporation that is driven only to maximize profits for its shareholders and pay for its top executives. Boeing moved its headquarters to Chicago in 2001 and decided to build its new 787 Dreamliner in South Carolina, with the first planes rolling out in 2012, assembled by 6,000 workers who earn $15 per hour, almost 50% less than what Washington assembly line workers earn.

Early this month, Boeing tried to blackmail both its union members and Washington state. Declaring that it would consider moving assembly of a new line of 777X planes out of state, the corporation asked for mammoth tax incentives and huge concessions on wages and benefits. The Governor and State Legislature caved immediately, passing the largest development tax break for a company in American history, $8.7 billion over 16 years, in a special weekend session. The leadership of Machinists Local 751 also wavered, agreeing to put the contract up for a membership vote, over the objections of most of the union’s management council.

But then a remarkable thing happened, in an age in which Americans, scared that they will lose what they have left, seem resigned to shrinking pay and disappearing benefits.  A grassroots swell of membership opposition to the contract rose up, leading to 67% of the member rejecting the contract. The members did so with their eyes wide open, understanding that Boeing might not be bluffing and despite the fact that Boeing combined bribery with their extortion; the contract would have provided a $10,000 signing bonus to each worker. So why did they show such resolve?

In making their case, the members who organized against the contract focused on the fact that they would be giving up “hard fought contract negotiations and strikes by generations of Fighting Machinists that came before us. ” They warned, “Boeing is hoping you will deny the next generation many of the benefits we have today.”

While the proposed contract came with skimpy pay increases and benefit cut-backs for all workers, younger Boeing workers and new hires would have been hit the hardest. Instead of a steady progression to higher wage rates as workers stayed with the company and acquired new skills – which is what Boeing contracts have guaranteed for years – under the proposed contract, recent hires and new hires would be locked into low pay, with glacial increases. The contract would have frozen current pensions and replaced future pensions with a 401K, the defined-contribution accounts that have no guaranteed pay-out and are subject to market risk. Boeing would have been allowed to transfer money from the over-funded workers’ pension fund to the under-funded executive retirement fund.

Angered at the company’s “corporate threats and intimidation,” the members declared, “The one thing Boeing can’t take away is our solidarity.”

Unlike Boeing, which has no allegiance to anything but the bottom line, the workers care about their community. As the 751voteno.com website stated, “We must be prepared for a decision they [Boeing] may make and understand that if they take the work elsewhere, they are responsible for that decision. We just could not destroy ourselves in order to keep the company from making a decision that destroys union and non-union workers alike, our communities and the investors.”

That statement reminds me of a memorable insight I received in the first lecture of a finance class at the University of Chicago School of Business, delivered by Robert Hamada, a future dean of the School. Hamada pointed out that in the class we would be learning how a firm calculates return on investment (ROI), but that there was no reason that the calculations needed to be applied to ROI for shareholders. The same methods could be used to maximize ROI for workers, the community or society at large.

As a society, we do not have to accept that the mammoth entities that control so much of our economy should operate just to benefit their shareholders. We can require that corporate decision making take into account its impact on its workers, our communities and the broader economy.

That is what unions have done historically and still do at companies like Boeing, which pay high union wages, and in countries that support high rates of unionization.  To give workers a say in decision making, German corporations are required to have works councils, which have union members sharing in decisions – which the UAW is now trying to win in a Volkswagon plant in Tennessee –  and union representatives have the right to sit on corporate boards of directors. 

Two years ago there was a huge uproar from conservatives when the National Labor Relations Board accused Boeing of moving to South Carolina in 2009 because of anti-union bias, which is prohibited under the National Labor Relations Act. The Board was roundly attacked for second guessing a corporate decision on where to locate jobs. But the Board’s action was based on a Boeing memo, which admitted “the only consistent advantage attributed to Charleston was the ability to ‘leverage’ the site placement decision toward ‘rebalancing an unbalanced and uncompetitive labor relationship.’” The Board dropped the case after the union and company agreed to a new labor contract, the very one that Boeing now wants to replace with the concessions that the union’s members just rejected.

Part of the controversy around the Board’s decision was its novelty; cases are rare because it is difficult to prove that a company made relocation decisions based on anti-union bias. If we are going to reign in corporate destruction of wages and communities, we should instead imagine a labor law in which corporations are not able to expand into non-unionized facilities and make long-term investment decisions at the expense of jobs at already unionized facilities. These and other changes aimed at giving workers a powerful role in corporate governance are needed to balance the grip that corporate America now has on our economy and democracy.

We will find out in the next year whether Boeing is bluffing or serious. Production problems at the South Carolina plant give the union some hope that Boeing might return to the bargaining table, although only after looking to see what they can extort in concessions for anti-union states.

