Thursday, December 11, 2008


Are Corporate Fat Cats Undermining America’s Competitiveness?
Published: December 3, 2006
By Kathy Masera

Toward the end of the 19th century, American workers and consumers were victims of the robber barons – greedy, ruthless capitalists who amassed incredible wealth by exploiting labor and a lack of government regulation. It was a time of monopolies and other anti-competitive business practices. The age of Carnegie and Rockefeller certainly comes to mind once again as salaries in the executive suites across America spiral out of control.

However you choose to characterize it, there is no sugarcoating the fact that many senior executives in both the public and private sectors are taking home obscene amounts of money. According to a report by the Economic Policy Institute, the average American CEO’s pay is 821 times that of a minimum-wage worker (in 1978 the multiple was 78). Put another way, the typical CEO makes more in three hours than a minimum-wage worker earns in an entire year.

In this era of corporate cost-cutting, large-scale layoffs, disappearing pensions and an increasingly competitive global marketplace, it would seem that executive salary restraint should be the order of the day. Unfortunately, most signs are pointed in the opposite direction. A recent report by Mercer Human Resource Consulting found that average annual compensation for those running the top ten businesses, based on shareholder returns, ballooned 51.3 percent to $10,229,218. Stock options further inflate the picture, with CEOs, on average, holding another $10 million in unexercised options.

As new revelations come to light, there seems to be no end to the gall and greed of some US executives. The surreal headlines are starting to read like an installment of Ripley’s Believe It or Not. Examples abound.

In November, two separate studies on CEO pay both named Barry Diller, chairman and chief executive of IAC/Interactive, the Internet and home shopping channel, as the most overpaid executive. Diller raked in $469.7 million (including his take from IAC spinoff Expedia stock options) despite lackluster company performance that analysts say does not warrant such compensation. One wonders how any level of performance, no matter how spectacular, could possibly warrant such compensation.

Perhaps we should ask America’s billion-dollar CEO, William McGuire of Minnesota-based insurer UnitedHealth, who was awarded $1.6 billion in stock options. Even the California Personnel Retirement System (CalPERS), which holds 6.5 million shares of the company, couldn’t stop the gravy train. Over CalPERS objections, UnitedHealth upheld its decision to escalate executive largesse to record levels. And what did the company get for its investment? McGuire was forced to resign as CEO in October amid allegations that many of his options were illegally backdated. "A money-grubbing scheme to wring even more money from an already generous pay package," observed Rich Duprey on The Motley Fool’s website. At 57 years old, McGuire will retire from UnitedHealth with a $6.5-million severance payment and $5.1 million a year for life.

No wonder health insurance is so expensive.

But Diller and McGuire are just two competitors in a crowded field of money-bag marathoners.

Consider Lee Raymond, one of the best-paid CEOs in America before he was eclipsed by McGuire. In 13 years with Exxon, he received $686 million in total compensation, and departed with a severance package worth $400 million. The man made more in a day ($202,958) than most Americans make in four or five years. How could anyone argue that Raymond was worth over $25,000 an hour?

There’s no question that Exxon has been highly profitable. But for some bigwig payoffs, profits are beside the point. Scott McNealy, co-founder and former CEO of Sun Microsystems, averaged $13.3 million a year over a six-year period during which his company’s annualized return was a negative 31.5 percent.

Even executives who hoodwink their own company do well in today’s environment. Consider Radio Shack executive David Edmondson, who was fired earlier this year for lying on his resume. Sure, he was dismissed, but he managed to pocket $1 million and change on his way out. If it took him two days to fabricate a resume, his payday made that creative writing project worth about $62,500 an hour.

Alarmingly, the public sector is not immune to the current climate of unconscionable avarice. The executive payroll scandal embroiling the University of California now totals over $870 million. The money went for extravagant remodeling projects (including a $30,000 dog run), overly generous severance packages and a wealth of unauthorized bounty, courtesy of California taxpayers.

So startling are the university's secret pay deals that even state legislators are astounded. "It’s embarrassing," Republican Sen. Abel Maldonado of Santa Maria, told a reporter. "There is no accountability. They are violating the public trust."

Entitlement Mentality

Doubly disturbing is the fact that executive fat cats dismiss any questioning of their compensation as nothing more than ignorant whining from the unwashed masses. They insist that they are paid what they’re worth, and they are worth all they can get. US Treasury Secretary John Snow endorses the payscale process as part of an "aspirational" star system. "Do I trust the market for CEOs to work efficiently? Yes. Until we can find a better way to compensate CEOs, I’m going to trust the marketplace," Snow told the Wall Street Journal. This from the former chief executive of railroad company CSX Corporation, who pocketed over $100 million while presiding over a decline in CSX stock value and a company performance that described as "middling at best."

So expect the chasm to widen between cubicles and corner offices. Because America’s CEOs are reassuring each other that they are entitled to millions if not billions, regardless of their company’s performance.

Entitlement, as we are frequently reminded by those in charge, is a dangerous mindset – like people on welfare who often come to expect something for nothing. Has the epidemic of entitlement finally trickled up to the executive suite?

Double Standard

Certainly these payroll-padding employers, who tell American workers that they should expect to earn less in a global economy, need to apply that global argument to themselves. At a time when the average CEO in America is making 430 times as much as the average worker, how is it that German CEOs make only 13 times more than average, while the ratio in Japan is 11 to one. If we are to make America more competitive in the global economy, shouldn’t that initiative start at the top with some serious downsizing of executive compensation?

There can be no doubt that America is made weaker by this corporate raiding of the public trust. Think of the jobs that are off the table as a result: For every million dollars awarded to a single executive, 25 people could have jobs earning $40,000 per year. A billion dollars could employ 10,000 people, each earning $100K a year. Even for those who haven’t lost their jobs, is there any doubt that with more responsible pay policies, Exxon could cut the cost of gasoline, UnitedHealth could offer more affordable medical coverage, and the UC system could have reduced some of those tuition hikes?

When the people in charge would rather exploit the status quo than broker an equitable solution, quick change is unlikely. The current crop of capitalists without conscience act as if they alone produce the results of their workers’ labor, when in fact their contributions tend more toward manipulating markets and buying political influence. If they’ve built anything, it’s most likely another vacation home, probably offshore.

At least the robber barons of 100 years ago contributed to the advancement of society by creating major industries that provided the platforms for America’s 20th Century emergence as an economic superpower. They also left a legacy of endowments, public facilities and educational institutions that enriched the entire populace. Banking magnate JP Morgan became a prodigious philanthropist who created 2800 free libraries worldwide. He espoused that "the man who dies rich dies disgraced."

Fortunately, some powerfully positive role models can be found in two of today’s richest Americans. Microsoft founder Bill Gates and investor Warren Buffet, who earned their money the old-fashioned way, are giving billions toward the betterment of the world.

It’s worth noting that the abuses that occurred during the era of the robber barons eventually brought about many vital reforms and controls on our free-market economy that once seemed unimaginable. Time will tell if history is about to repeat itself.

Kathy Masera is the CEO and Publisher of California Job Journal.

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