By Robert Reich
“Grandpa, why did top executives began to get so rich in the Clinton administration when you were in the cabinet?”
“For many reasons, sweetie. One of the most important was that most of their pay started to be linked to the price of their company’s shares of stock.”
“But grandpa, didn’t this encourage executives to do all sorts of bad things to increase their stock prices, such as cutting worker’s pay and benefits, and moving jobs overseas?”
“Yes, my sweet, it did.”
“And besides, I thought President Clinton didn’t want top executives to earn so much more than their workers. He said that when he first campaigned for President.”
“You’re right again, pumpkin. But one day early in his administration, several of his economic advisers had a meeting ….”
Robert Rubin (head of the National Economic Council, former chairman of Goldman Sachs): During the campaign the President said he didn’t want companies to be able to deduct executive pay exceeding $1 million from their taxable earnings. We need to pin this down for the budget and get him a recommendation.
Lloyd Bentsen (Secretary of the Treasury, former Senator from Texas): He proposed a lot of things during the campaign. Circumstances change.
Me: It got a lot of press. A lot of people out there think corporate executives are overpaid. He can’t reverse himself without being accused of waffling.
Bentsen: Well, they’re wrong. It takes a lot more than a million dollars to attract a talented CEO these days, and he’s worth every penny if he can make the company more competitive and raise the value of its shares.
Leon Panetta (Chief of Staff, former member of Congress from California): Maybe there’s some way we can do this without actually limiting executive pay.
Me: Look, we’re not limiting executive pay. Companies could still pay their executives whatever they wanted to pay them. We’re just saying that society shouldn’t subsidize through the tax laws any pay over a million bucks.
Laura Tyson (Chair of the Council of Economic Advisers, former Berkeley professor): What are we really trying to accomplish with the proposal? Discourage companies from paying their executives more than a million dollars, or making sure that when they do, they’re really acting in the best interest of their shareholders?
Bentsen: We have no business doing either, but the second is more valid.
Rubin: I agree with Lloyd. Why not require that pay over a million dollars be linked to company performance? Executives have to receive it in shares of stock or stock options, that sort of thing. If no linkage, no tax deduction.
Panetta: Good idea. It’s consistent with what the President promised, and it won’t create flak in the business community.
Me: But we’re not just talking about shareholders. The wage gap is widening in this country, and it affects everybody.
Bentsen: Look Bob. We shouldn’t be social engineering through the tax code. And there’s no reason to declare class warfare. I think we’ve arrived at a good compromise. I propose that we recommend it to the President.
Rubin: Fine. Now to a few other items on the agenda ….
This article was published at Robert Reich’s Substack