Brief History: Executive Pay

When the news broke in January that wall street executives were paying themselves handsomely for piloting the U.S. economy into a mountainside, President Obama’s response was unequivocal. “It is shameful,” he said. Ten months later, even as he moved to curb bailed-out execs’ pay, banks are on track to pay employees a record $140 billion this year. Andrew Hall, a star trader at Citi’s commodities unit Phibro, made headlines for what could be a $100 million payout. “Frustrating,” said White House chief of staff Rahm Emanuel with a sigh, appearing on CBS’s Face the Nation on Oct. 18.

Critics of lavish executive compensation can be forgiven for sounding weary; their fight goes back to ancient Greece. Plato recommended that a community’s highest wage should not exceed five times its lowest. By the late 1890s, the banker J.P. Morgan had increased it to 20 times the average. The Securities and Exchange Commission enacted strict executive-compensation-disclosure laws in 1938, but four years after that, the New York Times denounced President Franklin Roosevelt’s attempt to cap Americans’ pay at $25,000 (about $331,000 today) as a ploy to “level down from the top”; Congress rebuffed it.

During the postwar boom, pay for U.S. CEOs remained fairly steady in real dollars until the 1970s. But under new tax policies, the 1980s saw the rise of stock options. Intended to tie executive pay to performance, they offered the potential for huge riches with little downside, encouraging risk-taking. In 1991, CEOs earned 140 times the average worker’s pay. A 1993 attempt to cap compensation merely shifted more pay into options. By 2007 the median S&P 500 CEO earned in three hours what a minimum-wage worker pulled down in a year. And Great Recession or no, 2009 looks like more of the same.