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Published on Thursday, April 20, 2000 in the San Francisco Chronicle
The Fed Is Overlooking the Inflationary Effect of CEO Compensation
by John C. Gamboa and Mary Ann Mitchell
 
AMERICA'S MOST SKILLED inflation fighter may have finally met his match -- CEOs of high-tech companies, who receive billion-dollar stock-option compensation packages even though their companies post no profits.

For more than a decade, Federal Reserve Chairman Alan Greenspan has guided our economy through both the political and theoretical currents that have threatened unprecedented economic expansion. This has included attacks on the inflationary impact of government-ordered 5 percent per annum increases of the minimum wage and his surprising silence on the often triple-digit increases in executive-compensation packages.

While providing the theoretical anti-inflation underpinnings to Republican-led opposition to a nickel an hour per month increase in the minimum wage, the Federal Reserve has refused to examine the potential inflationary effect of billion-dollar New Economy stock compensation packages for CEOs -- usually not tied to company profits or real productivity.

For example, despite government studies on the alleged inflationary effect of modest wage increases for 20 million minimum-wage workers, the Federal Reserve has refused to commission any studies on the potential inflationary impact of excessive compensation packages of CEOs.

On April 2, a New York Times-commissioned study of 60 New Economy CEOs demonstrated the continued indifference of the Federal Reserve toward the ``trickle down'' inflationary impact of excessive executive compensation packages. These 60 chief executives alone appear to have received in excess of five times more in increases over the past three years than 20 million minimum- and near-minimum wage workers received in total during the same time period. (These CEOs received average increases of $1.2 billion.)

The inflationary effect of these pay pack ages may be far greater than increasing the federal minimum wage by 50 percent, to almost $8 an hour from $5.15 an hour. The $75 billion secured by these 60 CEOs may be just the tip of the executive- pay iceberg. Most of the Fortune 1000 and New Economy chief executives are taking similar pay increases at an even greater cost to the U.S. economy. And it is a rare CEO who (in order to protect the legitimacy of his triple digit compensation increase) does not provide similarly large increases for most, if not all, of top management.

These escalating executive increases can have a destabilizing effect on the distribution and availability of necessary goods. Recent examples are: the million-dollar, three-bedroom Silicon Valley homes that even a $100,000-a-year Stanford University professor cannot afford; the refusal of many qualified teachers and police officers to seek work in areas lacking affordable housing, and; the growing number of Silicon Valley homeless who have full-time jobs.

Compounding this social destabilization caused by excessive and unevenly distributed compensation, is the inefficient cost- cutting many CEOs engage in to justify their compensation increases, such as layoffs or terminating health benefits.

These inflationary costs, which in aggregate may exceed $500 billion, may be mild relative to what might occur if labor union leaders replicated this behavior. Imagine the inflationary impact should the ordinary worker, including police officers, teachers, secretaries and skilled tradesmen, seek triple, or even double digit wage increases.

And it defies human nature to believe that cost-cutting and large-scale layoffs -- allegedly necessary for global competitiveness -- can be effective once 95 percent of the workers recognize that they alone, not their leaders, must pay the price.

Most likely, Federal Reserve Chairman Greenspan, whose political acumen is often as extraordinary as his wisdom and luck, will not be found wanting and will make available the evidence demonstrating the link between excessive compensation and future inflation.

Perhaps such evidence, combined with freezes on executive compensation, will reduce the need for future Federal Reserve interest rate increases that help fuel inflationary homeownership costs and limit small business expansion.

John C. Gamboa is a member of the Federal Reserve Consumer Advisory Board and executive director of The Greenlining Institute. Mary Ann Mitchell chairs the National Black Business Council Inc.

2000 San Francisco Chronicle

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