CEO Pay as a Menace to Our Health

Peter Drucker, the internationally acclaimed founder of modern management science, lived nearly a century. He died in 2006 at age 95. He died troubled.

The Austrian-born Drucker had always considered management a noble calling, a profession essential to the common good. Humankind would only prosper, he believed, if enterprises operated efficiently and effectively. Only skilled executives who respected their employees — and valued their insights — could nurture enterprises this high-performing.

But Drucker would live long enough to see executives in his adopted United States pervert his management ideal. The corporate “downsizing” epidemic of the 1990s appalled him.

The “financial benefit top management people get for laying off people,” Drucker told an interviewer in 1996, rates as “morally and socially unforgivable.”

Management in the United States has come a long way — in the wrong direction — since then. Today’s top corporate execs aren’t just laying off their workers to line their own pockets. Today’s top execs are putting actual lives at risk, not just jobs, to make themselves ever richer.

This summer’s biggest corporate scandal — the life-threatening price gouging committed by the drug maker Mylan — has shoved this new immorality onto the nation’s front pages.

Mylan sells a medical device that injects an antidote to deadly allergic reactions. Mylan bought this medical technology in 2007. At the time, the injector and medicine sold for about $100 — and the Mylan CEO was taking home $2.5 million a year.

Mylan’s execs proceeded to double the price of their “EpiPen” product and then more than double it again — to $600. In the process, Mylan CEO Heather Bresch watched her take-home soar. By 2014, she was pulling down nearly $26 million. Last year, she pocketed another $18.9 million.

What would Peter Drucker have made of EpiPen controversy? His outrage would undoubtedly have been unbounded. But why should we bother caring about Drucker’s reaction? Here’s why we should bother: Drucker’s thinking about management — and management compensation — offers a promising counter to future CEO greed grabs.

At the heart of Drucker’s thinking about corporate compensation: the idea that we ought to be paying close attention to the ratio between executive and worker pay. The wider the gap, the more toxic the corporate culture, the less successful — as an efficient and effective enterprise — the corporation.

No executives, Drucker wrote in 1982, should make more than 20 times the compensation of their workers. Back then, in the early 1980s, top execs were making about 40 times more than average workers. Today’s gap? Some 335 times, according to the latest AFL-CIO PayWatch stats.

How large has the pay gap at Mylan become? We don’t know. Corporations in the United States have to annually reveal how much they pay their top five executives. But they don’t have to disclose how much they pay their workers.

But that situation will change effective this coming January 1. On that day, U.S. corporations that trade on Wall Street will have to start tracking the ratio between the compensation of their CEO and their median — most typical — workers. The first federally mandated CEO-worker pay ratio disclosures will start going public early in 2018.

Peter Drucker would be pleased. But not satisfied. And we shouldn’t be satisfied, either. If we truly want to end the corporate outrages — like the EpiPen price-gouging — that windfall CEO pay rewards make inevitable, we can’t stop at disclosure. We need consequences, too.

Corporations that overpay their top execs, in other words, need to pay a price for the inequality they create.

This notion has been floating around America’s political margins since the early 1990s, when Martin Sabo, a former Minnesota member of Congress, introduced legislation that would deny corporations tax deductions for any executive pay that runs over 25 times what the company’s workers are making. Rep. Barbara Lee from California is sponsoring similar legislation in the current Congress.

Today, with mandatory CEO-worker pay ratio disclosure on the near horizon, more and more lawmakers are talking consequences.

In Rhode Island, state senators have been debating legislation that would give preferential treatment in the government contract bidding process to companies that keep their CEO-worker pay gaps at modest levels.

In California, a proposal to hike tax rates on corporations with wide CEO-worker pay gaps has won the support of about half the state’s Senate.

And now local governments are getting into the act. In Portland, Oregon, city commissioner Steve Novick is proposing a surtax on corporations operating within the city’s limits that pay their CEOs over 100 times their worker median pay.

A surtax that penalizes companies for paying their CEOs excessively more than their workers, says Novick, could be “an inducement” to pay workers better.

Top business leaders, predictably, have no patience for any of these approaches. The California Chamber of Commerce, for instance, has fulminated that upping tax rates on corporations with overpaid CEOs would “ultimately cost California jobs.”

But corporate movers and shakers might want to think twice before digging in against proposals that would link taxes and government contacts to CEO-worker pay ratios. If they go all-out to undercut and reject modest proposals like these, tougher ratio-related moves figure to almost surely follow.

What sort of tougher measures? In Seoul, the leader of an opposition party in South Korea’s National Assembly, Sim Sang-jung, earlier this summer introduced legislation that would cap South Korean executive pay at 30 times the nation’s minimum wage.

Institute for Policy Studies associate fellow Sam Pizzigati co-edits Inequality.org. His most recent book: "The Rich Don't Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900–1970." Follow him on Twitter: @Too_Much_Online.