Modern theological finance: Usury, Jubliee, and CEO pay

We all know that CEO salaries in the US are absolutely out of control, even more so than health care and higher education costs. In 2005, by the Economic Policy Institute's calculations, CEOs made 265 times the average worker. They earned about 25 times the average in 1965, which does seem reasonable. EPI includes all stock-based compensation in CEO pay, but there are some pay factors that aren't transparent to the public, such as executive pensions. For workers, they considered production and non-supervisory workers. CEO pay in 2005 was over 800 times minimum wage, and if minimum wage grew as fast as CEO pay, minimum wage earners would be making at least $15 an hour.

Today, there are some exceptions: Whole Foods executives are capped at 19 times their workers' average salaries. The CEO of Bridgeway, a small mutual fund company, caps himself at 6 times the average salary of his firm, and he also donates half the firm's profits to charity. The CEOs of Costco and Berkshire Hathaway are also very modestly remunerated. However, these exceptions prove the rule.

Christians have theological reasons to care about this. The Bible prohibits usury - lending money at interest. Not just lending at unreasonable interest, the Bible charges us not to take interest at all. Now, these days, we consider money to have time value - a dollar next year is worth less than a dollar this year, even ignoring inflation. We could invest that dollar this year and earn interest on it. That's what enables us to buy a house with a mortgage: I don't have $300,000 in the bank, but I do have 10% of that, and the bank will lend me the rest. The loan is secured with real property, which the bank could repossess and sell if I defaulted. The bank makes money off my loan. My wealth grows in the long run, as property values appreciate and I pay off my loan, bit by bit. This transaction would qualify as usury to the ancient Hebrews, but there is nothing unfair about this one (assuming no predatory lending).

However, if the interest rate is unreasonably high, I'll pay a larger percentage of my current income every month to the bank. That extra income could have been invested in other projects, or in retirement savings. I lose the compounded value of that wealth over time. I am a lot less wealthy than I would be if the bank charged me a reasonable interest rate. This is the problem that Grameen Bank was founded to solve: people being stuck in poverty because they had borrowed money at usurious (the modern definition) rates from moneylenders. They were barely able to repay the loans with the money from their businesses or jobs, and were stuck paying interest for long periods. I assume this is why the Israelites forbade usury. This is also part of the Year of Jubilee: every 50 years, slaves were freed and debts were forgiven.

Muslims today still generally forbid charging interest. Islamic scholars and banks are working to offer workaround products that will enable Muslims to access credit - which, if used properly, can build wealth and make people better off.

We should all look to apply ancient concepts of financial fairness in modern times. When financial systems benefit the rich at the expense of the poor, we need to be concerned. I've already covered microcredit institutions, and I've covered subprime lending. The latter, I have to admit, isn't as much a case of the rich getting wealthier at the expense of the poor, because one major subprime lender is in bankruptcy, and the industry in general is in severe difficulty. But it is a case of the financial system not working to help the poor.

And so, we come to CEO pay. On one hand, even the $200-ish million that Robert Nardelli of Home Depot received was quite little compared to total profit. The stock price had declined the last few years before his ouster, and there were operating problems. Nardelli's compensation was generally considered to be egregious, but made over $90 billion in sales last year. Surely CEO pay is and should be commensurate with their heavy responsibilities?

Charles O'Reilley of the Stanford Graduate School of Business finds that excessive CEO pay is usually not limited to the CEO, it extends to other upper-level managers as well, which costs shareholders, and that excessive pay leads to employee dissatisfaction and increased turnover. The costs of turnover to a company should not be understated - it takes years to develop the experience necessary to perform at an optimum level. When individuals feel that they are being unfairly treated, they will lower their performance.

O'Reilly's analysis did not go into this, but this decrease in morale costs us all. It costs the workers, who could be earning more if they performed better, and who lose seniority and pay if they leave for another organization. And they end up paying less in taxes, which (we hope) society could use to fund worthwhile programs. Rising societal inequality may result in increased crime rates, and it certainly results in large-scale dissatisfaction. And many of us are indirect shareholders in many companies, if we have any sort of personal investments (IRAs and 401ks) or a pension fund. Generally, mutual fund managers vote the shares on our behalf, and they generally go with what management recommends, but we should have some say too. Americans do depend on large corporations to produce wealth that benefits all of us. It should not be that upper managers enrich themselves while laying off employees, as was the case at Delphi.

And so, Congressman Barney Frank of Massachusetts sponsored a "say on pay" bill in the US House of Representatives, which would give all shareholders nonbinding advisory votes on CEO pay yearly. The bill passed the House with more than two thirds of the vote. However, it has to be introduced in the Senate and passed. If it passes by less than two thirds, the President will veto it, and he has indicated his opposition.

Critics argue that the law increases unnecessary oversight, provides an opportunity to blackmail companies by threatening to convince other shareholders to vote no on pay in exchange for something else, and that corporate boards are a better mechanism to determine pay. First, the UK already does this, and they don't seem to have problems with abuse. Second, it takes a lot of effort to convince over 50% of shareholders to vote no on something, and if I want to blackmail a company there are better ways. Third, board members typically have close relationships with the executives they oversee, creating a conflict of interest when determining pay.

Another article on the subject can be found here. Pray this passes.