Paying CEOs Top Dollar for Poor Performance

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This post first appeared in The Nation.

Lehman Brothers Holdings Inc. Chief Executive Richard S. Fuld Jr., testifies before the House Oversight and Government Reform Committee on Capitol Hill  in Washington, Monday, Oct. 6, 2008, on the collapse of Lehman Brothers. Days from becoming the largest bankruptcy in U.S. history, Lehman Brothers steered millions to departing executives even while pleading for a federal rescue, Congress was told Monday. (AP Photo/Susan Walsh)
Lehman Brothers Chief Executive Richard Fuld testifies before the House Oversight and Government Reform Committee on Capitol Hill in Washington, Monday, Oct. 6, 2008, on the collapse of Lehman Brothers. (AP Photo/Susan Walsh)

One of the great American delusions is meritocracy — the idea that everyone competes on an even playing field, and then gets what they deserve. In a meritocratic society, we would expect top-earning chief executives to represent the best and the brightest. Or, at the very least, to be good at their jobs.

Consider the case of Richard Fuld, who ran Lehman Brothers from 1994 until 2008. Fuld made the list of America’s twenty-five highest-paid executives for eight years in a row, until the bank collapsed under a slew of bad investments. The Lehman bust was the largest bankruptcy in the nation’s history and a defining event in the financial crisis. For his leadership in the eight years prior to the collapse, while the firm was making bad bets and covering them up with accounting tricks, Fuld raked in more than $466 million.

Then there’s Vikram Pandit, former CEO of Citigroup. Pandit made the top-twenty-five list in 2008, earning $38 million. That same year, his firm laid off 75,000 employees, and took government bailouts ultimately exceeding $472 billion. Pandit accepted only $1 for his services while his firm was in the red, but by 2011 he was back on the list of top earners.

These cases of gross overcompensation for poor performance seem exceptional, but in fact they’re representatives of a trend. A twenty-year review released today by the Institute for Policy Studies found that the records of nearly 40 percent of America’s top-earning executives include leading their firms to bankruptcy, government bailouts, fraud-related fines and settlements, and their own firing.

Institute for Policy Studies

“So many of the CEOs that wound up leading our economy to disaster showed up on the list [of America’s twenty-five highest-paid CEOs] both before and after the financial crisis,” said Sarah Anderson, one of the report’s authors and the director of the Global Economy Project at IPS. While the financial sector is heavily represented in the list of poorly performing, highly paid executives, women are noticeably absent. In two decades, only four broke into the top twenty-five.

More than a fifth of the highest-paid executives ran firms that either received taxpayer money or collapsed during the financial crisis. Another 14 percent of all top earners ultimately lost their jobs because they were fired, forced to retire, or their company went bankrupt. Then these CEOs walked away with severance packages averaging $47.7 million.

“The average worker is very lucky to get a small severance. To see that the average ‘golden parachute’ was worth 48 million [dollars] reinforces the belief that there is no accountability here,” Anderson said.

The lack of accountability extended to executives whose companies were accused of fraud during their tenure. Nineteen CEOs on the high-pay list ran companies that paid fraud-related fines and settlements — many through deals that did not force the firm to admit any wrongdoing. The majority of these CEOs pocketed their pay and left the company before the fraud settlements were finalized.

Institute for Policy Studies

The injustice of excessive pay isn’t limited to the fact that America’s executives make hundreds of times more than their average workers in exchange for poor, and in some cases irresponsible, leadership. What’s particularly outrageous is the fact that ordinary Americans are the ones picking up the tab.

“Excessive executive compensation is a key factor driving the trend towards extreme inequality, which frays our social fabric and undermines democracy,” Anderson said. Last year, executive pay reached its highest level ever, while the number of Americans living in extreme poverty is rising.

“More concretely, through tax loopholes, all taxpayers subsidize excessive executive pay,” Anderson explained. “It has to either come out of cutting spending on government programs that mean a lot to people, or it means that the rest of us have to pay more in taxes.”

One significant loophole in the tax code allows corporations to deduct unlimited “performance-based” pay from their income taxes. (Deductions for regular compensation is capped at $1 million per employee.) In other words, companies have an incentive to increase supplemental compensation, often in the form of stock options, because it will lower their tax bill. The Economic Policy Institute estimates that between 2007 and 2010, this loophole cost the government more than $30 billion.

Max Baucus, the Democrat in charge of the Senate Finance Committee, and Dave Camp, the Republican leader of the House Committee on Ways and Means, are both expected to introduce massive overhauls of the tax code this fall, but whether the “performance pay” exception will be on the table isn’t clear. In early August, Democratic Senators Richard Blumenthal and Jack Reed introduced a bill to put an end to unlimited write-offs for performance-based pay, capping total deductions for compensation at $1 million per employee. Democratic Representative Barbara Lee introduced a similar bill in the House in January.

Other reforms have been signed into law, but regulators are dragging their feet. The Dodd-Frank financial reform legislation, passed in 2010, includes a provision that would force corporations to disclose the gap between what their top executives and their typical workers earn, making the culture of inequality more transparent. Dodd-Frank also instructs regulators to rein in incentive-based pay that “encourages inappropriate risk.” Both of these checks have yet to be implemented, and Republicans in the House have moved forward a bill to repeal the pay disclosure requirement.

