The Myth of Crony CapitalismSteven N. Kaplan
As the share of income taken home by top earners in the United States has risen over the past few decades, so, too, has popular concern about economic inequality -- something the Occupy Wall Street movement loudly reminded Americans about in 2011. Much of the outrage has centered on the compensation of the United States’ top corporate executives, who are said to be taking home ever-fatter paychecks, while the incomes of lower-level employees have stagnated. “American workers are having to make do with less,” an AFL-CIO official complained to The New York Times last year, “while C.E.O.s have never had it better.” (Europeans have also gotten worked up over these issues, with the EU proposing rules that would cap bankers’ bonuses.)
Part of the problem, allegedly, is that the corporate boards that determine CEOs’ pay packages have severed the link between salary and achievement. Lucian Bebchuk and Jesse Fried, authors of the 2004 book Pay Without Performance, conclude that “flawed compensation arrangements have not been limited to a small number of ‘bad apples’; they have been widespread, persistent, and systemic.” Mihir Desai of Harvard Business School has claimed that skewed incentives for executives have fueled “the twin crises of modern American capitalism: repeated governance failures . . . and rising income inequality.”
Economists such as these argue that although CEOs are in theory beholden to the boards that hire and fire them, often the reverse is true, with directors striking sweetheart deals to stay in the good graces of powerful executives. If only corporate boards broke free from their executive captors, the logic goes, CEOs would get a taste of accountability, their pay would return to earth, and the growing gap between the rich and the poor could begin to narrow.
But the reality of executive compensation reveals a far different picture from this caricature of skyrocketing pay packages and crony capitalism. In fact, although their incomes rose dramatically over the twentieth century, U.S. CEOs of public companies have seen their pay fall, not rise, for the past ten-plus years. Moreover, they are penalized for bad results, with their pay tracking their companies’ stock performance. And boards do monitor performance; executives of companies with sliding stock prices now face a much greater risk of getting fired than they did in years past.