But regardless of where Boeing builds the 777X, the fight for an America in which hugely profitable corporations – whether it be Wal-Mart, McDonald’s or Boeing – share their wealth with their workers and their communities is just heating up. The bold vote by Boeing workers, like the wave of fast food strikes, are encouraging signs of a new movement of workers, supported by our communities, to build an America that again promises broadly based prosperity. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

 

Boeing airplane landing image via Shutterstock.com

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Show Your Invisible Hand: Why the SEC Should Make Corporations Disclose Political Contributions

Oct 31, 2013Susan Holmberg

Corporations are increasingly active in U.S. politics, and their investors deserve to know where the money is going. Click here to read Susan Holmberg's new paper, "A Cost-Benefit Analysis of Corporate Political Spending Disclosure."

Corporations are increasingly active in U.S. politics, and their investors deserve to know where the money is going. Click here to read Susan Holmberg's new paper, "A Cost-Benefit Analysis of Corporate Political Spending Disclosure."

A core assumption of the Supreme Court’s opinion in 2010’s troubling Citizens United case, which broadened corporations’ abilities to use their money for political purposes, was that shareholders could decide for themselves whether they agreed with the ways that money was being spent.

According to Justice Anthony Kennedy, who delivered the opinion for the Court, “With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation's political speech advances the corporation's interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.”

The problem with this particular assumption, which economists call perfect information, is that corporations are, surprise surprise, not legally obligated to share information on political spending with their shareholders or the public. In August 2011, a group of high-profile law professors filed a petition with the Securities and Exchange Commission, calling on the agency to require public companies to disclose what corporate resources they spend on political activities because “most political spending remains opaque to investors in most publicly traded companies.”

Why do companies spend money on politics? The answer seems obvious: they want to generate profits. They are seeking advantages like reduced trade barriers, government contracts, easier regulatory inspections, and lower tax rates. For more on this point, see my colleague Tom Ferguson’s recent paper with Paul Jorgensen and Jie Chen, which reveals how “Too Big to Fail” Wall Street firms and telecom companies have captured the GOP and the Democrats, respectively. (As an aside, isn’t it odd that the same companies orchestrating the expansion of the surveillance state are so concerned about their own privacy?)

But there is sufficient research to suggest there is another, more covert reason that has serious consequences for shareholders. In my recently published Roosevelt Institute paper on the costs and benefits of this disclosure rule, I cite several studies that show corporate executives frequently spend on politics for their own personal advantage rather than the company’s bottom line. These personal benefits include things like prestige, a future political career, star power, or assistance for political allies.

With these kinds of distorted incentives, the lack of information available to the public about corporate political spending puts shareholders and potential investors at enormous risk. Why would they want to invest in a company that is undertaking activities that are more likely to benefit its executives than its investors? Requiring corporations to disclose their political spending, on the other hand, would do the following:

  • Enable investors to make informed investment decisions. Good information is always key to helping potential shareholders calculate the risk they are taking by investing in a company or helping current shareholders decide if they want to hold on to a company’s stock.
  • Create the motivation for corporate executives to focus less on their own personal benefit and more on the political spending that would increase shareholder wealth. By disclosing their political activities, corporate executives would have less of an opportunity to waste company resources for their own advantage.
  • Benefit corporations that already share their political spending information. Research suggests companies that already disclose SEC-required information enjoy a bump in stock returns when the particular rule is put in place.

Two years after the lawyers submitted their petition, File No. 4-637 is finally on the SEC’s official agenda and support for the disclosure rule is overwhelming. Recent polling finds that 79 percent of surveyed Republicans and nearly 100 percent of Democrats support the rule, and more than 600,000 public comments supporting the rule have been submitted to the SEC. Major institutional investors are also in agreement. Former Vanguard mutual fund CEO John C. Bogle, six state treasurers, CalPERS and other pension funds, and many more are also in support. The rule also has the endorsement of small business owners across the country, as large companies have a competitive advantage over smaller businesses because of their ability to influence lawmakers and agencies through campaign contributions and lobbying.

The pushback against disclosure is typically about the costs of disclosure. But companies already have to document their political spending for the IRS, so the additional cost would be, at most, the few hours it would require an employee to copy and paste data from an internal file into a public one. Furthermore, companies already submit annual forms to the SEC. The political spending information would simply be a few additional lines of text added to these forms.

A more valid concern about this rule is that, if companies are required to disclose this information to the SEC, the information could be exploited by their competitors and harm the companies’ bottom line. But corporate political activities are already well known among industry competitors. In fact, sometimes political spending is even coordinated among industry groups. The people who are actually excluded from this information are the ones who need it most: investors.

At a briefing held this past Wednesday organized by the Corporate Reform Coalition, Senators Elizabeth Warren (D-Mass.) and Robert Menendez (D-NJ) called for the SEC to finally adopt this important rule. “There is no excuse,” said Warren, “There is no reason […] for saying a corporation wants to be able to spend shareholders’ money and not tell shareholders how that money is being spent.”

Susan Holmberg is the Roosevelt Institute's Director of Research.

 

Handshake with money banner image via Shutterstock.com

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