Government contracts offer another example of how CEOs benefit from America’s taxpayers, according to the report. More than 12 percent of the highest-paid CEOs worked for firms among the government’s top 100 contractors. “We could be doing more to use the power of the public purse to encourage more rational pay practices,” said Anderson.

Zoë Carpenter is a reporter in The Nation’s Washington, DC, bureau. She has written for Rolling Stone, Guernica and the Poughkeepsie Journal. An Oregon native, Zoë studied writing and environmental politics at Vassar College.
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  • JonThomas

    Good article. I’ve long been an opponent to corporations, but now I’m even moving towards the necessity of eliminating the type of market trading we see from Wall Street and the other stock markets.

    I don’t think there is anything inherently wrong with private investment, but public trading seems to be a serious societal ill. I need to consider this view more.

  • Anonymous

    Mr. Fuld remains at the head of my personal hate-this-dickhead list. He took my Mom’s money and kicked her to the curb. She trusted Lehman.
    Of course he’s perfectly comfortable today living high in Florida and trying to figure out how to screw even more people but I wonder sometimes how his brain works.

  • bk

    thank you Bill. I believe that by the end of this year we will have made the first small steps towards the disposal of the delusional mentality that we have to rely on ‘big names, big salaries, big boys and girls’ for anything to truly get done. Then, we can figure out how to begin with the dis-assembly of the Corporation-body and the culture that enables it.

  • Anonymous

    I’ve often wondered if I posted an advert in the WSJ offering my services to large corporations based on my total ignorance of actually running a large business for, say, 1/10 the ‘going’ salary, if I’d get any responses. My rationale? Hey, I couldn’t do any *worse*!

  • MD

    Elizabeth, we need you!!

  • Virginia

    I have thought that when you hire someone with a super big pay package, you might be hiring someone who is interested in the remuneration but maybe not passionate about running a good business, or making a good product, or making a contribution to their community.

  • Vortsukoto

    I would argue that this list shows that CEOs aren’t incompetent so much as the job itself is corrupt. Forcing settlements that absolve corporations of wrongdoing, securing bailout money and other handouts, and acting as a scapegoats in case of scandal are all core duties of the modern CEO.

  • unkerjay


    “SIEGEL: But if I were a Wall Street banker – at least, I can imagine a Wall Street banker saying, you don’t understand; we have a different relationship to stress. We thrive off of people who thrive on stress, are totally stressful. We don’t care when they have cardiac arrest, but they make a ton for us while they’re working.

    Prof. ARIELY: Yes. You know, I went to give a talk to some bankers, and they said exactly that, right? They said, oh, no, no, you do experiments on regular little people, and we are super-special people. We thrive on stress to such a degree that there’s not enough money in the world that would get us to stress. We would never get to that level.”

    “Super-special people”

    Fantasy meets reality and fantasy wins.

  • Anonymous

    “I would argue that this list shows that CEOs aren’t incompetent so much as the job itself is corrupt”.

    I would say BOTH!

  • Anonymous

    I look forward to it! Is it gonna happen? Can you promise??

  • Anonymous

    “….but I wonder sometimes how his brain works”.


  • Jack Jackson

    There’s nothing about CEO performance that justifies the delta between them and their #2. The guy at the top is usually just a better negotiator…but of course, we’d have a hard time convincing them of that since a large ego is a prerequisite for the job.

  • REkzkaRZ

    When you say they are ‘usually a better negotiator”, I don’t think that is based on *ANY* facts. It’s just an assumption, which makes an … aww, you know.

  • REkzkaRZ

    “Super special”, as in, “douchebags”.

  • Anonymous

    Seems interesting the years of collusion are identical to the GW Bush Regime. Knew something was up when on C-SPAN GW was attending The 2006 CEO Conference in Palm Beach and so we were not allowed to see what was going on. Umm

  • Anonymous

    They have only caused stress and that is correct there is no amount of money that will make you feel stress. It is the lack of accessibility to money after working 3 jobs and having nothing left. That is Stress!

  • NotARedneck

    As an accountant, in the capacity as an auditor, I can assure you that the board of directors and CEO are in a symbiotic relationship. At the very least, it’s “you rub my back and I’ll rub yours”. They both profit mightily from this relationship and have no intention of upsetting the applecart. Everyone else loses.

  • Eric Scoles

    I once heard someone describe this phenomenon as one aspect of a sort of neo-Calvinism: A highly-paid CEO’s high pay is seen as an indicator of their virtue, as proof that they have merit. They come to be seen as a member of the Elect, favored (by God?) for greatness. The reason for the analogy to Calvinism is that, as shown here, poor performance isn’t necessarily seen as a sign of lacking virtue. As in the Calvinist ethos, misfortune may be seen as a test, not a sign. In Calvinism, your personal moral and religious response is adjudged by your peers as indicating your blessed state (or not); in this secular, capitalist neo-Calvinism, your ability to obtain a new, lucrative posting is an indicator of your continued virtue in response to the test you’ve been given.