As she announced her presidential campaign, former secretary of state Hillary Rodham Clinton criticized executive compensation, suggesting that executives are paid too much at a time when median wages have barely budged. Clinton's message to supporters this month noted that "the average CEO makes about 300 times what the average worker makes."
It was an echo of her husband's argument more than two decades earlier, when he made excessive compensation a big theme in his campaign for president. As The Washington Post's Dan Balz reported at the time, Clinton promised he wasn't "somebody who talks tough but acts easy on the people at the top of the totem pole."
Yet critics, including Sen. Elizabeth Warren (D-Mass.), see Bill Clinton's attempt to address soaring compensation as having backfired. They say that not only did Clinton's actions fail to contain executive pay, but that they also contributed to a broader transition in how corporations are run. These days, according to the critique, executive officers too often make decisions in the interests of their current investors, ignoring employees, customers and the viability of the company in the long term.
The story begins during Bill Clinton's earliest days in the White House. Soon after his election, he worked with Congress to limit corporations' ability to deduct executive compensation from their taxes, as they do for ordinary workers' wages and other expenses of doing business. A limit of $1 million was set for deductions for executive compensation.
There was a big exception, though. Compensation that was dependent on the firm's performance was exempt from the threshold. In practice, that meant pay in the form of shares of the firm's stock, or options to buy them, which gained or lost value depending on how well the firm was doing.
Lawmakers hoped to encourage what they thought would be a more rational system of paying corporate executives, giving them a reason to look out for investors' interests. Congress felt that pay in the form of stock would force executives earn their keep by protecting the value of the company. And if the price of the stock rose, investors would benefit as well.
As a result, the new limit didn't prevent executives from receiving ever fatter paychecks -- but they got the money in stock and options, rather than in cash. Clinton and Congress had failed to solve the problem.
"My cynical opinion is that they were trying to look like they were doing something," said Steven Balsam, a professor at Temple University.
Some, like Warren, say the provision was worse than useless. In a speech last week, she called on her colleagues in Congress to change the rules, although without discussing how they'd come about.
"This tax incentive has encouraged financial firms to compensate executives with massive bonuses – bonuses that too often reward short-term risk-taking instead of sustained, long-term growth," she said. "We can close that loophole and stop pushing companies to reward short-term thinking."
Lynn Stout, a law professor at Cornell University and an outspoken skeptic of today's corporate governance, says the Clinton-era shift led executives to try to boost stock prices in the near term by laying off employees and spending less on research and development. These measures, according to this line of thinking, made firms more profitable in the short term because their costs were lower, which resulted in high stock prices, but less able to generate value in the long term for investors and the economy.
Lawmakers "interfered with corporate governance through the tax code, and it's turned out disastrously," Stout said. "They certainly made the problem of high executive pay much worse, but that's a small problem compared to the perverse incentive they created for CEOs to run firms with a focus only on the short term, including cutting payroll and investment in innovation."
There is good evidence for a decline in investment. Before the Reagan administration, corporations retained some of their profits to invest in new projects and hiring. Then something changed, as the economist J.W. Mason has shown. In the past 30 years, the average corporation has returned all of its profits to investors by buying stock back from the public and issuing dividends, and then borrowed even more to pay out on Wall Street.
At other times, critics have said that this emphasis on the short term has taken the more blatant form of dodgy accounting. When Enron collapsed, many observers said its leaders had been trying to protect the stock price by maintaining the illusion of a profitable company.
During the Bush administration, Securities and Exchange Commission Chairman Christopher Cox told Congress the provision "deserves pride of place in the Museum of Unintended Consequences." He complained that corporations were rigging their stock options in ways that all but guaranteed hefty returns to the executive officers who received them. Since the options weren't actually dependent on performance, the companies and their leaders were dodging the limit on deductions for pay.
Some of these criticisms might go too far. There are other diagnoses of the lethargy in corporate investment, and some experts doubt that Clinton's adjustment to the tax code changed executive behavior at all. "It's been relatively benign," said Temple University's Balsam.
In a recent study, he concluded that Clinton's revision to the tax code had no effect on the amount or structure of executive compensation. Where firms couldn't avoid the limit by paying their executives in equity, they just ignored it and swallowed the steeper tax bill.
The basic problem, he suggests, was that the section didn't address how boards of directors negotiate compensation with their top executives. Personal relationships can interfere with directors' independence and sway them to offer more generous terms.
"I do think that a lot of the overpayment comes from the fact that notwithstanding the more diverse economy, the more diverse business community, still in the end, it's a club at the top," said Ed Kleinbard, a law professor at the University of Southern California and an expert on corporate taxes.
Negotiations over pay are "not at arm's length," Balsam agreed. "It's more incestuous."
For his part, Balsam said he isn't convinced that CEOs are systematically overpaid, but at those firms where they are getting more than they deserve, shareholders are losing money, too. He argues that giving shareholders more control, and making sure that those sitting on the board are truly representing investors' interests, should lead to fairer compensation.
Yet that proposed solution isn't likely to persuade those who are concerned about income inequality more broadly. Ballooning executive compensation has been one reason the U.S. economy has become ever more unequal, but returns on investments are another, and those increasing returns are concentrated among households with money to set aside and buy stock. About half of U.S. households have no money saved -- or if they do, they owe as much or more on mortgages, credit cards, student loans and the like.
Any ideas for limiting CEO compensation that would simply give shareholders a greater claim on the money would not answer the more basic question about inequality in the economy. When it comes to America's totem pole, like so many other issues in politics, talking tough is much easier than action.