How the pursuit of shareholder value weakened the economy

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6) Focusing on shareholder value as the sole purpose has contributed to wage stagnation

There is no doubt that since the shareholder value revolution, the benefits of the company have gone overwhelmingly to  and shareholders and top management (much of it through stock and option based compensation). Tthe top CEO to worker pay ratio increased from 20:1 to over 300:1 today.

Stock and option based compensation simply shifts the incentives towards maximizing the short-term stock price as this is related to most of executive compensation. William Lazonick:

Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.

We have already seen above that share prices indeed correlate with buybacks. It's a main driver of executive pay: Lazonick:

As documented by the economists Thomas Piketty and Emmanuel Saez, the richest 0.1% of U.S. households collected a record 12.3% of all U.S. income in 2007, surpassing their 11.5% share in 1928, on the eve of the Great Depression. In the financial crisis of 2008–2009, their share fell sharply, but it has since rebounded, hitting 11.3% in 2012.

Since the late 1980s, the largest component of the income of the top 0.1% has been compensation, driven by stock-based pay. Meanwhile, the growth of workers’ wages has been slow and sporadic, except during the internet boom of 1998–2000, the only time in the past 46 years when real wages rose by 2% or more for three years running. Since the late 1970s, average growth in real wages has increasingly lagged productivity growth. 

While company earnings are not a zero sum game, what is notable is that median wages have started to lag the growth of productivity in a meaningful way, and while this effect has played out in other countries, none of them to the extent of what happened in the US. As we wrote elsewhere, this really is almost exclusively a US problem.



While there are other reasons for the wage stagnation, the shift to shareholder value as the exclusive goal of the company is, in all likelihood contributing significantly:

• Proportionally much more of the company's spoils go to shareholders and executives
  
• It changes the incentives of management to short-term cost cutting and away from making long-term investments in capabilities with more uncertain returns. We have already seen above the shareholder revolution hasn't been followed by an investment boom, quite the contrary. This is hurting wages in two ways, with less investment, companies grow less fast, hurting future employment opportunities. Declining investment also lead to a faster aging capital stock and a slower introduction of newer, more productive capacity. While this is beneficial for employment levels in the short run, it hurts productivity growth and the possibility for real wage rises.