In April, Gretchen Morgenson boldly called out the hypocrisy of BlackRock pillorying corporate short-termism while the investment giant simultaneously approved more than 96 percent of executive pay packages last fiscal year. She also described one BlackRock investor’s intrepid campaign to better align the company’s supposed philosophy with its executive pay practices: Stephen Silberstein, a retired software company founder, wrote a shareholder proposal for reform, and BlackRock investors and shareholders in general (including anyone with a pension or college savings) should take heed.
The important connection between short-termism and executive pay that Morgenson and Silberstein are making is not widely understood. People who object to America’s grotesque CEO pay practices usually do so in terms of fairness, which is an argument that certainly has its own merit. But what many Americans are not aware of is how bad CEO pay practices are for the economy, particularly in terms of how they are so tied up with short-termism.
Simply put, short-termism is the heavy emphasis corporate managers and shareholders have increasingly placed on the next quarter’s stock price over the long-term growth and viability of a company. Executive pay is arguably the primary driver of short-termism. Since the early 1990s, the trend has been to compensate executives primarily with “performance pay,” particularly stock options, in order to align the motivations and incentives of executives with corporate shareholders. (Incidentally, this practice helped to propel CEO pay into the stratosphere, as median pay for CEOs of S&P 500 Industrials soared from close to $2 million to nearly $6 million over the course of the 1990s. In 2014, median S&P 500 pay was $10.8 million.)
When executives get paid with stock equity, company stock gets “diluted.” In other words, a company’s outstanding shares rise and share prices fall. According to economist William Lazonick, this has led to the widespread practice…