Bringing Overpaid Executives to Heel

by Dollars and Sense

From today's LA Times. Hat-tip to Danny Postel. The cover story in our Nov/Dec issue, Have the Rich Won?, makes a similar argument.

Bringing overpaid executives to heel

Power, not productivity, determines earnings. That's why new laws are needed to check the unfair distribution of the fruits of workers' labors.

By Moshe Adler | January 4, 2010

A recent Time magazine poll found that 71% of Americans who responded want the government to place limits on the executive compensation at firms that received bailout money. Yet accomplishing this task selectively is impossible to do.

The government did appoint a czar of executive compensation for these corporations, but he approved a $7-million salary/$3.5-million bonus plan for the head of AIG, 80% of which is now owned by taxpayers. Few workers, executives included, would agree to work for less than the going rate. Executives are simply used to earning millions of dollars, and there is little that either the czar or shareholders can do about it unless Congress limits all executive compensation. But the chance of such legislation passing is slim.

Why is limiting executive compensation so difficult? Because executives have a seemingly unassailable argument -- market forces -- that University of Chicago professor Steven Kaplan defended in an October debate: "Market forces govern CEO compensation. CEOs are paid what they are worth."

Of course, market forces are cited not only to justify outsized compensation for executives but also poverty wages for workers. Textbooks claim that minimum wage laws and union wages create unemployment. Just what are these market forces, and should we let them determine executive compensation and wages?

When British economists David Ricardo and Adam Smith examined this question 200 years ago, they concluded that what a person earns is determined not by what the person has produced but by that person's bargaining power. Why? Because production is typically carried out by teams of workers, managers and machines, and the contribution of each member cannot be separated from that of the rest. A driver and a bus, for example, generate $100,000 of income a year. The driver is paid $25,000. Is this because the driver had transported 10 of the passengers without the bus while the bus had transported 30 of the passengers without the driver? The driver's pay is so small only because the driver is so weak at the bargaining table.

It was Smith who explained that the bargaining power of each party is determined by the laws that the government passes and the way that it enforces them, and that, as a rule, the government sides with employers against employees. He was particularly concerned with anti-unionization laws. Had he witnessed the largesse that boards of directors are permitted to offer executives, and the government's behavior toward executives in the current crisis, he probably would have added that the government also sides with executives against shareholders and taxpayers.

Despite the logic of Ricardo and Smith's explanation that it is power, not productivity, that determines what people earn, the notion that people earn what they "deserve" persists. It dates to the Haymarket riot of 1886 in Chicago -- in which police and labor protesters clashed and several policemen and demonstrators were killed -- and the labor unrest that followed. Concerned about this unrest, John Bates Clark, a Columbia University professor, warned in an 1899 book: "The indictment that hangs over society is that of 'exploiting labor.' If this charge were proved, every right-minded man should become a socialist."

It was thus with a clear political agenda that Clark took it upon himself to prove that the charge of exploitation of workers was dead wrong. Clark's "proof" was to ignore the fact that production is carried out by teams and that individual contributions cannot be measured. He simply declared that the contribution of each individual worker and each machine could be measured, and that the earnings of either workers and executives or machines are simply the values of these contributions.

In this view, if the government were to raise wages by law, employers would have no choice but to fire workers, because no employer can pay out more than the worker puts in. And if the government were to set limits on executive compensation, the bright and the talented would choose to work less or limit the level of their performance.

Evidence that Clark's theory is wrong -- that production is carried out by teams and that astronomical compensation is not a requirement for good performance -- can be found everywhere. In 1941, Wassily Leontief, a Nobel Prize-winning economist, tried to alert economists to the fallacy of Clark's theory. But Leontief, like Ricardo and Smith, was ignored. And Clark's tale that earnings are determined by productivity alone is still being taught around the globe.

Corporate executives take a different approach: picking the argument that suits them. When it comes to their workers' wages, Clark's theory rules: The wage of each worker is equal to the value of his or her product, and raising wages will cause unemployment. When it comes to the executives' own compensation, however, they hide behind the idea that an individual's contribution can't be measured. So even when the corporations they run lose big and their stocks decline, they still collect millions in pay. Executive compensation is now so large that executives' work effort no longer has any relation to the level of their compensation.

Adam Smith got it right: The remedy for the rule of power is the rule of law. We need new laws to check the unfair distribution of the fruits of our labor. One such law could set a maximum ratio at any given company between the highest executive compensation and the lowest worker's wage. Another could set a minimum ratio for the division of income between labor and shareholders. Still another could raise the minimum wage and tie it to the median wage, which would make the minimum wage a consistent living wage.

Overpaid executives take more than their fair share and leave too little for the rest of us, threatening our health -- and that of society.

