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Executive Excess and the Compensation Divide: Reaching Even Greater Heights

| Tuesday December 23rd, 2008 | 1 Comment

grinch-steal_tree.jpg The 116 banks receiving emergency bailout funds from the government doled out some $1.6 billion in executive compensation in 2007, even as these corporate leaders led their companies and the US financial system over the brink. The same is seen at multinational US automakers, where GM CEO Waggoner’s salary was bumped up 64% to $15.7 million even as the company progressed to the verge of bankruptcy.
Concern, commotion and outrage over the issue of executive compensation is rising to new heights, and rightly so. JP MorganChase CEO Jamie Dimon and Citigroup chairman Robert Rubin are forgoing their bonuses this year. Quite a sacrifice. Of course, they’ll still take down multiple millions in base salary and stay on to play prominent roles not only in their own companies and industry, but also in Washington D.C. policy making circles.
That’s just the tip of the iceberg. Studies show that the disparity between executive and worker compensation in the US has been widening sharply since at least the 1980s, breaking down the middle class and Americans’ long and dearly held notions of economic equity and upward mobility. Globalization and the opening up of the Chinese, Indian and former USSR economies has brought a tidal wave of eager, new emerging market “capitalist” workers into the global labor pool. That’s tilted the balance of power even more in favor of those who have the capital versus those who provide the labor.


Bailouts, Back Room Golden Handshakes Courtesy of US Taxpayers
execexcesstoon.JPG Recent studies show just how great the gap between executive and worker compensation in the US has grown even as manufacturing and service jobs move overseas, trends that continue to beggar the US workforce and threaten to eventually reduce the middle class to the political and demographic margin. Unfortunately – at least if you’re not already in the top tier of the executive ranks–the US government has turned into one ‘of big business, for big business and by big business.’
What’s worse, the US tax code encourages this, according to “Executive Excess 2008,” the 15th annual review of executive and CEO compensation put out by researchers at the Institute for Policy Studies and United for a Fair Economy.
Adding insult to injury, political representatives are busy allowing the present administration to dole out and mortgage public finances to bail out failed companies and executives. The US Congress in its hastily constructed bailout legislation gave Treasury Secretary Paulson free rein to allocate $700 billion in TARP funds.
Paulson and company are busy spreading this among his former banking industry peers, using it to buttress and bolster fundamentally flawed, failed – and excessively compensated–managements and boards. Executives in other industries aren’t feeling the “love,” and they’re chomping at the bit to get some of the public finance pie.
In a bum’s rush to feed off the public trough, the list of applicants for TARP funds continues to grow as banks, auto finance companies, insurers, consumer finance, mortgage and real estate companies and others are converting to bank holding companies in order to obtain TARP funding. Pres. Bush and his administration, in yet another instance of misleading ‘pretzel logic’ says such government intervention is necessary to save the American version of free market capitalism, as if it such a thing ever existed in the first place.
Meanwhile, legislators are now bemoaning their failure to build in adequate responsible oversight and accountability into the allocation of TARP funds, even as auto execs are now waiting to get their hooks into some of it, and others are getting in line. Banks refuse, or are unable, to publicly account for their use of the funds. Evidence shows, however, that they’re using them not to lend to US businesses but to go on something of an M&A spree and taking over weak competitors. Neither are executives being called and held to account.
Pay Divide Widens to “Chasm” Like Proportions
LeadersWorkers.GIF Cutting compensation among US corporate elite has a long way to go and US execs have a lot to learn, writes Keith Fitz Gerald, investment director of the Money Morning investment news and advisory service. Good luck.
Fitz Gerald pointedly uses the example of differences in executive compensation levels between US and foreign companies, particularly in Asia, to illustrate some radical differences.
As has been done here on Triple Pundit, Fitz Gerald references the example of the CEO of one of the world’s largest airlines, Haruka Nishimatsu of Japan Airlines Corp., as a salutary case that shows there’s a more responsible, just, equitable and better way to go.
Nishimatsu gets paid $90,000 a year, less than some of the company’s pilots, and has pared his perquisites to the bone as his company’s performance has suffered. Bit of a contrast from the attitude from corporate and D.C. fat-cats here in the US, whose attitude seems to be more along the lines of, “Let them eat cake.”
“According to a United for a Fair Economy survey, CEOs of large corporations made an average of $10.5 million in 2007, 344 times the wages of the average U.S. worker,” Fitz Gerald writes. In stark contrast, executive compensation levels in Japan, and throughout much of Asia, are typically only 10-15 times more than that of base level employees. “The pay gap between the boardroom and the factory floor – already a longtime topic of controversy here in the United States – has widened to the point that it’s become absolutely staggering.
These are statistics based on aggregated industry data. In one of numerous high-end examples, Capital One Financial Corp. (COF) CEO Richard D. Fairbank was paid $73.1 million last year–1,456 times the median household income of $50,233–and taxpayers foot the bill for Capital One’s bailout to the tune of $3.55 billion.
“The 10 highest-paid CEOs made more than half a billion dollars collectively while half of them were leading companies whose profits shrank dramatically,” Fitz Gerald notes as per figures from The Corporate Library and a USA Today study, respectively.
“The Economic Policy Institute puts it at only 275 times higher, which is still outrageous when you consider that the average working stiff won’t see in his lifetime what these guys have made in a year lately.”
US Tax Code All For It
CEOs at S&P 500 companies continued to pocket excessively large compensation packages despite hard economic times and poor performance, according to the “Executive Excess” report.
They pulled down an average $10.5 million last year, 344 times the pay of the average US worker. Private investment fund managers did orders of magnitude better. The top 50 hedge and private equity fund managers averaged an incredible $599 million each, more than 19,000 times as much as the average US worker. As if they needed or earned it, Treasury Secretary Paulson has decided to give them access to billions more of publicly financed TARP funds.
Even more egregious, average US taxpayers subsidized such outlandish compensation to the tune of more than $20 billion per year, according to the report. This courtesy of varied and numerous accounting and tax loopholes. That’s more than double what the lawmakers decided to invest in educating America’s disable children.
Billions more taxpayer dollars indirectly encourage this, the researchers found, from awarding of government contracts for goods and services to corporate bailouts. More than 85% of publicly listed companies on the federal government’s top 100 contractors list paid their CEOs more than 100 times what the average worker earned.
The checks and balances that in the past existed and were enforced at least to some degree to prevent such scandalous abuse have been steadily eroded since the 1980s, according to the researchers. Without serious, rigorously enforced tax and labor reform, that’s a trend that will continue on into the foreseeable future, they conclude.


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