by Deb Cupples | Reportedly, the Obama Administration is seeking more effective regulations on all sorts of things financially related, e.g., derivative trading, hedge funds, the so-called "shadow banking system," and executive pay at banks and public companies.
Nearest and dearest to me, as a public company shareholder, is the prospect of limiting executive pay -- which federal officials should have done in the early 2000's, after the wave of corporate scandals made it glaringly obvious that our system allowed execs to loot their shareholders' money pot (e.g., Enron, Adelphia, and Tyco).
The New York Times reports:
"The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said....
"One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.
"The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission." (NYT)
Halleluja!
Every company dollar funneled into an executive's personal bank account is one less dollar to spend on growing a company, paying off its debts, offsetting losses, or even giving dividends to us shareholders.
Over the past few months, we've been seeing some results from what amounts to company looting by executives -- all with the approval of the Board of Directors (which sets executive compensation packages).
Overpaying executives amounts to a massive redistribution of shareholder wealth. Period.
As an indicator of the growth of that redistribution of shareholder wealth, consider the massive increases in CEOs' pay compared to average non-managerial workers' pay:
- In 1970, CEOs averaged 25 times more than average workers.
- In 1990, CEOs averaged 90 times more than average workers.
- In 2002, CEOs averaged 143 times more than average workers.
- In 2006, CEOs averaged 364 times more than average workers.
Executives and managers make companies less valuable to shareholders by helping themselves to bigger and bigger pay packages -- even when the companies weren't doing so well. Merrill Lynch, Fannie Mae, AIG, and Enron are just five of many examples.
The large-scale funneling of shareholder dollars to a relative-few corporate managers has done more than decrease the wealth of us ordinary shareholders: it also has had ugly effects on our nation's economy.
Think about unemployment, for example. Every dollar in an executive or manager's personal pocket is one less dollar to pay productive employees -- who actually help companies grow.
Many public companies have been cutting their work forces over the past few years. Since December 2007, our nation has lost almost 5 million jobs (651,000 of those jobs disappeared in February 2009, alone). Our unemployment rate is now about 8.1%.
In October, I read about seven major public companies that were planning to cut their work forces by at least 10%. Those companies are listed in the table below, along with the 2007 pay for those companies' CEOs.
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| Company | CEO |
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. In short, the executives' compensation packages for 2007 likely exceed 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).
I couldn't help wondering how many jobs might have been saved if those companies' Boards had simply cut executive compensation packages and used the money saved to keep paying non-managerial employees.
Let's assume that the average non-managerial employee costs each company $100,000 a year (likely a high estimate).
Let's assume that each CEO actually deserves 25 times more money than the average employee: i.e., execs are worth $2.5 million a year.
How many non-managerial jobs could be saved if the companies listed in Table 1 simply cut their CEO's pay to $2.5 million a year? See Table 2 (below).
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| 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 |
Yes, just by cutting CEO pay to $2.5 million a year, those seven companies could have collectively saved more than 1,200 jobs for a year.
The news gets better, because CEOs are not the only managers diverting company dollars away from the task of saving (or creating) jobs -- which means that there are more managerial pay packages that could be cut in order to fund non-managerial jobs.
In 2007, for example, Goldman Sachs paid just its top-5 execs $324 billion (most of which was in the form of bonuses). That's just one year and a small fraction of the number of execs and managers that likely got compensation packages.
In 2006, Merrill Lynch funneled $5 to $6 billion to 2,000 employees just in the form of bonuses.
I could go on and on with examples, but my point is that executives should be prohibited from looting their shareholders' money pots.
It is be the job of each public company's Board of Directors to stop the looting. Obviously, many Boards have simply failed or refused to protect shareholders' interests by stopping the looting. Given that Boards set executive pay, it's apparent that many Boards have outright approved said looting.
Who's left to step in an prevent the virtual robbery of millions of Americans who own stocks -- hardworking people whose retirement and financial security depend on stock portfolios, mutual funds, or 401k's?
The same people who allow public companies the privilege of peddling their stocks to the public at large: that is, the folks running our federal government.
Long story short, I'm glad to see that the Obama Administration is talking about cleaning up the executive pay situation. I just hope that it's more than talk.
What concerns me are a few sentences from the New York Times article:
"The officials spoke on condition of anonymity because the regulatory plan was still being formulated and they did not want to upstage Mr. Obama or Treasury Secretary Timothy F. Geithner, who will describe the plan when he appears before Congress on Thursday."
The anonymous source "did not want to upstage Mr. Obama?" Then why did he or she blab to one of our nation's largest newspapers?
That's a bit like saying, "I don't want to hurt you" -- right before you punch someone square in the jaw.
I'm skeptical of anonymous sources. First, the guy who leaks without permission has no sense of ethics, which casts doubt on his credibility.
Second, if higher-ups instructed the guy to leak but to pretend he didn't have permission, then the higher-ups' aim is to deceptively manipulate the public -- which casts doubt on the higher-ups' credibility.
Neither contingency is good.
For now, we're stuck waiting and watching and ultimately seeing what the Obama administration and our representatives in Congress actually do. Here's hoping that their motives are good and their thinking is clear.
Memeorandum has commentary.
Other Buck Naked Politics Posts:
* Execs Made Millions While Driving Companies into Ditch
* Real Bonuses Based on Fake Profits
* Merrill CEO Redistributed Shareholders' Millions to Self
* AIG Execs Redistributed Shareholder Wealth to Themselves
* Lehman Execs Redistributed Shareholder Wealth to Themselves
* Cleaning up Political & Corporate Culture Could Help Economy
* Why are Republicans Attacking Alan Grayson?
* Citi Downgrades Wal-Mart over Possible Worker Gains but Ignores Executive Pay
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