Moshe Adler teaches economics at Columbia University and is the author of "Economics for the Rest of Us: Debunking the Science That Makes Life Dismal."

Read the original article.

Labels: Adam Smith, David Ricardo, executive pay, Moshe Adler

 

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1/04/2010 01:43:00 PM 0 comments

 

Lose Money Get Raise

by Dollars and Sense

The New York Times has a nice chart showing how CEOs from public companies are making out like bandits with massive pay raises even while their bottom lines plummet.

Some tidbits: ArcherDanielsMidland CEO Patricia A. Woertz saw her compensation jump 397% to $15 million from 2007 to 2008 while profits fell 17%.

Data giant EMC's CEO Joseph M. Tucci a 148% raise in 2008 to $11.7 million while the company lost money.

On a similar note, Paul Krugman laments that compensation for investment bankers is zooming back up to levels from pre-meltdown days. As he notes:

there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.

...

One can argue that it's necessary to rescue Wall Street to protect the economy as a whole - and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it's dangerous. Why, after all, did bankers take such huge risks? Because success - or even the temporary appearance of success - offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we're seeing similar rewards offered to people who can play their risky games with federal backing.

So what's going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren't plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They're making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it's eat, drink and be merry, for tomorrow you may be regulated.

--d.f.

Labels: ceo pay, compensation, Corporate Swindles, Daniel Fireside, executive pay, Paul Krugman

 

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4/27/2009 03:53:00 PM 0 comments

 

What Harvard Money Managers Make

by Dollars and Sense

As we reported earlier, Harvard expects to lose $11 billion, or 30% of its endowment (just what they lost is equivalent to what Iceland received in bailout funds). The budget for the entire city of Boston is $2.4 billion.

Although a lot of money was lost, the financial geniuses who run the fund (officially the Harvard Management Corporation) have pocketed a pretty penny.

Here are the annual compensation packages for the top six managers (fiscal years July 1 to June 30th):

2003 $107.5 million (source) (note: alumni outrage at the compensation from this year prompted the imposition of salary caps, although even then, as seen below, the caps are still quite generous.)

2004 $78.4 million (source)

2005 $56.8 million (source)

2006 $13.3 million (source) (note: total payout is lower because of management turnover and outsourcing of some fund oversight.)

2007 $22.3 million (source)

2008 $26.8 million (source)

The total for these six years for the top six money managers (HMC does not report the compensation of the other employees) was $305.1 million.

Interestingly, the top managers of Yale's endowment, which has posted similar outsized returns, earn about one tenth of their counterparts at Harvard.

Even with the drop to a total value of $20-some billion that is expected to be reported in July, the endowment represents a massive amount of capital controlled by a single non-profit, tax-exempt entity that receives hundreds of millions in taxpayer grant money.

--df

Labels: Daniel Fireside, executive pay, Harvard University, University endowments

 

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4/15/2009 11:30:00 AM 0 comments

 

AIG Head Insists On Giving Millions In Bonuses

by Dollars and Sense

AIG, the company that has received more bailout billions than any other institution ($140 billion and the meter is still running), is forging ahead with its plan to dole out over $700 million in bonuses and "retention pay" to the "indispensable" people in charge of its financial products operation.

Despite a reported angry phone call from Treasury Secretary Timothy Geithner, AIG CEO Edward Liddy claims that his hands are tied lest his top talent leave the firm in search of better offers.

"I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," Liddy wrote in a letter to Geithner, as reported in the Washington Post. "Our competitors understand how valuable our top executives are, and we are acutely aware that they would like to siphon off our most talented leaders," he continued.

Apparently the prospect of AIG geniuses finding work at other financial institutions deemed "too big to fail" (read "will demand taxpayer bailout after looting ceases") convinced Geithner to forget the whole thing.

Incidentally, the Post notes that if the Treasury had decided to properly nationalize the company instead of just taking on an 80% stake as a silent partner, the government could have canceled all such payments and unilaterally rewritten the the company's employment contracts.

Labels: AIG, Corporate Swindles, corporate welfare, executive pay, Timothy Geither, Treasury Department

 

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3/14/2009 11:47:00 PM 2 comments

 

CEOs Not Worried About Pay Caps

by Dollars and Sense

As they say, it's good to be a Bankster.

From the WSJ

President Barack Obama's crackdown on Wall Street pay contains loopholes, and may have limited impact in restraining compensation, according to some executive-pay consultants and management attorneys.

Some compensation professionals already are pointing out potential holes in the rules, including tactics such as changing executives' titles or rearranging pay packages. Just as past attempts by the government to restrict executive pay largely backfired, these people warn, the new curbs also may have unintended consequences.

The plan, announced Wednesday, includes a $500,000 cap on annual compensation for senior executives of companies that receive future "exceptional" government aid. Additional compensation would have to be paid in restricted stock or similar long-term incentive arrangements, which the executives could cash in only after the government is repaid, with interest.

