Executive Pay: What Worked?

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I. INTRODUCTIONThere is a substantial consensus that something is seriously amiss with executive pay, as compensation of top executives of U.S. public companies is widely perceived as scandalously generous.1 Critics of executive pay can be found even amongst stout defenders of free markets.2 For instance, Richard Posner, a law and economics pioneer before he became a federal appellate judge, said in 2010 that proposition that executive pay was excessive was accepted not by many leading scholars but by almost entire nation, including many chief executive officers.3Critics of executive pay often draw upon history for support, noting that chief executive officers (CEOs) of today are much better paid than their counterparts of a half-century ago.4 Being a chief executive may be challenging. Still, when job is basically same one it was during mid-20th century, how can it be that CEO pay has increased substantially quicker than gross domestic product (GDP) per capita, total shareholder returns, corporate earnings, and wages of ordinary employees?5The dramatic growth in executive pay has not occurred in a vacuum. Managerial compensation has generated substantial controversy and criticism for at least a quarter-century,6 and various reforms have periodically been introduced in response, seemingly to little avail. As Wall Street Journal observed in 2006, critics tried to slow skyrocketing pay through regulations, legislation and shareholder pressure. Few of their tactics worked. Many backfired.7 For those perplexed or frustrated that efforts at reform have failed to reverse dramatic increases in executive pay, history may provide valuable lessons. American business enjoyed unparalleled success from mid-1940s to 1970.8 Nevertheless, during middle decades of 20th century, CEOs of U.S. public companies not were paid less along various measures than their present-day counterparts, but inflation-adjusted executive compensation remained static and executives lost ground as compared to rank-and-file employees. What worked to constrain executive pay? This is topic we explore in this Article.Others have identified shiftfrom (relatively) modest mid-20th century executive compensation to CEO pay by century's closing stages as a topic worth investigating. Paul Krugman said nearly 15 years ago, [t]he explosion in C.E.O. pay over past 30 years is an amazing story in its own right, and an important one.9 Michael Dorffwrote similarly in 2014 that, [t]his major shiftprovides an opportunity to probe inner workings of CEO pay.10 Research on point nevertheless is just beginning. Carola Frydman, who has empirically analyzed 20th century executive pay trends in considerable detail,11 observed in a 2010 survey of CEO pay the causes of apparent in CEO compensation . . . remain largely unknown.12Explaining regime change that disrupted mid-20th century CEO pay has important present-day policy ramifications. Thomas Piketty, in his much publicized 2013 tome Capital in Twenty-First Century, detailed historical changes in concentration of income and wealth and offered policy prescriptions designed to reverse growing inequality on both fronts.13 In so doing, he argued that imposing high individual marginal income tax rates may be the way to stem observed increase in very high salaries.14 He suggested that optimal top marginal tax rate would be above 80%,15 a policy recommendation that became increasingly contentious as popularity of his Capital book grew.16 Piketty bolstered his argument with historical evidence, attributing a late 20th century surge in income of top earners in United States, including CEOs, to substantial cuts to income tax rates that began in 1970s and were pronounced in 1980s.17 He argued that if intention is to stop stratospheric pay of supermanagers, then only dissuasive taxation of sort applied in United States and Britain before 1980 can do job. …