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Thread: Corporat Executive Compensation - The system is not working. An essay

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    Corporate Executive Compensation - The system is not working. An essay

    In the Boardroom, Every Back Gets Scratched

    By BEN STEIN
    Published: April 6, 2008
    “Your basic human is not such a hot item.”


    Michelle V. Agins/The New York Times, top; Stefan Wermuth/Reuters
    Lloyd Blankfein, chief of Goldman Sachs, top, was paid $54 million in 2007. Stephen Schwarzman of the Blackstone Group got more than $350 million.

    START with the obvious. Executive pay at the top levels in this country is stunning in its size and its rate of climb.

    According to the Congressional Research Service, average pay for chief executives stood at 179 times average worker pay in 2005, up from a multiple of 90 in 1994. Adjusted for inflation, average worker pay rose by a total of only 8 percent from 1995 to 2005; median pay for chief executives at the 350 largest companies rose 150 percent.

    Top executives’ pay as a ratio of their employers’ earnings has also skyrocketed in the last 15 years. And these executives are paid far more than their counterparts at companies of comparable size in Britain or Japan. How did this happen? How did pay grow so fast at the top?

    It starts with several corporate governance factors and then goes into psychosocial factors. For one thing, although a company’s stockholders by every legal precept own the company, they have almost no say in how their employees, the executives, are paid. Instead, the pay of the top executives is set by the board, usually the compensation committee. The directors are elected by the stockholders via proxies — those things you get in the mail and then throw away. Thus, in effect, the board is selected by top management, usually by the C.E.O. himself. Once a director is on the board, there is only the slightest of chances that he will leave, except for death or old age or illness.

    To be a member of the board of a large company is a little example of paradise. You get good pay for just sitting in a meeting and listening to summary presentations. You get insurance and a pension. You can go to luxurious resorts and play golf. What the heck are security lines? You fly in private jets.

    Sometimes, you get stock options, and these can be meaningful.

    In other words, it’s nice to be the director of a public company. How do you keep your job? You are really nice to the person who put you in that job. You don’t know the little stockholder in Muncie who might have 500 shares. But you do know the guy who repeatedly reappoints you for your post at the directors’ table. The little stockholder cannot do a thing for you, but the boss can.

    When it comes to compensation, you want him to be really happy. It doesn’t matter how well he’s doing, unless he’s wreaking havoc and you may be sued. It doesn’t matter if the stock price has languished. You want what’s best for No. 1, and that means what’s best for Mr. Big.

    You hire a compensation consultant to work out pay and options and deferred pay and retirement and every other good thing for Mr. Big. The compensation committee knows that its hiring and rehiring are dependent on Mr. Big’s being happy. So it crafts a package that will keep him happy — and throws in a few goodies for the directors.

    It’s called the “boardroom buddy system,” and it works perfectly once you are on the inside. You just have to make sure you stay on the inside. And to do that, you don’t upset the apple cart with tacky questions about what the C.E.O. is doing or why he is paid so much.

    Let’s look at some recent real-world tales of executive pay. My old pals at Goldman Sachs are paid so much that over 40 percent of the firm’s net revenue went to compensation and benefits last year, according to its latest 10-K. Goldman’s chief, Lloyd C. Blankfein, was paid $54 million last year. To be sure, the firm did well in 2007, but the stock has been tanking. It’s now at $175.40, down from $250.70 on Oct. 31.

    Similarly, Stephen A. Schwarzman of Blackstone, which has lost about 40 percent of its value in the past six months, got more than $350 million. This is a company that has been a nightmare for investors since its debut last year as a public company. Pay at this level is art. (Blackstone wasn’t included in Equilar’s compensation survey because its revenues were below $6.5 billion.)

    The amazing fact is that as the economy goes through challenges, as the stockholders and workers fume, the executives can basically set their own pay. Once the board has acted, according to a legal doctrine known as “the business judgment rule,” hardly anyone can challenge its actions. If it gets that compensation consulting firm to approve what it did, or if it comes from the compensation firm first, the pay is set in stone — except for the next time the board wants to raise it.

    Bear in mind that everything I’ve been discussing is legal compensation. I haven’t mentioned illegal practices that some executives have used, like backdating stock options and not counting them as expenses. Backdating guarantees that option holders make money on their option grants, no matter how the stock performs. In addition, some companies made secretive “gross up” arrangements in which the company agreed to pay the executives’ taxes on pay and perks. (Gross-ups are legal if they are disclosed.)

    In other words, it’s not a pretty picture. It shrieks greed and contempt for shareholders and workers.

    Why was executive pay so much more restrained in years past? If the public stock corporation, of which Adam Smith was so skeptical back in the 1700s, is just a big treasure ship floating rudderless on the high seas and the executives are just pirates who loot it until they are too old to keep doing it, why didn’t they do it sooner?

