Obama to cap executive pay for those who receive public funds

Responding to outrage over reports of Wall Street excess, President Obama announced plans to cap executive compensation at $500,000 for those firms that accept significant federal assistance moving forward. Well, not surprisingly, a number of interested parties immediately began to point out that capping salaries on Wall Street is a mistake. For example, Heidi Przybyla and Christopher Stern of Bloomberg report:

Efforts to curb executive pay may backfire, said Scott Minerd, chief executive officer and chief investment officer of Guggenheim Partners Asset Management, who helps oversee more than $30 billion in stocks and bonds.

The Obama measure is “too draconian and too arbitrary, and doesn’t take into account free-market forces,” said Minerd. “Companies that need the most talented people to fix their problems won’t be able to pay them.”

Many white collar workers have bonuses – to a greater or lesser degree – as a part of their compensation package. Most of these same workers understand that if the organization isn’t successful then your bonus is negatively impacted. Hell, it is safe to say that many white collar employees did not receive bonuses this year due to the economic downturn.

So it is no surprise that the typical non-Wall Street white collar worker would be appalled that employees of “unsuccessful” Wall Street firms would receive nearly $18 billion in bonuses (6^th highest total in Wall Street history), when nearly every firm received tax payer funds.

When your firm is on life support and is receiving public funds due in large part to your executive teams greed and very poor decision making, then the argument that limiting pay will cause brain drain rings hollow. It is difficult to believe that the firm has the best and the brightest who are deserving of extraordinary pay when the firm is in a ditch. In fact, those responsible for the firms decisions should be thankful to have a job because based on their performance they should be unemployed.

Ultimately the decision is simple. If your firm is confident in your team of rain makers that clearly is worth millions and can not live with pay caps, then don’t accept the funds and make them earn their pay. Use their extraordinary talents to pull the firm out of the ditch. We wish you luck and great success. However, if you need public funds in order to survive, then you need to tighten your belt and figure out how you will survive on $500,000 until your firm can pay back the public funds.

CEO Pay

I read an article on PC World about the rumored layoffs by IBM – the rumors are reportedly bogus – and I began to reflect on the Douglas Mattern article entitled, CEO Pay is Outrageous and It’s Undemocratic.  In particular, the following quote really stuck with me.

Business Week reports that the disparity between the ‘shop floor and the executive suite’ is at an all-time high. In 1980, CEOs made 42 times the average blue-collar worker. By 1990, this disparity rose to 85 times, and by the year 2000 the disparity between worker and CEO climbed to 531 times as much.

This trend is particularly bothersome because while it may motivate those employees who are striving to become CEOs, it mostly de-motivates blue collar and other lower paid employees – those that are most susceptible to layoffs.  While the CEOs role is critical and is a very stressful position, in general they are being disproportionately compensated – often with little or no direct ties to the performance of the company.  For example, Bob Nardelli when he accepted the position at Home Depot refused to have his compensation tied to the stock price of the organization.  Over his six year tenure, he made many moves to make the organization “lean and mean” which both drained morale at this once proud organization and had negative impacts on customer service.

While some organizations are cracking down on CEO pay packages, most still provide lucrative “golden parachutes” to CEOs.  The CEO severance package, which are often for multiple millions of dollars, include additional benefits on top of the enormous compensation packages that they received during their tenure with the company.  What’s maddening is that these packages are paid out after the organization decides that, based on a lack of performance; they need to replace the CEO.  Employees will see the total pay packages of the CEO and also witness hundreds, if not thousands, of their fellow employees get laid off due to budget cuts and restructuring and it is not hard to understand why they would lack motivation.

So while the IBM story may not be accurate, it is nevertheless tough to watch as employees get laid off due to ineffective, grossly overpaid executives.

Executive Compensation

 

Everywhere that we look we see articles, reports and blog postings about excessive executive pay.  Now, I admit that I am a bit conflicted.  I do not consider myself a greedy person, but I do believe that I am willing to accept as much as someone is willing to pay me for my absolute best efforts.  But, when you see some of the examples of executive pay over the last few years – some have gone past fair compensation to pure greed.

 

One such example is Occidental Petroleum Corp. CEO Ray Irani who, according to the LA Times, received $460 million in total compensation in 2006.  But the all-time “best” was William McGuire, CEO of UnitedHealth Group who in 2006 earned $1.6 Billion.  Luckily only $333 million of the compensation was tied up in a stock options backdating scandal that may land him in jail.

 

“From 1992 to 2005, the average CEO saw his or her pay rise by 186.2%, while the median worker saw wages rise by 7.2%.” (2007, PBS.org)  According to Anderson et al. in “Executive Excess 2006,” for every $1 earned by the average worker, a CEO earns $411.  No single employee is valuable enough to command such a wide disparity in pay.  No one will argue that a CEOs job isn’t stressful and we recognize that if is nearly a 24×7 position.  But a CEOs base salary and bonus make up for the nature of the position.

 

So while the chief executive has a base salary that is significantly larger than the average employee – understandably so.  What is inexcusable is when an executive breaks the law in order to line their own pockets.  “Fourteen percent of option grants to top executives between 1996 and 2005 were ‘backdated or otherwise manipulated.’” (2007, PBS.org)

 

The largest gap in executive pay is when we focus on the industry that has seen the largest jump in the price of its products – energy.  “CEOs of the top 15
U.S. oil companies are paid 281 percent that of the average CEO in a comparably sized businesses. The top 15
U.S. oil CEOs received an average of $32.7 million in 2005 compared to an average of $11.6 million for CEOs operating in a similar market size.” (2007, PBS.org)  The poor oil companies are seeing the costs of crude oil go up, while their profits and executive compensation both go through the roof.  How will they manage to survive?

 

When you consider that they executive compensation committee is made up of senior executives or CEOs of other companies, is it any wonder that they approve these incredible pay packages for their “buddies?”  Imagine if there were caps on executive pay and these additional profits were either returned to the shareholders in additional dividends and/or reinvested back in the business – instead of lining one person’s pockets.