Executive Pay and Its Effect on the Economy

[NorthSideSox72]

Balta posted a WSJ article that mentioned executive compensation, and its obscene levels. The increases, even on a net basis, that we are seeing for high level execs nowadays are just so many multiples over everyone else that's getting ridiculous.

 

Here is a topic for discussion - how do you address this, politically? The concept behind the free market stance on the matter is that the equities markets should keep this in check, because gaudy executive pay takes money right off the top and therefore depresses profits. Also, Boards of Directors of publically traded companies should be part of the controls. But I think its obvious these checks and balances aren't getting it done. The markets are far too derivative (as dividends and A-shares are so much less relevant to pricing) and predictive (algorithmic trading and super-advance analysis) now to penalize companies, not to mention that the obscene salaries are now an expected norm. And these Boards are often made up of company officers, thus defeating that particular check.

 

So what can be done? I for one would love to see someone start a mutual fund targeting companies that keep executive pay under control. In theory, these companies will be more profitable, all else equal. That could create a small buck to the trend, but not enough to do a lot in the big picture. Anyone have any other suggestions?

[jackie hayes]

So what can be done? I for one would love to see someone start a mutual fund targeting companies that keep executive pay under control. In theory, these companies will be more profitable, all else equal. That could create a small buck to the trend, but not enough to do a lot in the big picture. Anyone have any other suggestions?

Not true. Because of options compensation & bonuses, the companies with the highest paid executives are often the ones with the largest equity gains. (Profitability is another question, but of course a fund wouldn't care about that.) I don't say this to be a jerk, but your fund idea is a nonstarter.

 

The only role I can imagine for policy is limiting cross-board influences. There may be a you-scratch-my-back-and-I'll-scratch-yours effect when the board knows that the ceo knows people on their board, or when your law firm serves his friend's firm, etc. But that's something that's awfully hard to police.

 

To be honest, I think the best answer is merely a certain social ethos. Look at Japan, hardly a 'socialist' economy, which enjoys relatively minute inequality (and has for a very long time). The US has never looked like that, but it's been closer to that than it is today. It's a tough thing to legislate, though.

[NorthSideSox72]

Not true. Because of options compensation & bonuses, the companies with the highest paid executives are often the ones with the largest equity gains. (Profitability is another question, but of course a fund wouldn't care about that.) I don't say this to be a jerk, but your fund idea is a nonstarter.

 

The only role I can imagine for policy is limiting cross-board influences. There may be a you-scratch-my-back-and-I'll-scratch-yours effect when the board knows that the ceo knows people on their board, or when your law firm serves his friend's firm, etc. But that's something that's awfully hard to police.

 

To be honest, I think the best answer is merely a certain social ethos. Look at Japan, hardly a 'socialist' economy, which enjoys relatively minute inequality (and has for a very long time). The US has never looked like that, but it's been closer to that than it is today. It's a tough thing to legislate, though.

I understand what you are saying about compensation by options or discounted stock purchase, but that doesn't necessarily translate to equity gains at all. Those purchases are generally done off-market, purchased in bulk over time then compensated to the buyers. Yes, that information (inside trades, option coverage, etc.) is indeed reported, and yes, I'm sure brokers see that. But they also know its no longer a huge factor in determining stock strength, because its now so commonplace for these large purchases and large option grants to occur for executives at all firms regardless of profitability. And since price gain is now the far-and-away primary factor for making money off stocks (as again, dividends continue to become the exception rather than the rule), and those options and bulk in-company purchases are not seen as market-moving indicators, they won't translate to much equity gain. Those cheap-strike options, discounted stock purchases and outright stock grants are just back door salary.

 

I could swear I saw an article in WSJ a while back pointing this out as well, but I think its behind their online wall now. I'll see if I can find it. It also mentioned the other side of the coin that you brought up.

 

I think you are probably right about a change in social structure being needed, but as you say, its tough to legislate (not to mention a process slow as molasses, if it ever even occurs). Cross-pollenation of company boards COULD be legislated, if Congress so desired. I somehow doubt they would though, unless the public groundswell was quite huge.

[Balta1701]

I think that the biggest problem in this whole matter is the fact that executive compensation seems to my eyes to have become completely divorced from either the economic situation or the performance of the company.