Other recipients of future federal bailout money would have to place tougher limits on severance packages and disclose luxurious perks, such as the use of company jets. Annual compensation above $500,000 at these companies would be subject to a nonbinding shareholder vote.

"The mix of transparency and accountability is powerful and strikes the right balance to allow banks to continue operating effectively while operating under common-sense guidelines that rein in excessive compensation," a Treasury Department official said Thursday.

Many applauded the moves as a useful step to curb Wall Street compensation practices that may have led to excessive risk-taking. But some critics identified weaknesses, suggesting the restrictions be retroactively applied to companies that already have received federal bailout cash. They noted that the most stringent restrictions likely would affect only a few firms; others could avoid some of the curbs by putting extra pay to a shareholder vote.

Some said the plan doesn't limit total compensation, because it allows companies to boost awards of restricted stock.

"I am fearful that companies will look at this as an opportunity to grant more restricted shares and stock options to executives who already have an abundant amount of equity," said Jesse Brill, a securities and compensation lawyer who is chairman of CompensationStandards.com, an advisory Web site. He would prefer barring executives from cashing in stock until age 65 or two years past retirement to encourage long-term decision making.

Michael Kesner, head of compensation consulting at Deloitte Consulting LLP, worries the plan allows executives to claim restricted-stock awards once the company pays back the government, and doesn't require companies to tie those awards to operating results or share-price gains, as many companies now do.

"They're actually saying we don't care about performance," Mr. Kesner said.

Others said the preliminary restrictions released by the Treasury Department are overly vague. For example, the $500,000 annual pay limit applies only to "senior executives." James F. Reda, a New York compensation consultant, said companies could give certain executives lower titles or assign them to head subsidiaries.

"Now you're going to have executives ask not to be called a senior executive," said Steven Hall, a New York pay consultant.

Full story here.

Labels: executive pay, Wall Stree bonuses

 

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2/24/2009 04:57:00 PM 0 comments

 

Bonuses--Not Wages--Sticky Downwards?

by Dollars and Sense

From The Times:

The Times
January 29, 2009
Wall Street bankers keep two-thirds of bonuses
Christine Seib in New York

Bankers in America's financial heart saw their bonuses fall by only a third last year, despite the financial devastation wreaked on Wall Street, it emerged yesterday.

Thomas DiNapoli, the New York State Comptroller, said that Wall Street's bonus pool fell by 44 per cent to $18.4 billion (12.9 billion pounds) last year, the biggest percentage fall in 30 years. However, because 19,200 people were sacked from their financial services jobs in 2008, there were fewer people to share in the pool. This meant that the average bonus was down 36.7 per cent, at $112,000.

Mr DiNapoli forecast a tough 2009 for the street's workers. "The industry is still continuing to write off toxic assets. It's painfully obvious that 2009 will be another difficult year."

Richard Lipstein, managing director at Boyden Global Executive Search, said that many of Wall Street's redundant employees had left the financial sector altogether. "Lots of people are making mid-career changes," he said.


Bank of America (BoA) is expected to tell its bankers today that their bonuses will be deferred for at least a year. The new policy, likely to be announced when BoA informs employees of their 2008 bonuses, will mean that payments of $50,000 or more will be held back until 2010.

The bank is at the centre of a row over bonuses, after John Thain, the ousted Merrill Lynch chief executive, rushed through up to $4 billion worth of incentives for staff in the weeks before the bank’s takeover by BoA.

Andrew Cuomo, the New York attorney-general, has subpoenaed Mr Thain as part of his inquiry into bonus payments by banks that have received US government bailouts. BoA's board last night expressed its support for Kenneth Lewis, the bank's chief executive, who has been under fire for his handling of the Merrill acquisition.

Read the rest of the article

Labels: bailout, executive pay, financial crisis

 

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1/28/2009 10:38:00 PM 0 comments

 

$1.6 Billion of Bailout Went to Pay Top Execs

by Dollars and Sense

According to a study by the Associated Press, $1.6 billion of the federal bailout funds went into the pockets of top bank executives. Even institutions that have cut the salaries and bonuses of top corporate officers have awarded massive compensation packages, despite having logged billions of dollars in losses.

Some highlights:

The total amount given to 600 top executives of financial institutions that have received federal bailout money would have covered what many of the 116 banks received in taxpayer funds.

Banks that received federal bailout money paid their executives an average of $2.6 million in salary, benefits, and bonuses.

The top five executives of Goldman Sachs took home $242 million last year, including $54 million for CEO Lloyd Blankfein. The company has received $10 billion in taxpayer money, and has posted its first quarterly loss since going public in nine years ago. Reacting to public outrage over executive compensation, the executives have decided to forgo their bonuses this year, and live off a mere $600,000 salary (no word yet on any plans to refund last year's bonuses).

