by Deb Cupples | As our nation's economy spirals downward, I cannot help thinking about how our nation's political climate and corporate culture have contributed to the current crises.
Two specific issues leap to mind: 1) "mistakes" that government officials made when crafting the $350 - $700 billion Wall Street bailout plan; and 2) how executive pay can drain companies and destroy jobs.
Those two issues are in severe need of addressing if we hope to prevent future economic disasters.
The purpose of this year's $350 -$700 billion corporate bailout was to unfreeze credit markets by sending cash to banks so they would start lending money again.
Some bailout-fund recipients, however, chose to use the money for purposes other than generating loans. (NY Times) At the end of October, the Associated Press reported:
"[R]eports surfaced that bankers might instead use the [bailout] money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it." (AP)
Apparently, companies that received bailout funds were legally allowed to not use those funds to unfreeze credit markets and help our nation's economy.
Why? Because Congress and the Bush Administration (which includes Treasury Secretary Henry Paulson) either failed or refused to legally require companies that get bailout funds to actually use the money to generate loans.
Setting such a requirement would have been easy: a few sentences drafted by staff lawyers at Treasury or Congress were all that was required.
Can we chalk up the bill-drafting failures to human haste or tiredness or naivete? I doubt it.
Mr. Paulson was CEO of Goldman Sachs before becoming Treasury Secretary in 2006. He is savvy and knows how the folks running the banking firms operate.
Some representatives in Congress might not be the sharpest tools, but they have access to staff lawyers (as do Mr. Paulson and other Bush Administration officials).
Basic principle: if you give a guy money and don't contractually require him to spend it in certain ways, then he is not required to spend the money in certain ways. Period. End of story. First-year law students understand this.
I suspect that officials in Congress and the Bush Administration -- including Mr. Paulson -- also understand that principle.
The big question: why didn't they insert into the bailout bill some sentences requiring bailout-fund recipients to spend our tax dollars on generating loans and unfreezing credit markets?
The bailout plan started as a roughly 3-page Treasury Department proposal. If memory serves me, the first House bill (which was voted down) was about 100 pages. The final bill (which was passed) was 451 pages and reportedly chock full of riders.
In short, government officials were very busy adding thousands of sentences to the final bailout bill before both houses of Congress passed it.
If those officials had time and hand-strength to insert 300+ pages of stuff into the bailout bill, then they could have inserted sentences requiring companies that received bailout funds to spend that money on generating loans.
And yet, such sensible sentences are conspicuously absent from the bailout bill -- as absent as are sentences that would have ensured various forms of accountability.
If the omission of such sentences was accidental, then a whole slew of government officials and staffers should be replaced by competent people.
Executive Pay Drains Companies & Destroys Jobs
In November, our nation lost 533,000 jobs, followed by losses of 320,000 jobs in October and 403,000 jobs in September (USBLS) Yes, in just three months, our nation lost 1.2+ million jobs.
At the end of October, the New York Times reported that major companies were thinking about cutting jobs, including giants like Alcoa, Bank of America, Coca-Cola, General Electric, Goldman Sachs, Merck, and Xerox. [Bank of America and Goldman Sachs got a combined $25 billion in bailout funds from us taxpayers; General Electric got $3+ billion in federal government contracts in 2007, alone.]
Every dollar that flows into an executive's personal pocket is one less dollar for a company to spend on preserving non-managerial jobs or otherwise promoting the company's growth.
That said, how many employees' jobs could have been saved if those companies' Boards had simply cut executive pay?
Let's look at a few executive pay packages, which -- no matter how you slice them -- amount to a redistribution of shareholders' wealth.
2007 Salary, Bonus, Incentives,
Perks, & Stock Grants*
|Alcoa||Alain Belda||.....$12 million|
|Bank of America||Kenneth Lewis||........$17 million|
|Coca-Cola||Neville Isdell||.....$18.5 million|
|General Electric||Jeffrey Immelt||.....$19.3 million|
|Goldman Sachs||Lloyd Blankfein||.....$53.5 million|
|Merck||Richard Clark||.......$12 million|
|Xerox||Anne Mulcahy||.....$11.5 million|
* Total does not include stock options, because 1) execs pay something for them, and 2) stock option values are hard to calculate. The total also does not include deferred compensation or pension growth. Thus, the executives' actual compensation for 2007 likely exceeded the totals listed in Table 1. The total includes stock grants, because they represent a transfer of company wealth to an executive (i.e., the company could sell those stocks and keep the proceeds).
In short, many executives have massively redistributed shareholder wealth to themselves.
Lets assume that the average non-managerial employee costs each company $100,000 a year (likely a high estimate).
Let's assume that each CEO is actually worth 25 times the average employee: i.e., $2.5 million a year (another likely high estimate).