 

It seems that almost every week, if not more often, there's another article out there about some company taking draconian steps to cut benefits or pay at the level where the middle-class used to sit. Last week's great example was Circuit City firing 3500 employees because they were too highly paid and allowing those same employees to re-apply for their former jobs at lower salaries.

 

But meanwhile, the people at the top never, ever, ever seem to have to share in these hardships. At company after company, we see executives under who's management the situation of the company has become worse, not better. Employees at lower levels get hammered, stock values dip, the company outsources half its workforce, the company runs losses for a year or two, the economy dips into recession, etc., but what happens at the executive level? These same companies cut multi-million salaries, and tens-of-millions of value in options and severance packages regardless of performance.

 

It is my belief that one of the key reasons why this has happened is that large corporations have these days moved into situations where they are just run by cronyism, rather than by people who earn the position. A CEO of one company or a well-connected individual gets put on the board of several companies, and he votes for all his friends to receive higher compensation packages so that a few years down the road, those same people will hire him as a CEO or vote him a higher salary package. Therefore, at the top levels in the corporate world, some significant amount of accountability seems to have been lost.

 

My fixes? Well, naturally I don't have a perfect one, and half the people here are going to hate one of them...but first, I create a new tax bracket for people making something like $1-2 million a year, and raise the tax rate in that bracket. And beyond that, step back some of the other tax cuts that have been made that strongly favor the highest earning shareholder/option holding class. Make all stock options taxable and force them to be taxed at the time they are issued, instead of allowing execs to cash them in at the lowest prices to reduce the tax bill (as a ton of them did right after 911 when the market was hammered). Re-enstate the taxes on dividends. And come up with specific tax penalties for specific actions, such as reincorporating overseas to avoid U.S. tax laws.

 

Beyond that, there is reform within the corporate system that might help. You'd hear screaming from executive boards, but I think the more democracy we force into these corporations, the better. Give shareholders more control over executive names and executive compensation packages. Allow shareholders to vote as to whether or not execs have earned their salary and compensation packages. Don't just have the voting forms be "Do you approve or disapprove of this whole group of people" as it currently often is now.

 

Don't misunderstand me here...not all executives are a problem, and not all exec compensation is a bad thing. If a guy takes over as CEO of a company, triples the stock price, is a good corporate citizen, and does a fine job overall, there is nothing wrong with making him a rich man (to a point). But that is not the issue here, to my eyes. The issue is everyone else other than that guy, who are mucking up the system for the few actual good guys up there.

[NUKE_CLEVELAND]

This is how I see it. CEO's of companies have a difficult job by any measure and are well paid for it. As far as I'm concerned a company can pay whoever it wants whatever it wants. Those who play professional sports get paid at least as much as the top-tier CEO's and instead of being responsible for thousands of employees and the well-being of a company, the only thing they are responsible for is a game.

 

Simplistic view of things? Perhaps. But I don't hear people howl nearly as much about player salaries as I do about CEO salaries.

[Balta1701]

Simplistic view of things? Perhaps. But I don't hear people howl nearly as much about player salaries as I do about CEO salaries.

Dude, you really don't pay much attention to sports media, do you?

 

(Actually...the way today is going, you probably should avoid it for a day or so)

[NUKE_CLEVELAND]

Dude, you really don't pay much attention to sports media, do you?

 

(Actually...the way today is going, you probably should avoid it for a day or so)

 

 

It's been a really annoying day all the way around for me. The Sox home opening disaster was just the cherry on top of a real s*** sundae.

[NorthSideSox72]

My fixes? Well, naturally I don't have a perfect one, and half the people here are going to hate one of them...but first, I create a new tax bracket for people making something like $1-2 million a year, and raise the tax rate in that bracket. And beyond that, step back some of the other tax cuts that have been made that strongly favor the highest earning shareholder/option holding class. Make all stock options taxable and force them to be taxed at the time they are issued, instead of allowing execs to cash them in at the lowest prices to reduce the tax bill (as a ton of them did right after 911 when the market was hammered). Re-enstate the taxes on dividends. And come up with specific tax penalties for specific actions, such as reincorporating overseas to avoid U.S. tax laws.

