Bush economic report praises 'outsourcing' jobs
Tuesday, February 10, 2004By Warren Vieth and Edwin Chen, Los Angeles Times
WASHINGTON -- The movement of U.S. factory jobs and white-collar work to other countries is part of a positive transformation that will enrich the U.S. economy over time, even if it causes short-term pain and dislocation, the Bush administration said yesterday.
The embrace of foreign "outsourcing," an accelerating trend that has contributed to U.S. job losses in recent years and become an issue in the 2004 elections, is contained in the president's annual report to Congress on the health of the U.S. economy.
"Outsourcing is just a new way of doing international trade," said N. Gregory Mankiw, chairman of Bush's Council of Economic Advisors, which prepared the report. "More things are tradable than were tradable in the past. And that's a good thing."
The report, which predicts that the nation will reverse a three-year employment slide by creating 2.6 million jobs in 2004, is part of a weeklong effort by the administration to highlight signs that the recovery is picking up speed. Bush's economic stewardship has become a central issue in the presidential campaign, and the White House is eager to demonstrate that his policies are producing results.
In his message to Congress yesterday, Bush said the economy "is strong and getting stronger," thanks in part to his tax cuts and other economic programs. He said the nation had survived a stock market meltdown, recession, terrorist attacks, corporate scandals and war in Afghanistan and Iraq, and was finally beginning to enjoy "a mounting prosperity that will reach every corner of America."
The president repeated that message during an afternoon "conversation" on the economy at SRC Automotive, an engine-rebuilding plant in Springfield, Mo., where he lashed out at lawmakers who oppose making his tax cuts permanent.
"When they say, 'We're going to repeal Bush's tax cuts,' that means they're going to raise your taxes, and that's wrong. And that's bad economics," he said.
Democrats who want Bush's job were quick to challenge his claims.
Massachusetts Sen. John F. Kerry, the front-runner for the Democratic presidential nomination, supports a rollback of Bush's tax cuts for the wealthiest Americans and backs the creation of tax incentives for companies that keep jobs in the United States -- although he supported the North American Free Trade Agreement, which many union members say is responsible for the migration of U.S. jobs, particularly in the auto industry, to Mexico.
Campaigning yesterday in Roanoke, Va., Kerry questioned the credibility of the administration's job-creation forecast. "I've got a feeling this report was prepared by the same people who brought us the intelligence on Iraq," he said. "I don't think we need a new report about jobs in America. I think we need a new president who's going to create jobs in America and put Americans back to work."
In an evening appearance at George Mason University in Fairfax, Va., North Carolina Sen. John Edwards mocked the Bush administration's economic report.
Edwards, also a Democratic presidential nomination candidate who also supports repealing tax cuts for the richest Americans and offering incentives to corporations that create new jobs in the United States, said it would come as a "news bulletin" to the American people that the economy is improving and the outsourcing of jobs overseas is good for America.
"These people," he said of the Bush administration, "what planet do they live on? They are so out of touch."
The president's 411-page report contains a detailed diagnosis of the forces contributing to the U.S. economic slowdown and a wide-ranging defense of the policies Bush has pursued to combat it.
It asserts that the last recession actually began in late 2000, before the president took office, instead of March 2001, as certified by the official recession-dating panel of the National Bureau of Economic Research.
The report repeats the administration's contention that the Bush tax cuts must be made permanent to have their full beneficial effect on the economy.
Social Security also must be restructured to let workers put part of their retirement funds in private accounts, the report argues. Doing so could add nearly $5 trillion to the national debt by 2036, the president's advisers note, but the additional borrowing would be repaid 20 years later, and the program's long-term health would be more secure.
Saturday
Corporate America: The Land of the Greed
August 31, 1998
One can get attached to wide open spaces living in the center of the United States. However becoming geographically challenged is a drawback if you stay too long. Over the last thirty years business trends have led to a disturbing fact; small town America is dying.
Case in point: Enid, OklahomaIn the late 1960's and early 1970's my parents would cram the family in the car and drive to the third largest city in Oklahoma; Enid. It was a modern city in many ways. Champlin refinery (and the oil business in general), Phillips University, Vance Air Force Base, Bond bakery and Gold Spot dairy all provided Northwest Oklahoma with a big city outpost and good jobs to keep the city a wonderful place to live and work. At one time Geronimo automobiles called Enid home (only one Geronimo car still exists and it is on display at a local museum.)
The Enid town square was visible from miles away as several skyscrapers surrounded and dwarfed the large county court house in the center of town. The Broadway Tower was the largest. Enid hosted another type of skyscraper; North of downtown stretched one of the top three largest grain storage complexes in the world.
Three railroads served the town and the grain complex with lines radiating out in ten directions (The Atchinson Topeka and Santa Fe, the St. Louis and San Francisco (better known as "The 'Frisco"), and the Chicago Rock Island and Pacific (better known as "The Rock Island").
In fact, the town still had passenger rail service up until 1968, although the Rock Island's Twin Star Rocket was probably not used frequently because it arrived in the early morning hours. An amusement park existed on the Southwest side of town.