The rest of the sad story can be found here.

Labels: executive pay, Golden Parachutes, Goldman Sachs, TARP program, taxpayer ripoff

 

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12/21/2008 09:32:00 PM 0 comments

 

Not Just an American Problem

by Dollars and Sense

From today's Guardian:


Rescued bank to pay millions in bonuses

RBS 'making monkeys' out of the government, says Vince Cable

Simon Bowers
The Guardian,
Saturday November 1 2008


Royal Bank of Scotland, which is being bailed out with 20bn pounds of taxpayers' money, has signalled it is preparing to pay bonuses to thousands of staff despite government pledges to crack down on City pay.

The bank has set aside 1.79bn pounds to cover "staff costs" - including discretionary bonuses - at its investment banking division for the first six months of the year alone. The same division caused a 5.9bn pound writedown that wiped out the bank's profits for the same period.

The government had demanded that boardroom directors at RBS should not receive bonuses this year and the chief executive, Sir Fred Goodwin, is walking away without a pay-off. But below boardroom level, RBS and other groups are preparing to pay bonuses to investment bankers who continue to generate profits.

Read the rest of the article

Labels: executive pay, financial crisis bailout, Liberal Democrats, Royal Bank of Scotland, Vince Cable

 

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11/01/2008 11:39:00 AM 0 comments

 

Demand from New Admin: Claw This Back!

by Dollars and Sense

From Reuters:

U.S. banks owe billions in pay, pensions to executives: report

Fri Oct 31, 2008 6:36am EST

(Reuters) - Troubled financial giants getting cash infusions from the U.S. Federal Reserve owe their executives more than $40 billion for past year's pay and pensions as of the end of 2007, the Wall Street Journal said in an analysis.


The sums owed are mostly for special executive pensions and deferred compensation, including bonuses, for prior years, said the paper.

The Journal also cited investment banks Goldman Sachs Group Inc, which owes its executives $11.8 billion; JPMorgan Chase & Co, which has a payment of $8.5 billion pending; and Morgan Stanley, which owes between $10 billion and $12 billion to executives.


Criticism of executive pay has gained momentum this election year with presidential candidates from both major parties lashing out over rich payouts for CEOs of companies that have suffered big losses in the U.S. housing market bust and ensuing credit crisis.


As a result, the government has sought to rein in executive pay at banks getting federal money as part of the Bush administration's $700 billion bailout program.


But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces, the Journal said.


For instance, nine banks paid out an estimated $50 billion of bonuses in 2007, based on the total compensation expense for the companies and assuming that for investment banks about 60 percent of total compensation was allocated for bonuses, and for commercial banks about 20 percent went to bonuses.


Goldman Sachs, Morgan Stanley and JP Morgan Chase did not immediately return calls seeking comment.


(Reporting by Shradhha Sharma in Bangalore; Editing by Kim Coghill)

Labels: executive pay, financial crisis, financial crisis bailout, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Reuters, Wall Street Journal

 

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10/31/2008 11:27:00 AM 0 comments

 

Bernie Sanders on the Senate Bill

by Dollars and Sense

Bernie Sanders, the Socialist senator from Vermont, joined 24 others in voting against the bailout bill Wednesday night. He had earlier submitted an amendment that would have established a five-year, 10 percent surtax on families with incomes of more than $1 million year and individuals earning over $500,00 to raise $300 billion to help bankroll the bailout. The amendment was set aside in a voice vote.


In a statement on his web page, Sanders noted

"This bill does not deal with the absurdity of having the fox guarding the hen house. Maybe I'm the only person in America who thinks so, but I have a hard time understanding why we are giving $700 billion to the Secretary of the Treasury, the former CEO of Goldman Sachs, who along with other financial institutions, actually got us into this problem. Now, maybe I'm the only person in America who thinks that's a little bit weird, but that is what I think."

Labels: bailout, Ben Bernanke, Bernie Sanders, economic meltdown, executive pay, financial crisis, financial crisis bailout, Goldman Sachs, Henry Paulson, income inequality, mortgage meltdown

 

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10/01/2008 09:51:00 PM 1 comments

 

Companies Tap Pension Plans To Fund Executive Benefits

by Dollars and Sense

Excellent reporting on the front page of today's WSJ:

Companies Tap Pension Plans To Fund Executive Benefits

Little-Known Move Uses Tax Break Meant For Rank and File

By ELLEN E. SCHULTZ and THEO FRANCIS
August 4, 2008; Page A1

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.

The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.

Read the rest of the article.

Labels: executive pay, pensions, Wall Street Journal

 

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8/04/2008 02:26:00 PM 0 comments