Cashing In On the Covid Crisis
In the aftermath of the Great Depression observers noted how certain of the wealthy could cash in on a crisis and dubbed them 'market crash millionaires'. There were only a few then. However, at that time there was a counter balance: the bailout in the 1930s went to the distressed homeowners and continued the progress toward economic equality for workers that had begun slowly in the 1900s.
But by 2020, the super-rich had perfected methods of ensuring that they got the full benefit from every economic crisis. It's a tale of how both Democrat and Republican administrations supported, and still support, this trend. To understand how the present stimulus package is going to permanently put the economy at risk for the salaried classes, but protect the moneyed classes, I'll review a pernicious relationship that is never discussed in the media: the role of executive compensation related to buybacks.
We need to go back to 1993 when Bill Clinton ran on the promise to stop the outrageous executive compensation that had been wildly escalating since the 1970s.
Clinton's solution: any pay over $1 million could not be deducted from the corporation's tax. Sounds good, but next comes a method often used to actually do the opposite of what the politicians say is being done: an exemption. The corporations could deduct pay over $1million if based on performance. The board of directors could set targets. If the executives met these targets, the corporation could pay them, not in cash, but in stocks or stock options in the corporation.
Great! said those who promoted this exemption. This puts the executives' interest in line with the best interest of the corporation: if the company does better, they do better. But it doesn't. It puts the executive's interest at odds with the corporations in what economists call a perverse incentive. Executives can manipulate the company's affairs to artificially inflate the share value at the time of their sale. The company pays more than the true value on the buyback. The executives get a benefit based on a temporary illusion.
As the graph by the Economic Policy Institute below shows, until the 1970s CEO-Worker pay ratio was 20:1. Then CEO pay started a gradual rise. In the Reagan years (1981-89) the curve angled up slightly, but not until the Clinton years (1993-2001) did it achieve full lift off.
CEO pay v. average slub.
(Image by (From Wikimedia) BoogaLouie, Author: BoogaLouie) Details Source DMCA
The Executive Buy Back is Done in Secret
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