The New York Times reports that Walmart US CEO William Simon’s contract gave him the opportunity to earn a $1.5 million bonus last year on top of $10 million in salary and stock awards if the company’s American net sales grew by 2 percent. But net sales grew only 1.8 percent last year and Simon still received his bonus. That’s because Walmart calculated an “adjusted” sales growth over 2 percent that “corrected” for a series of factors that it said were beyond Simon’s control. Similarly, the company’s proxy statement reveals that executives would still receive a cash incentive even if the company’s total operating income declined by 1.5 percent.
Simon’s “performance pay” can be compared to the pay structure for Walmart associates revealed in an internal document last year. It lays out the hourly wage bonus that associates receive based on five different levels of performance. After calculating the annualized bonus associates receive if they work 52 40-hour weeks per year, it’s clear that Walmart doesn’t use the same pay structure for its executives that it uses for its associates. An associate who is graded “below expectations” or “needs improvement” won’t get any extra pay. A “solid performer” will receive $832, “exceeds expectations” nets $1,040, and a “role model,” the highest grade, is awarded $1,248. This means an associate can get an 8 percent bonus over the minimum wage when she is a role model, and a CEO can still get an 11 percent bonus when he misses his objectives.
Simon’s pay package also undermines the logic behind trickle-down economics. Thomas Piketty’s bestseller Capital in the Twenty-First Century finds that one of the main drivers behind growing inequality is surging executive pay. Defenders of inequality like to argue that growing executive helps the economy by providing incentives for them to work hard and grow their companies—growth that trickles down to the rest of us.
George W Bush’s former chief economist, for example, writes that “the most natural explanation of high CEO pay is that the value of a good CEO is extraordinarily high.” The Heritage Foundation goes a step further, warning that reducing CEO pay by raising taxes would damage the economy because it “would reduce the incentives for high-earners to work and take risk, which would reduce opportunity for lower-income workers because it would result in less job creation.”
But this incentive system is one where Simon gets paid $1.5 million if he succeeds and $1.5 million if he fails. And it’s just one telling example of how the growth of executive pay has less to do with the growing productivity of executives than with a corporate governance system where executives sit on each others’ boards and give each other raises.
It shouldn’t be surprising that a fundamental tenet of trickle-down economics—executives are paid for performance—fails when placed under the microscope. Our economy grew slower in the trickle-down 2000s than in the 1990s, when President Clinton raised the top marginal tax rate for the wealthy. If the price of public investments that will grow and strengthen the middle class—and our economy along with it—is slightly raising taxes on highly paid executives like William Simon, then it’s a price we can pay.
Brendan V. Duke is a middle-out policy analyst with the Center for American Progress Action Fund.