August 14, 2014
Harold Meyerson had an interesting column about how the problem of inequality is not just about low wages at the bottom, but also about people at the top ripping us off. However part of his story is not exactly right.
At one point the column tells readers:
“As a recent study in the Harvard Business Review concluded, a ‘survey of chief financial officers showed that 78% would “give up economic value” and 55% would cancel a project with a positive net present value — that is, willingly harm their companies — to meet Wall Street’s targets and fulfill its desire for “smooth” earnings.'”
While Meyerson portrays this smoothing as benefiting shareholders, as he describes the process, it is actually coming at the expense of shareholders. If the company is sacrificing long-term profitability to meet earnings targets then most shareholders are likely losing in this deal. The most likely winners would be top managers whose bonuses are tied to meeting earnings targets or who have options coming due at specified times.
This distinction is important since it describes alternative political paths. The situation as Meyerson describes it clearly indicates the potential of an alliance with shareholders against top management. Since CEOs and other top management are an important part of the 0.1 percent, reducing their pay could have a substantial impact on income distribution, especially when the spillover effects are taken into account.
In this case, the nature of the problem is a corporate governance structure in which the directors, who are the immediate governing body of the corporation, act in the interest of top management instead of shareholders. Empowering shareholders would then be an effective way to rein in CEO pay.
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