How many non-managerial jobs could have been saved if the companies listed in Table 1 had simply cut their CEO's pay to $2.5 million a year? See Table 2 (below).
|Company||$ Saved by CEO Pay Cut||# Jobs Saved|
|Alcoa||$9.5 million||95 jobs|
|Bank of America||$14.5 million||145 jobs|
|Coca-Cola||$16 million||160 jobs|
|General Electric||$16.8 million||168 jobs|
|Goldman Sachs||$51 million||510 jobs|
|Merck||$9.5 million||95 jobs|
|Xerox||$9 million||110 jobs|
Just by cutting the pay of seven CEOs to $2.5 million a year each, those seven companies could have collectively saved more than 1,200 jobs for a year.
The news gets better (in a twisted way), because CEOs are not the only executives and managers diverting company dollars away from the task of saving (or creating) jobs. In other words, more jobs could be saved if more executives' pay was cut.
For example, Goldman Sach's top five executives got $324 million in compensation in 2007. I don't know how much was in the form of stock options. Assuming that half of it were in stock options, then $162 million was directly transfered to Goldman Sachs' top five execs.
Under that assumption, if each of those five execs' pay had been cut to $2.5 million a year (a combined $12.5 million), Goldman Sachs would have had $149.5 million for non-managerial jobs. Simply by cutting the top-five execs' pay to $2.5 million a year each, Goldman Sachs could have paid nearly 1,500 non-managerial employees for a year.
Here's another example of how a board's spending decisions can destroy jobs: in 2006, Merrill Lynch spent $5 to $6 billion on employee bonuses.
Apparently, Merrill's executives and board members didn't believe in reinvesting company earnings in the company: i.e., paying off debts, financing growth, or saving money to cover future losses.
In September 2008, Merrill Lynch was in such bad shape that it negotiating to be sold off to Bank of America. A few weeks later, Merrill was slated to receive $10 billion in taxpayer loans via the bailout plan.
'Too bad for us taxpayers that Merrill hadn't kept the $5 - $6 billion (instead of spending it on bonuses), so that we could have spent fewer tax dollars bailing out that company.
Note: I'm not proposing a strict $2.5 million executive-pay limit; I chose that number to illustrate a point.
On the other hand, $2.5 million is not small potatoes. Even if the federal taxes ate up 60%, then take-home pay on a $2.5 million salary would be more than $80,000 per month.
The reason that many executives may find $2.5 million less than adequate is that executives have spent years persuading their compliant Boards to continually inflate executive pay.
If all companies deflated executive pay, the norms for executive pay would also deflate.
Yeah, I know. I too have heard the specious arguments about the need to pay executives egregiously well in order to attract and retain "talent."
Given how poorly so much of Corporate America's highly paid "talent" has performed during this decade, the attracting-talent argument doesn't seem to hold much water.
Despite highly paid "talent," for example, Enron and WorldCom filed for bankruptcy protection in 2001 and 2002, respectively. At the time, WorldCom's was the largest corporate bankruptcy in U.S. corporate history.
In September 2008, Lehman Brothers filed the new-largest bankruptcy in U.S. history. Lehman's "talented" CEO -- alone -- was paid $350 million during the eight years leading toward the bankruptcy (about $43 million per year). I don't know what Lehman's numerous other executives pocketed as the company's "talent" drove the company toward Chapter 11.
Over the past couple months, AIG had taken more than $150 billion in bailout funds (loans from us taxpayers). AIG paid one top exec $280 million during the eight years leading up to AIG's need for a massive bailout.
In 2007, the year leading up to the crumbling of Merrill Lynch, Merill's CEO John Thain was paid $83 million.
I could go on and on (and on) with examples of executive "talent" that caused or allowed their companies to suffer huge losses -- despite the enormous compensation packages that said "talent" received.
Public companies' shareholders should be up in arms over executive pay, because every dollar funneled into an exec's personal pocket is one less dollar that could instead be spent on making a company more profitable.
We taxpayers should also be up in arms -- especially given the more than $1 trillion we've committed to bailing out corporations whose woes have affected our nation's economy. The reason we taxpayers have committed money to bailing out big companies is that we figure it'll help our nation's economy.
One way for those companies to give back (i.e., to pitch in and actually help our economy) would be to continue employing people -- even better, to employ more people.
The figures in the two tables above are not exact, but they do illustrate my point: some of America's corporate giants do have money available to keep people employed and maybe enough to create new jobs.
One problem: the people making corporate spending decisions seem more interested in funneling shareholder dollars into their own pockets than in helping our nation's severely sick economy.
So much for phrases like "corporate responsibility," "corporate citizenship," and the "public-private partnership."
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