    Now we come to a sad fact about modern American life. It was brought up by the Rev. Dr. Martin Luther King Jr., who often said that America, through its technology, has made of itself a neighborhood, but not a brotherhood. It is a lot worse now. The nation has become, to some at the top, far more of a looting opportunity than a family.

    I am not sure where this has come from — maybe from media that glamorize wealth and high-end consumption, maybe from poor moral training. But one thing is clear: Current law does not give shareholders or regulators any tools to rein in executive greed. There simply is no legal “cause of action” for pay packages that, however obscene, are approved by the board and disclosed to shareholders. Congress could change this. So could the Securities and Exchange Commission.

    To be sure, there have been efforts to rationalize pay for executives and chief executives. Yes, say the friends of the C.E.O.’s, pay has skyrocketed, but so has the size of the enterprises.

    I don’t get that one. Does that mean the chief executive is working twice as many hours? And isn’t the more meaningful measurement the welfare of the owners of the company, the stockholders? Or the profits?

    There have been attempts by Congress to limit the tax deductibility of chief executives’ pay. But these have done nothing to curb the rise in compensation. There have been efforts to link C.E.O. pay with stock performance. These have also not worked. (See “backdating” above, as well as perfectly legal changing of the strike price.) Every so often, dissident stockholders try to put nonbinding resolutions on proxies to approve or reject pay packages. That also rarely works, because the big institutional holders almost always vote with management. (It’s called the boardroom buddy system for a reason.)

    AND so, with all moral restraints cast off, there is little to be done. Except in rare instances, the compensation is perfectly legal. As for me, I suggest a law requiring that nonbinding resolutions about pay be allowed on proxies if even only a small percentage of stockholders want them. (Binding resolutions might be too harsh on the few good managers out there.)

    We could also have language barring “obscene and insulting pay,” which courts could interpret as they please, but this seems dangerously vague.

    In the meantime, we face a crisis of the joint stock company, much as Adam Smith expected that we would. When the ideal comes face to face with the actual, the picture is rarely pretty.

    And let me be honest about it. If I were a hard-charging C.E.O. who had worked my way up the greasy pole and spent most evenings and weekends away from my family, often in creepy hotels, and if my board came to me with a blue silk pillow on top of which was a check for $15 million for this year’s work, begging me to accept it with its thanks, I would probably take it. Wouldn’t you?

    Your basic human is not such a hot item — and the structure of the joint stock company does not bring out the best in us.
    [URL="http://www.nytimes.com/2008/04/06/business/06ben.html?_r=1&hp&oref=slogin"]http://www.nytimes.com/2008/04/06/business/06ben.html?_r=1&hp&oref=slogin[/URL]

    What is obviousl is that the system currently in place is not working. There are no rememdies for stockholders. Personal accountability which many libertarians preach so much about, and which I agree with is not practiced in our corporate boardroom. If an executive is actually ever called to task for his poor performance he usually leaves with such a lucrative severance packet that it is a joke.

    So what is to be done about this? What changes can we bring about? I would suggest that less people would throw out proxies if executive compensation was a directly voted upon matter.

    Anybody have other ideas?
    Last edited by Queens Jet Fan; 04-06-2008 at 03:29 PM.

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    [QUOTE=Queens Jet Fan;2466732]

    Anybody have other ideas?[/QUOTE]

    yeh- get the stockholders involved, which will be no easy task and could potentially have averse consequences...

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    Stockholders will not get involved when they feel like they have no say in the matter and as the essay pointed out it is nearly impossible for the stockholders to make any difference in a compensation package the board has approved.

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    Thanks for the post Queens. Very interesting.

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    Corporations suck. We should outlaw them.

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    [QUOTE=Warfish;2467380]Corporations suck. We should outlaw them.[/QUOTE]

    Yup. That's exactly what Mr. Stein was getting at.

    I'm surprised you didn't accuse him of jealousy. ;)

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    Good essay and I don’t think the message is that Corporation suck (Warfish sarcasm?)

    The message I read is that the leaders of corporations are taking advantage of a good thing and how do we fix it before we kill the golden goose. How would you fix it, if you got the corner office “dream” job?

    A large company/corporation has efficiencies of scale that allow it to provide all associates with good medical insurance, paid time off, retirement benefits and good companies invest in the community. Corporations are not bad but the leaders are clearly taking advantage; increasing their own pay and reducing employee benefits and salary. The board is worried about stock prices/profits and think that paying the best leaders will help maintain the stock price. I think this is the problem statement.

    Other ideas: how about profit sharing for all associates, pay associates for ideas that save the company money, restrict executive salary multiplier (179% of average worker is insane)
    Last edited by Ohio State NY Jets fan; 04-07-2008 at 07:44 AM.