 

Beyond that, there is reform within the corporate system that might help. You'd hear screaming from executive boards, but I think the more democracy we force into these corporations, the better. Give shareholders more control over executive names and executive compensation packages. Allow shareholders to vote as to whether or not execs have earned their salary and compensation packages. Don't just have the voting forms be "Do you approve or disapprove of this whole group of people" as it currently often is now.

 

I think you made some good points, but I think some of your suggested fixes won't really work.

 

Taxing options at the time of grant is highly problematic. An option does not have any specific value, even at an unrealized level. How do you value an option prior to exercise? Do you value it based on theoretical immediate exercise? Or projected price outside the constrained sale timeline in the tax laws? Your valuation will be highly derivative and pretty much a wild guess. What happens if the value in your method changes over time? Another problem with taxing options on grant is that you are then doing something that is almost never done in the tax code - taxing people on monies or valuation that they have not yet realized. Its like taxing someone for forward income, before they receive it. Doesn't that seem like a bad idea?

 

As for new taxes for the uber-high bracket, there is nothing per se wrong with that, but I certaintly don't agree with it. I don't see how it will do a darn thing to stop executive pay from being that high. If anything, it might even do the opposite. All you are doing there is redistribution of income. I don't think the answer to the equation is to let them make that money but then take some away. I'd rather use a business-focused solution of some kind and not have the salaries be so exorbitant in the first place.

 

As far as democracy on Boards, I do tend to agree that more can be done there. I'm not sure I'd call it democracy, but, I certainly think that laws could be written to segregate boards from the company personnel. They are far too entangled. For publically traded corporations, the law can specify something like... no one on the board can be current or recent former officers of the firm, nor can the board's salary be in any way variable based on compensation within the firm. Or something like that, with a lot more complicated wording.

 

Another solution is more information, and that is already underway. Total compensation for top executives is now (or soon will be) available to the public, and now will include all types of compensation. That is a small step in the right direction.

[southsider2k5]

I don't think you look at this politically at all. If the system really holds that executives are getting paid too much, they will start penalizing the stocks of companies that pay their execs too much. The big thing to remember is that most of the big paydays we are hearing about is stock option compensation, versus actual dollar compensation.

[NorthSideSox72]

I don't think you look at this politically at all. If the system really holds that executives are getting paid too much, they will start penalizing the stocks of companies that pay their execs too much. The big thing to remember is that most of the big paydays we are hearing about is stock option compensation, versus actual dollar compensation.

But that's one of the flaws in the system I mentioned earlier. What you are saying now was always a check in the system, but, its much less so now. The combination of dividends being less and less prevalent, along with the steep rise in technical trading, and a baseline expectation among brokerages that these salaries are all the norm, mean that the system is no longer balanced in this particular equation.

[Balta1701]

You can read above how I said that there seemed to be a horrific example of execs getting loaded while a company falls apart every single week? This week's example: Ford Motor Company.

 

Ford lost $12.7 billion in 2006.

 

In the first 4 months on the job for their new CEO, they paid him $28 million dollars. For 4 months, including his signing bonus, moving expenses, and a bunch of "Performance" related bonii. And on top of that, their former CEO, Bill Ford Jr., who gave up the title of CEO last year, saw his pay after giving up that title drop by only about 20%...still over $10 million. And I'm pretty sure that doesn't include the company jet usage that CNN talks about.

 

Meanwhile, Ford is still about to try negotiating with the UAW to massively cut benefits and is looking to cut some 30,000 jobs.

[Balta1701]

On the other hand...

Credit Ford Motor Co. CEO Alan Mulally with saving the leader of the free world from self-immolation.

 

Mulally told journalists at the New York auto show that he intervened to prevent President Bush from plugging an electrical cord into the hydrogen tank of Ford's hydrogen-electric plug-in hybrid at the White House last week. Ford wanted to give the Commander-in-Chief an actual demonstration of the innovative vehicle, so the automaker arranged for an electrical outlet to be installed on the South Lawn and ran a charging cord to the hybrid. However, as Mulally followed Bush out to the car, he noticed someone had left the cord lying at the rear of the vehicle, near the fuel tank.

