It's not about excessive executive compensation, it's about tax rates

This past Sunday's New York Times  business section had a story about how executive compensation at large corporations has returned to pre-recession levels.  Here's the total compensation (salary, bonuses, perquisites, and stock options) of the top 5 CEOs in 2010 (change from 2009 compensation in parentheses):

1. Philippe Dauman, Viacom: $84.5M (+149%)
2. Ray Irani, Occidental Petroleum: $76.1M (+142%)
3. Lawrence Ellison, Oracle: $70.1M (-17%)
4. Michael White, DirecTV: $32.9M (n/a - new in 2010)
5. John Lundgren, Stanley Black & Decker: $32.6M (+253%)

Poor Larry Ellison, who had to take a pay cut this year.  Don't feel too badly for him, however - the article notes that his holdings of Oracle Stock are worth over $26 billion.

The Times  article discusses shareholder concerns over rising compensation, and whether companies are truly getting value for what CEOs and other executives are paid.  But as much as the federal government has tried to control compensation through regulation, i.e., Sarbanes-Oxley, passed in 2002, it has had little impact.

The real issue is not how to control executive compensation, but the fact that tax rates on these mega-millionaires are as low as they are.  Each one of these CEOs paid the same marginal tax rate last year - 35% - as anyone who made over $373,650.  And they paid only 10 percentage points above the rate paid by someone with an income as low as $68,000.

The chart below shows the marginal tax rates for married couples with the mean income in each quintile, the top 5% of all earners, and the top marginal tax rate, from 1969 through today (click the chart to see a larger version of it).  The largest reductions have come for the top rate, dropping from 77% to 35%.  In contrast, the bottom rate has decreased only five percentage points.  For families in the middle, there has been a nine point drop.

The fix to this problem is far simpler than crafting legislation to try to control how much corporations pay their executives.  All Congress (and the president) needs to do is to have the fortitude and political courage to increase the top tax rate.  I am not arguing to return the top marginal tax rate to the 1960s level of 90% or even the 1970s level of 72%.  But can anyone convince me that any of these CEOs would work any less hard if the top marginal tax rate was increased to the pre-Bush tax cuts level of 39.6%?  Or even a ten percentage point increase to 45%?  I'm ready to listen to your arguments.

What does this have to do with educational policy?  The debate about controlling federal government spending - much of which of focuses on discretionary spending, including spending for education at all levels -  could be made easier if upper-income Americans paid a fairer share of taxes.

More on bogus rankings - "The Best Colleges"

Last year, I wrote about what I described as "embarrassingly bad" rankings published by Bloomberg Businessweek.  Those rankings were based on the return on investment earned by students attending various colleges, and in the post I described why they were suspect.

Last week, Penn State issued a press release touting its World Campus' selection as the "the No. 1 online institution for 2011."  This designation was conferred by the website, TheBestColleges.org, which I had never heard of before - and I've seen lots of different rankings over the years.  So I spent a little bit of time going through the website, and after about 30 minutes or so, I sent this message to Penn State's Director of Public Information:

I read your press release, and not having heard of “Best Colleges,” took a look at the website.  Unless you have some information establishing the validity and/or reputation of the website, I’d be a little cautious about how much you want to promote the WC and other rankings from this site.  While they say “We do not accept paid placements for our school rankings,” it appears to me that this is a site supported entirely by advertising fees from universities.  When you do a search for any of the degrees they show there (not the rankings, but a degree search), no matter what the degree, you get a list of for the most part for-profit and online universities, and very few of what most of us would consider more traditional universities whose quality and rankings are more universally recognized.

Here are the “criteria” they say they use to calculate the rankings for the 25 best online universities:

“We’ve relied on the following criteria to generate our online colleges and universities rankings: student satisfaction (as measured by graduation and retention rates), peer and instructional quality (as measured by acceptance rate and student-teacher ratio), affordability (as measured by tuition costs and availability of financial aid), and credibility (as measured by years of accreditation, reputation and awards).”

To be blunt, this is garbage.  Graduation and retention rates are not measures of student satisfaction, any more than acceptance rates and student-teacher ratios are measures of peer and instructional quality.

We can all agree there are problems with the U.S. News & World Report rankings, but they are at least considered reputable by most parties.  I would be cautious about trumpeting rankings from “Best Colleges” externally unless you know more about this organization (which I’d be interested in hearing).

Don Heller

There may be more substance to this website and their purported "rankings," but I certainly couldn't see it.  If you click on the "About" page for the website, this is all it says:

The Best Colleges reviews publicly available data and then produces independent ranking assessments of colleges in various disciplines. Our goal is to produce resources that are useful to prospective students. We recognize that no ranking system is perfect, and for this reason we recommend that our ratings be used only as a general guide when choosing a quality school.

We do not accept paid placements for our school rankings as this would defeat our primary goal of creating resources that students find useful.

They may not "accept paid placements" for their school rankings, but it appears that they do have quite a bit of advertising from many of the schools that do end up being ranked. And I'm guessing that they get click-through fees for students who go from their website to these schools.

I'd be happy to hear from anyone who has more information about this website.

Is it possible to make Georgia HOPE even worse?

The answer evidently is, "Yes."  The state of Georgia has managed to find a way to make the HOPE Scholarship Program even more inequitable than it already was (see two Civil Rights Project reports I co-edited with Patricia Marin in 2002 and 2004 for more on this).  NPR had a story this afternoon about the changes to HOPE, with a sound bite from me.  The state has upped the GPA requirement - to 3.7 - to receive a full tuition scholarship, and added the requirement of achieving at least a 1,200 on the SAT (or 26 on the ACT).  These changes are likely to mean that lower-income and minority students will receive less money, and upper-income and white students will be more likely to retain the full scholarship.  Not exactly a step in the right direction for a state that still has large gaps in college access and attainment between white and minority students.

When Tennessee was considering implementing its lottery-funded scholarship program back in 2004 - which, not coincidentally, was modeled on Georgia HOPE - it ran some simulations based on high school GPA and ACT scores.  The data showed that white students were approximately 10 times more likely than black students to have a GPA of 3.76 or greater and an ACT score of 26 or more.  Similarly, students from families with incomes of $100,000 and above were about 5 times more likely to have this level of achievement than were students from families with incomes below $36,000 (which was about the median income in the state at the time).  It is likely that the results in Georgia would be very similar.