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    Ben Stein is one of the rare true conservatives with usually sound logic.

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    [QUOTE=Ohio State NY Jets fan;2467436]Good essay and I don’t think the message is that Corporation suck (Warfish sarcasm?)[/QUOTE]

    Just a wee bit.:D

    My friend CR's constant message on this forum is how evil and bad Corporations are. So rather than argue with someone who has made up their mind on the issue already, I figured I'd give him a little playful poke.

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    I never said all of corporations were evil, the majority of them are just out of control and do not want to accept responsibility.

    And of course I am just simply jealous. I gotta keep up or my wife will leave me.

    [QUOTE=Warfish;2467459]Just a wee bit.:D

    My friend CR's constant message on this forum is how evil and bad Corporations are. So rather than argue with someone who has made up their mind on the issue already, I figured I'd give him a little playful poke.[/QUOTE]

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    This may sound a bit simplistic and naive but I think one remedy might be bad publicity for the companies paying these ludicrous salaries. I remember the American Airlines board gave themselves big pay raises when they won new contracts from the pilots and other unions with new concessions from the union employees.

    The bad publicity was intense against the board and if I remember correctly they had to either rescind their raises or resign.

    If the unions involved or employees with the financial media really hitting hard against these corporate boards they might be forced to be more reasonable for fear of embarrassment.

    Warren Buffett is also someone who has been very outspoken on this topic. He said that he would not invest in any company where its top executives were obscenely paid and has publicized areas where he sees abuse.

    Corporations do not like bad publicity.
    Last edited by Queens Jet Fan; 04-07-2008 at 09:38 AM.

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    [QUOTE=cr726;2467477]I never said all of corporations were evil, the majority of them are just out of control and do not want to accept responsibility. [/QUOTE]

    Actually, I believe you said all corporate management types ere equivalent to "street thugs", and that working in corporate management required no skill or effort and that you could easily have been a multimillion-a-year CEO, but you have avoided it thus far based on your impeccable and unquestionably superior morality.

    I salute you sir, for weeding out this evil. I am sure you will triumph in the end! DOWN WITH CAPITALISM AND SO-CALLED FREEDOM!! VIVA LA REVOLUTION!

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    Thank you for showing me how limited your reading comprehension is and why VA Tech was right in their rejection.

    [QUOTE=Warfish;2467683]Actually, I believe you said all corporate management types ere equivalent to "street thugs", and that working in corporate management required no skill or effort and that you could easily have been a multimillion-a-year CEO, but you have avoided it thus far based on your impeccable and unquestionably superior morality.

    I salute you sir, for weeding out this evil. I am sure you will triumph in the end! DOWN WITH CAPITALISM AND SO-CALLED FREEDOM!! VIVA LA REVOLUTION![/QUOTE]

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    [QUOTE=cr726;2467960]Thank you for showing me how limited your reading comprehension is and why VA Tech was right in their rejection.[/QUOTE]

    Yea, you're probably right.

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    Geez. Is there any chance we can have a civil conversation on this topic or it's just hopeless here?

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    [QUOTE=Queens Jet Fan;2467518]This may sound a bit simplistic and naive but I think one remedy might be bad publicity for the companies paying these ludicrous salaries. I remember the American Airlines board gave themselves big pay raises when they won new contracts from the pilots and other unions with new concessions from the union employees.

    The bad publicity was intense against the board and if I remember correctly they had to either rescind their raises or resign.

    If the unions involved or employees with the financial media really hitting hard against these corporate boards they might be forced to be more reasonable for fear of embarrassment.

    Warren Buffett is also someone who has been very outspoken on this topic. He said that he would not invest in any company where its top executives were obscenely paid and has publicized areas where he sees abuse.

    Corporations do not like bad publicity.[/QUOTE]


    I believe they gave themselves secret bonuses or bonus type compensation not long after 9-11 when huge cuts had to be made at AA....when word leaked out they were forced to step down...I remember the tall gray haired CEO...and it was based on stockholder outrage....

    short of regulation, if the stockholders do not get involved then your question is moot...

    there are plenty of ways for stockholders to get involved (see Eisner at Disney) most just can't be bothered....how many people who own stock actually fill out the card and vote on the BOD when it is mailed to them???

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    Probably not, but I enjoyed the dig anyway.

    [QUOTE=Warfish;2467964]Yea, you're probably right.[/QUOTE]

  18. #18
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    [QUOTE=cr726;2468298]Probably not, but I enjoyed the dig anyway.[/QUOTE]

    Well, if you can't toss a dig at your friends, who can you toss them at, right?

    It's all good CR. We're cool.

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