 

"I just thought, 'Oh my goodness!' So, I started walking faster, and the President walked faster and he got to the cord before I did. I violated all the protocols. I touched the President. I grabbed his arm and I moved him up to the front," Mulally said. "I wanted the president to make sure he plugged into the electricity, not into the hydrogen This is all off the record, right?"

Maybe that's what he did to earn that $40 mil or so in 3 months. (Turns out that the $28 mil, I think, does not include the $10 mil buyout they gave him for his old contract).

 

You know what this story reminds me of? Frank Grimes knocking the acid out of Homer's hand. "You idiot! You almost drank a vial full of sulfuric acid!" "Boy, would my face have been red."

[mr_genius]

Meanwhile, Ford is still about to try negotiating with the UAW to massively cut benefits and is looking to cut some 30,000 jobs.

 

just curious, do you own/drive an American car?

Edited April 9, 2007 by mr_genius

[Rex Kickass]

On the other hand...

Maybe that's what he did to earn that $40 mil or so in 3 months. (Turns out that the $28 mil, I think, does not include the $10 mil buyout they gave him for his old contract).

 

You know what this story reminds me of? Frank Grimes knocking the acid out of Homer's hand. "You idiot! You almost drank a vial full of sulfuric acid!" "Boy, would my face have been red."

 

Maybe this is why nobody buys a Ford, who puts an electrical outlet in a hydrogen tank?

[Balta1701]

just curious, do you own/drive an American car?

Nope. Honda Civic. Bought it about 7 months ago. I looked at the equivalent vehicle from Ford and was unimpressed, particularly by the quality. The last Ford I was driving...nearly died in the middle of Mexico. Wound up limping back across the border. I did drive a GM vehicle in high school, while my dad had a Mercury, and I was unimpressed by both.

 

I would be happy to own or drive an American car if the American car industry tried to build the kind of car I wanted; high quality, not going to break on me, high mpg, small, nimble, useful. I don't want an SUV, I don't want something giant, I don't want a pickup truck, and therefore I don't see a good reason to buy what the U.S. car companies are building.

 

Then again, I think my vehicle probably has about as high a %age of American-made parts as a standard Ford these days.

Edited April 9, 2007 by Balta1701

[mr_genius]

Nope. Honda Civic. Bought it about 7 months ago. I looked at the equivalent vehicle from Ford and was unimpressed, particularly by the quality. The last Ford I was driving...nearly died in the middle of Mexico. Wound up limping back across the border. I did drive a GM vehicle in high school, while my dad had a Mercury, and I was unimpressed by both.

 

I would be happy to own or drive an American car if the American car industry tried to build the kind of car I wanted; high quality, not going to break on me, high mpg, small, nimble, useful. I don't want an SUV, I don't want something giant, I don't want a pickup truck, and therefore I don't see a good reason to buy what the U.S. car companies are building.

 

Then again, I think my vehicle probably has about as high a %age of American-made parts as a standard Ford these days.

 

well, if Ford's union workers can't build a decent car i guess you can't blame Ford for cutting those jobs.

 

Edited April 9, 2007 by mr_genius

[Rex Kickass]

I would say it has more to do with the design of the car. I was in a Ford Edge the other day? It feels underpowered and has a clunky design. That's a seriously Bold Move!

[Balance]

I would say it has more to do with the design of the car. I was in a Ford Edge the other day? It feels underpowered and has a clunky design. That's a seriously Bold Move!

Not to mention the fact that the Edge (and most other Fords besides the Mustang) are breathtakingly ugly....

[Balta1701]

well, if Ford's union workers can't build a decent car i guess you can't blame Ford for cutting those jobs.

 

Of course...it's always possible that the execs above them just aren't making good decisions about what kind of cars and procedures to prioritize, but hey, what do I know...This is our country! (Yes, I know, I'm crossing companies now, but Goddamn am I sick of that song!)

[Rex Kickass]

At least GM is starting to make cars that people seem to want again... design wise, they seem to be a little more resilient than Ford.

[Queen Prawn]

I'd have to disagree. I have several friends and are big into GM and won't touch them due to design and reliability. (I've also read a few letters in the Hemmings magazine that completely rip on the soon to be new Camero. Of course there are a few that do like it as well.)

