Saving Capitalism: For the Many, Not the Few

The compensation for CEOs in America’s large corporations, compared to the pay of average workers, went from a ratio of 20-to-1 in 1965, to 30-to-1 in 1978, to 123-to-1 in 1995, and now sits at more than 300-to-1. Reich explains that a common justification for the soaring CEO pay in recent years is that the stock market has also soared, and the primary job of a CEO is to maximize shareholder returns. However, Reich argues that as the stock market rises, CEOs should demonstrate above-average performance to justify increased remuneration. A primary theory as to why CEO pay has skyrocketed is that they often play a major role in appointing their company’s board of directors, and they appoint those who agree with them. While such cronyism has certainly played some role, Reich believes the larger issue is how CEOs are paid.

To truly understand why CEO pay has skyrocketed, one also needs to understand that since the mid-1990s, a steadily larger portion of CEO pay has come from shares of company stock. In addition to stock options and stock awards as a form of compensation, CEOs now use a strategy of stock buybacks to boost the share price in the short term. This strategy borders on insider trading and was considered a potential vehicle for fraud and stock manipulation by the Securities and Exchange Commission until the early 1980s, but it has now become a major corporate expenditure. Such buybacks allow corporation insiders rather than investors to know when shares are entering the market, which in turn allows the CEOs to time their own stock sales and exercise their own stock options.

In Chapter 12, Reich examines the subterfuge of Wall Street pay and how investment bankers, venture capitalists, and hedge fund managers earn millions in profits through hidden subsidies. He explains that despite the fact that the near meltdown and financial crisis of 2008 was brought on by their excessive risk taking, the big Wall Street banks have been considered “too big to fail” and received more support than other banks (108). Additionally, the subsidies continue to this day because they are still considered too big to fail. Wall Street’s biggest banks have a competitive edge over smaller banks because their investors accept a lower interest rate since their investment is not as risky. As a consequence, the biggest banks make more money and continue to grow larger. Researchers have shown that the hidden subsidy the biggest Wall Street banks receive is roughly 0.08%, which in 2013 came to $83 billion overall when multiplied by the total amount of money parked in those banks.

While the Federal Reserve has made moves toward increasing the capital requirements on big banks, Congress or administrators have not limited their size or imposed special taxes on them to equal the amount of the hidden subsidy. Reich argues that big bank donations to Congress and presidential candidates create a “lucrative revolving door” between Wall Street and Washington (110). Additionally, Wall Street has been given wide latitude by the Securities and Exchange Commission concerning insider trading because the Commission itself, judges, and prosecutors have been allowed to determine the law’s meaning. According to Reich, the way in which Wall Street inhabitants earn their incomes, including the hidden too-big-to-fail subsidy and use of insider information, suggests that their wealth is “involuntarily transferred” to them from smaller players: taxpayers and small investors.