Corporate boards, the small group of independent appointees who are supposed to protect the best interests of the world’s largest companies, have spent the COVID-19 pandemic bending over backward to protect their CEOs’ massive paychecks.
Boards are supposed to be a check on company executives, ensuring their actions are in the best interest of stakeholders — from employees to shareholders. But even as employees risked their lives on the front lines, many company boards focused on shielding their CEOs from the crisis. The boss didn’t meet their bonus targets? No problem! Simply move a goalpost here, concoct a special “retention” award there, and voilà — pay cut averted.
In fact, according to a report I coauthored last year, 51 of the 100 biggest US corporations with median employee pay below $50,000 a year altered pay plans in 2020 to protect top brass. Chief executives at those 51 firms got an average raise of 29%, while median worker pay declined 2% to an average of $28,187.
As inflation started picking up in the second year of the pandemic, corporate leaders continued to fixate on fattening CEOs’ paychecks — often with taxpayer backing. But taxpayers shouldn’t be subsidizing the outrageous pay gaps between CEOs and their workers. Congress has so far proved unwilling or unable to reel in this taxpayer-subsidized greed, so it’s time for President Biden to step in and encourage more equitable pay practices that would benefit workers, their communities, and even the corporate bottom line.
Big employers blew millions on stock buybacks instead of paying their workers better
A new study from the Institute for Policy Studies on the 300 US corporations with the lowest median worker pay found that CEO pay at these corporations increased by 31% in 2021, while leaving workers far behind. At more than a third of the firms, median pay for workers didn’t rise above the rate of inflation. Among the 300 employers we studied, the average gap between CEO and median worker compensation is now a stunning 670-to-1. It’s no wonder we’re seeing record numbers of workers quitting their jobs and a surge in unionization.
Did these companies not have enough money to make sure wages kept up with rising prices? Hardly. In fact, 67 of the companies we studied spent a combined $43.7 billion on stock buybacks in 2021. Instead of increasing worker pay and helping millions of people pay their bills, these companies purchased shares of their own stock — which artificially drives up the value and, in turn, the value of executives’ stock-based pay.
Stock buybacks were mostly illegal until the Securities and Exchange Commission loosened the rules in 1982. Since then, corporations have poured trillions of dollars into share repurchases to pad the pockets of their CEOs and wealthy shareholders. The tradeoffs are huge: Every dollar spent on buybacks is a dollar not invested in wage increases, research and development, equipment upgrades, or other productivity-boosting investments.
Among the firms in our sample where workers’ wages didn’t keep up with inflation in 2021, Lowe’s spent the most — $13 billion — on buybacks. With that hefty sum, the home-improvement chain could have given each of its 325,000 employees a $40,000 raise. Instead, median worker compensation at Lowe’s fell by 7.6% to $22,697, while Lowe’s CEO, Marvin Ellison, raked in $17.9 million — most of it in stock-based pay.
Best Buy was another top buyback splurger. With the $3.5 billion the company spent on share repurchases, it could have given each of its 105,320 employees a $32,270 pay hike. Instead, median annual pay fell by 1.8% to less than $30,000. Meanwhile, Corie Barry, the company’s CEO, enjoyed a 30% raise, to $15.6 million, after laying off 5,000 workers. Barry told analysts the job cuts were necessary because the company had “too many full-time and not enough part-time employees.” Part-timers are cheaper because Best Buy doesn’t have to provide them with benefits or guarantee their hours.
Thanks to underhanded decisions like these, the pay gap between CEOs and their workers continues to expand despite low-wage workers’ heroic efforts to keep the US economy going during the pandemic.
Equitable companies perform better
About 40% of the 300 companies we studied are, in some capacity, federal contractors. That means they’re receiving taxpayer money while enriching their top executives at the expense of their workers. CEO-pay apologists regularly argue that corporate leaders deserve their massive compensation packages because they bear enormous responsibilities and must take extraordinary risks. This argument quickly falls apart when we compare CEOs at major contractors with the government officials ultimately responsible for their contracts.
The secretary of Defense, for instance, manages the country’s largest workforce — more than 2 million employees — and makes life-or-death decisions on a daily basis. Yet this Defense secretary and other Cabinet members in the Biden administration make $221,400 a year, less than three times as much as the $76,668 average federal employee’s annual pay. Contrast that narrow gap with the situation at Amazon, which raked in more than $10 billion in federal contracts for web services over the past three years. Andy Jassy, the CEO of Amazon who took over for Jeff Bezos in 2021, received $212.7 million in compensation last year — 6,474 times the company’s median worker pay and 961 times the salary of the secretary of Defense.
The truth is, pay-equity incentives would deliver a bigger bang for the taxpayer buck. Study after study has found that companies with narrow pay gaps tend to perform better because they bring out the best in all of their employees. In fact, one recent analysis of 235 CEOs who served in the top job between 2006 and 2020 found that the best-performing companies had the lowest-paid CEOs. Similarly, a Harvard Business School study found that companies with overpaid CEOs and underpaid workers had significantly lower revenue and higher levels of employee dissatisfaction and turnover.