 

As for Chrystler/Dodge, they have been doing a great job in the design department.

 

My Cougar had 90K on it when I traded it in and at that point only one major repair - altenator. Only reason I traded it in is because I wanted to get a 4 door car (last chance to sell/trade in for the most part and with precreating on the horizon, I had to make the change).

 

I have a Milan right now with 23K on it and so far, so good, but it is still young.

 

We also have some 30+ year old Fords and Mercs but that is a whole other ball of wax.

Edited April 9, 2007 by Queen Prawn

[mr_genius]

I would say it has more to do with the design of the car.

 

 

lousy American engineers. fire them too.

 

 

Of course...it's always possible that the execs above them just aren't making good decisions about what kind of cars and procedures to prioritiz

 

 

actually, the Unions want them to make more SUV's and trucks. go figure.

[Balta1701]

I'd have to disagree. I have several friends and are big into GM and won't touch them due to design and reliability. (I've also read a few letters in the Hemmings magazine that completely rip on the soon to be new Camero. Of course there are a few that do like it as well.)

I will add this, the GM vehicle I referred to above that I was driving around in High school was an absolute disaster, and that was for essentially a new car. Within about the first year and a half I had it, we had to take it to the dealer like 6 times with the same problem; engine struggling to start and a service engine soon light. On the last time, they basically held onto the car for a month and left it sitting on the lot the entire time. They didn't give it back until my dad called the dealership and spoke to the owner. Eventually we learned that there was a recall on some part in the fuel injector or something, but even that didn't fix the thing, and from the point the car was 2 years old you'd have to turn the engine over for about 10-15 seconds before it actually starts. Makes it really fun trying to jump the car if the battery dies, btw. Wait, fun isn't the word, impossible is the word.

 

actually, the Unions want them to make more SUV's and trucks. go figure.

If that's true, then it's just about as stupid as the opposition the unions seem to have to increasing the CAFE standards.

[Queen Prawn]

I will say that Brian and I HATE (with a passion) the Edge. Another SUV is just what FLM needed (where is that danged rolling eye smiley when you need it lol).

 

They need to do the Cougar Eliminator they have been talking about...I mean NEED to do it. I never could figure out why they didn't do the Mercury Messenger - one of the most beautiful concept cars I have ever laid eyes on...

[Balta1701]

Like I said, if I wanted to, I could do this weekly.

When the airline industry went into a deep slump after the 2001 terrorist attacks, American Airlines' pilots, flight attendants and mechanics agreed to billions of dollars in cuts in wages and benefits to keep the carrier afloat.

 

Now AMR Corp., American's parent, is back in the black, so much so that 874 top executives will receive more than $150 million in stock bonuses next week.

 

As for the 57,000 rank-and-file employees, they're seeing red.

 

"We made huge sacrifices," said Dana Davis, an 18-year American employee and spokeswoman for the Assn. of Professional Flight Attendants.

 

The airline's 18,000 attendants took an across-the-board 16% pay cut and gave up vacation days. "We're not getting anything back for it," Davis said.

 

Flight attendants staged a protest at the carrier's Fort Worth headquarters Friday. On Tuesday, they'll conduct so-called informational picket lines at Los Angeles International Airport and 15 others around the country. Some will carry signs saying: "We Shared the Pain/Time to Share the Gain" and "Pulling Together or Pulling Apart?"

 

After five years of multibillion-dollar losses, airlines began making money in 2006 and executives are cashing in, setting the stage for contentious negotiations with employees whose labor contracts start expiring later this year.

 

"It's going to get nasty," said Michael Boyd, an industry consultant. The airlines "have really messed this up. The employees worked hard, gave back and it looks like management is basically saying, 'Thanks for the giveback, suckers.' "

 

At United Airlines Inc., which emerged from Chapter 11 bankruptcy protection in February, workers were infuriated when they learned about Chief Executive Glenn Tilton's 2006 shares and options package, potentially worth $38 million.

Maybe we should also mention the $25 billion in bailouts that the Congress gave those companies after 9/11 as well. So there goes some of your fancy tax dollars. Enjoy!