Limited liability corporations were created in order to ensure that investors were only liable for the amount they had invested in the corporation and protected against loss of personal wealth. Investors typically have little involvement in the day to day functions of managing a corporation. The responsibility to protect the investors’ interest falls upon the executives who manage the corporation. Executives did not always act in the investor’s best interest. Investors searched for ways to compensate executives which would align with the investor interest. Traditionally, executives received wages and bonuses based on overall performance of a corporation which wasn’t always a win-win situation for both the executives and the investors. The rules of the game changed during the Clinton Administration, to curb excessive executive compensation, the Clinton Administration enacted a $1 Million limit on tax deductions for executive compensation (Partnoy 156). As a result, companies started to tie executive compensation to stock performance with stock options. It was initially thought that if the corporation’s stock performed well on the market the investor profited and so did the executive. However, the executives got greedy which resulted in the investors and the employees paying the price. Today, we have record unemployment level in America while, at that same time, executives maximize their profits to ensure healthy stock options. Executives are compensating stock analysts for biased recommendations, the Government is subsidizing corporations, and allowing outsourcing and insourcing of American jobs while the investor and the American worker suffers.
Prior to the 1990s, the average investor had faith in the stock analysts’ recommendations to provide fair, honest, and an unbiased assessment of a corporation’s stock price. However, with the invention of the internet, information became instantaneous and it changed how the investor viewed, researched and evaluated stocks. At the same time, “It became difficult for research analysts to add much value” to their recommendations “consequently, analysts faced pressure to add value in other ways: by helping investment bankers solicit business from the companies they covered” (Partnoy 285). This was a direct change from the analysts’ looking out for the investors’ best interest. In 1990, there were 15 times more buy recommendations than sell recommendations (Partnoy 286). Unknowing investors were fueling the Dot.com explosion. Analysts were reacting to the incentive system and profiting from recommendations. The investor was looking to amass considerable profits in the form of the next Microsoft stock. The eruption of technology IPOs exasperated the problem because they are difficult to valuate and the investor relied more on the analysts’ recommendations. Stock analysts would recommend full buy recommendations to pump up the price of the stock then the investor, along with those with inside information, would react and buy because of the recommendation. After the required 180-day lockout period before reselling, the insiders would dump the stock amassing large profits while those investors who did not have insider information generally lost. A large portion of the technology companies, were in fact, bankrupt within a few years after the 180 day lock-out period. The investor was not aware the rules of the game had changed and no longer were analysts acting in the investor’s best interest.
Excessive executive compensation continues to grow. As a result, employees’ are fighting harder than ever to maintain their current pay levels, benefits, retirement, and employment while executives are actively trying to minimize their overall labor costs. In 2003, CEO compensation has increased faster than the average worker’s compensation by a ratio of 300 to 1 compared to 42 to 1 in 1982. If minimum wage grew at this rate, the current minimum wage would be $15.71 per hour