Maximus, the largest low-wage federal contractor we studied, offers a case in point. The firm, which services student loans and operates Affordable Care Act and Medicare call centers, has bagged $12.3 billion in government contracts over the past few years. Most of the gains from those lucrative contracts have flowed to the top of the company’s ladder. Last year, Maximus CEO Bruce Caswell collected $7.9 million in compensation — 208 times the firm’s median paycheck.
Half of Maximus’ 49,800 employees earned less than $38,059 in 2021. Before Biden’s April 2021 executive order to raise the minimum wage for federal contract employees to $15 an hour, many of the company’s call-center workers earned as little as $10.95 an hour. It’s hardly a surprise that Maximus employees are attempting to unionize and have organized multiple walkouts this year demanding decent pay and benefits.
Workers at Amazon are also pushing for better treatment. Despite fierce company resistance, Amazon employees on Staten Island successfully organized the company’s first US union earlier this year, and organizing drives are underway at Amazon facilities in other parts of the country.
How to close extreme pay gaps
An April report from Just Capital, a nonprofit research organization, found that of the 1,037 people it surveyed, 62% of Republicans and 75% of Democrats support a cap on CEO pay relative to worker pay. That’s a roughly 10-point increase since before the pandemic.
In the Build Back Better negotiations, Ron Wyden, the Senate Finance Committee chair, floated a more modest alternative to a rigid CEO pay cap: an excise tax to encourage narrower gaps. His proposal was loosely modeled on the Tax Excessive CEO Pay Act, which would apply graduated corporate-tax increases based on the size of a company’s gap between CEO and median worker pay. The tax penalty would kick in at 0.5 percentage points for companies with pay ratios of 50-to-1 or higher and max out at 5 percentage points for ratios above 500-to-1.
If this policy had been in place, Lowe’s — with a pay gap of 787-to-1 — would have owed an extra $560 million in federal taxes in 2021, a year in which the retailer raked in a record $11.2 billion in pre-tax earnings. If it had narrowed its pay gap to 99-to-1, the company would’ve owed an extra $56 million. And if it had dropped the ratio to less than 50-to-1, it would not have owed an extra dime.
This tax reform, despite being a sensible way to encourage narrower pay gaps, is stalled in Congress, along with much of Biden’s agenda. But the president does not need to wait for legislation to act. He could wield the power of the public purse by making it hard for companies with huge CEO-worker pay gaps to land lucrative federal contracts. Given the large number of low-wage employers that rely on these contracts, this would be a significant step to close the gap.
The government already gives small businesses owned by women, disabled veterans, and people of color a leg up in some contracting competitions, and it is illegal for the government to give contracts to companies that discriminate based on race or gender. In a similar spirit of leveling the playing field, the administration could give priority to corporations that pay their CEOs no more than 100 times what they pay their typical worker.
In other words, if two similarly qualified companies say they could do a job for $20 million, but company A has a pay gap of 300-to-1 and company B’s pay ratio is 75-to-1, company B would get the contract. This would encourage corporations to narrow their pay gaps, ideally by both reining in the top and lifting the bottom of their wage scales.
Existing rules for federal contractors send the clear message that our tax dollars should not be subsidizing racial or gender inequality. Why should we support companies that are driving extreme economic inequality?
Taxpayers shouldn’t fund inequality
Workers, of course, have their own tools to fight for better treatment and fairer pay: unions. But many of the same low-wage contractors that take taxpayer money and treat their employees terribly are also using those taxpayer dollars to crack down on the employees organizing for better treatment. While pocketing billions of dollars in taxpayer-funded contracts, Amazon has been spending millions of dollars fighting union campaigns at several of its warehouses.
The administration could also wield the power of the public purse to crack down on union busting. Requiring federal contractors to sign neutrality agreements in organizing campaigns would be one way that Biden could use his executive authority to strengthen workers’ rights.
Contracting standards could also address the problem of wasteful spending on stock buybacks. In his 2023 budget proposal, Biden called on Congress to ban executives from selling their own shares in the years after a stock repurchase. This would prevent CEOs from timing share repurchases to personally cash in on a short-term price pop they artificially created. A 2019 SEC investigation revealed that such shenanigans are a common practice: In the eight days following a buyback announcement, top executives sold five times as much stock on average as they had on an ordinary day.
But why wait for our hopelessly divided Congress to act? Instead, Biden should get the ball rolling by imposing a buyback restriction on federal contractors, a set of companies that employ an estimated 25% of the US private-sector workforce.
CEOs’ pandemic greed grab has stoked public outrage across the political spectrum. Just Capital’s survey found that 87% of Americans view the growing gap between CEO and worker pay as a problem not just for workers, but for the nation as a whole. Through federal contracts, ordinary Americans are forced to support this obscenely inequitable corporate economic order with their tax dollars — and Biden could do something about it today.
Sarah Anderson directs the Global Economy Project and coedits Inequality.org at the Institute for Policy Studies.