We are angry, rightly so, about the obscene bonuses and pay given to bankers and the financial mandarins who destroyed the economy. Part of the problem is that the political dialogue–parroted by the traditional media and the political leaders who are bought and paid for by the financial industry– never questions a basic premise: that financial institutions have to pay "market rates" to retain "top talent". But, it’s an entirely rigged and phony system. And, while I understand the desire for immediate revenge on the part of the people, if we want real change, we have to challenge the mindset.

Here is how the rhetoric, which we see in every defense of the stupendous salaries paid to the financial leaders (and, it needs to be said, corporate CEOs and top managers generally), goes: there is a competitive market out there. If we [insert any name here] don’t pay millions of dollars to this particular worker, s/he will go off to another firm, perhaps, perish the thought, to a foreign competitor [note here: it is always good to sprinkle this rhetoric with a little xenophobia to get your way]. So, that’s why pay goes up and up and up. It’s the "market" that decides.

So, here is how it really works. I want to illustrate this with an excerpt from a book I recently wrote called The Audacity of Greed. I had a chance to talk to one of the pioneers in the area of executive compensation–Graef "Bud" Crystal. If you Google him, you will find a pile of info about him. Here is what he explained:

Probably one of the best observers of the stock options’ scam is Graef "Bud" Crystal. Now semi-retired and living north of San Francisco, Crystal was once one of the country’s premier compensation consultants—the outside fixers that CEOs and their boards bring in to give their robbery of shareholders a veneer of respectability.

According to Crystal, the original notion of CEO compensation was simple: you pitched your pay level to that of other CEOs. But that notion didn’t last long. "In 1970, one CEO hired me and said,‘we don’t have a bonus plan and do we need one?’" recalls Crystal."I did the study and I went back to the CEO and said ‘yes you do need a bonus plan. But we have a problem area. You are making $150,000-a year and the problem is that the $150,000 is equal to the salary and the bonus to what your competitors are paying so we have to cut your pay to $100,000-a-year and then we can put in a bonus.’" Crystal laughs. "It was like a scene from The Exorcist where ice formed on the windows…he started arguing about the findings and he finally said ‘let me say this to you this way: who do you think is paying your bills anyway?’ I replied, ‘If I recall correctly the checks were drawn on the corporate account, not your personal account so the shareholders are paying me, not you.’ The meeting ended quite quickly."

One of Crystal’s early clients was the H.J. Heinz Company. "In 1973, at first, the CEO was in a non-descript building nestled in a big factory. I would come to meet with him, and I would be assaulted by the smells when I walked in," Crystal remembers. "I observed real
work going on, their testing lab was there." Then, says Crystal, the
CEO retired, and was succeeded in 1979 by Anthony J.F. O’Reilly, a very flamboyant, bon vivant Irishman. "He was a renowned rugby
star of his time, handsome, smart. He didn’t take kindly to his little
office building. U.S. Steel had built the largest building in Pittsburgh and was just going bankrupt. O’Reilly decided he wanted that space [in the U.S. steel building]. In there, you would ride in a very fancy elevator, you’d get out on the 60th floor and you’d have to almost use a machete to get through the thick carpet and everyone would be speaking in hushed tones and no one but the secretaries made less than a million dollars a year. They didn’t care what the workers were paid because they never saw the workers."

Crystal, then, told me about the massive pay package O’Reilly received and the trend that ignited:

However, O’Reilly was one-upped in 1996 by then Walt Disney CEO Michael Eisner, who, according to Crystal (who was Disney’s compensation consultant at the time), received "an enormous grant of 24 million shares in a single day, the largest ever seen then. I said
that if you are going to get this grant, we need to put some teeth in
it, we should set the strike price much higher than the market price
so you have to make quite a bit of progress to make a buck. I pushed
and shoved and the compromise was: he’d get 15 million where the market price was equal to the strike price, 3 million shares where the strike price was set 25 percent higher than the market, 3 million where the strike would be 50 percent higher than the market; and
the last 3 million share where it was set 100 percent higher than the market price."

At the time, Crystal says that the value of that one-time grant was $170 million. "Those numbers went into everyone’s comparative databases, including car companies and others that were not even in the same [movie] industry," he recalls with amazement. "I could almost hear the consultants calling up and asking, ‘Where are the compensation committees?’ and, if they were told they were on the
way to the plane, they would say, ‘Stop the plane. Michael Eisner just got this huge grant and you are way behind.’" To help mitigate the risk to Michael Eisner—-the risk of having a package that was worth $170 million—-the board of Disney agreed that the premium priced options (the ones Eisner got that were set above the level of the market price on the day the options were granted) would exist for 15 years, not 10 years as was typical.[emphasis added]

The point is that this is entirely a scam.

Pay has nothing to do with the "free market". It is entirely a function of a small group of people conspiring to bootstrap one person’s pay over another person’s pay–having nothing to do with the larger, and mythical, "free market".

The compensation consultant only gets paid–and only gets hired for future jobs–when he or she successfully boosts the pay of the CEO (thanks, of course, to complaint boards of directors). It has virtually nothing to do with competence or past performance of the company. It is a scam.

Yes, we can tax banks to recoup money from banks who took taxpayer money to bail themselves out partly because they paid outrageous sums of money to CEOs who acted in their own greedy self-interest (a tax I support but my opponent does not).

Yes, we need to stop the corrupting influence of money that lets these folks stop any real reform (I refuse to take their money while my opponent is awash in corporate money, particularly from the financial industry)

But, above all, we need to entirely change the dialogue. Every time we hear the slogan "market rates" or "competitive pay", we should ask how that pay was set and whether there is some independent way of actually assessing why a single person deserves pay that gobbles up an outsized share of the money paid out to workers.

And we need to demand from our elected officials that they stop regurgitating the idea of "market rates" without thinking what that means. If they profess to represent the people, politicians have to get some spine and stand up to the people who have robbed America and crippled the livelihoods and futures of millions of hard-working people.