As Enid FadesToday it is obvious that Enid is dying. The oil business has moved to Houston and overseas. In fact, the Champlin refinery has been dismantled and moved to Houston. Gold Spot dairy has closed after being merged with corporate conglomerate AMPI (American Milk Producers Incorporated).
While not a large dairy, Gold Spot did have an effect and local presence in the town. The milk tanks have been removed and a thrift store has replaced the corporate offices. Bond bread is gone. Geronimo cars were only produced for a short time because after the plant burned, no one bothered to rebuild. The downtown square looks like a ghost town. One expects a tumble weed to roll by at any minute.
Parking is no problem as it was in the 1960's and 1970's. Only three railroads still remain in town. Farmrail, the Burlington Northern Santa Fe, and the Union Pacific. The Union Pacific runs through town on a north south route. The Burlington Northern Santa Fe runs east west. Farmrail's deteriorating tracks run southwest of town. There are no local railroad offices remaining.
Many elevators sit empty while grain piles up outside other active elevators. The railroad no longer sees grain transport as a volume business in Enid so much of it is moved by semi trailers. Storage of grain is no longer seen as necessary in this town which is far removed from export grain sea ports. The oil business in Oklahoma has been dead for nearly fifteen years.
The result: Enid is collapsing. The loss of business has forced Phillips University to close its doors and liquidate its assets. The mall that was built to try and attract retail business is suffering. Even more the small businessman has changed. The Ma and Pa business have given way to national franchises. When was the last time you had a good Lotta Burger or Gold Spot hot fudge sundae?
Corporate AmericaWhat does this have to do with Corporate America? Corporate America has one goal; to please the stockholder. The customer and employee are left to suffer the consequences and, in turn, the nation suffers.
The big cities get bigger and the small cities die.
Corporate America is a silent invasion that takes families captive. These families are forced to move to the dangerous metro centers where gangs, crime and a general hectic pace of life prevail.
But that is another story.
The problem is that Corporate America has lost touch with general moral values upon which this country was built. Corporate America has become the Land of the Greed. Honesty, Quality, Company Loyalty to the employee and by the employee to the company, modest growth, customer satisfaction, and life-long careers all seem to be worthless in today's rat race. As a society we have become all too willing to purchase products that lack quality. Note the phrase "we live in a throwaway society."
What has caused this lack of quality? There are numerous reasons. Employees are forced to leave small cities like Enid and live in the traffic choked, family unfriendly, dirty "mega"tropolises. Mergers always loom on the horizon with the prospect of confusion and layoffs. Why go the extra mile when you are just running in circles?
The proposed four day week that was rumored in the 1970's has become the six day 70 hour work week for many of us and unemployment for others. Salaries have not kept pace with business growth so both household heads have to work. Employees suffer burnout as a record pace. Did someone say stress? All of this is caused by one trend.
Empires Over SatisfactionCorporate CEO's are more interested in Empire Building than Customer Satisfaction. Merging Corporations seems to be the new goal of the "head cheese." I know of some businesspersons who have left the same company several times only to return when the latest merger is announced. These major corporations are located in tier one cities for the most part and therefore good jobs are being sucked out of small cities at a record pace. This is why Enid is dying and the "mega"troplises are choking on their own consumption.
This devouring of the small town spirit is why gangs are becoming more violent as jobs in the heartland disappear and reappear in big cities. Mergers cause mass confusion on a corporate scale. People are displaced from their niche on both sides; buyer and buyee. The company expends resources on assimilation and consolidation rather than competition and quality. Mergers are sometimes a necessary evil. However, our government leaders seem blind to the effect on society as their approval is only a rubber stamp away.
ConclusionI would urge any politician reading this to think twice and read the facts before signing on the dotted line the next time you review a merger request. Stockholders beware: Not every merger is good. Consumers... drive past that national burger franchise and eat a Lotta Burger if you can find one.
One can get attached to wide open spaces living in the center of the United States. However becoming geographically challenged is a drawback if you stay too long. Over the last thirty years business trends have led to a disturbing fact; small town America is dying.
Case in point: Enid, OklahomaIn the late 1960's and early 1970's my parents would cram the family in the car and drive to the third largest city in Oklahoma; Enid. It was a modern city in many ways. Champlin refinery (and the oil business in general), Phillips University, Vance Air Force Base, Bond bakery and Gold Spot dairy all provided Northwest Oklahoma with a big city outpost and good jobs to keep the city a wonderful place to live and work. At one time Geronimo automobiles called Enid home (only one Geronimo car still exists and it is on display at a local museum.)
The Enid town square was visible from miles away as several skyscrapers surrounded and dwarfed the large county court house in the center of town. The Broadway Tower was the largest. Enid hosted another type of skyscraper; North of downtown stretched one of the top three largest grain storage complexes in the world.
Three railroads served the town and the grain complex with lines radiating out in ten directions (The Atchinson Topeka and Santa Fe, the St. Louis and San Francisco (better known as "The 'Frisco"), and the Chicago Rock Island and Pacific (better known as "The Rock Island").
In fact, the town still had passenger rail service up until 1968, although the Rock Island's Twin Star Rocket was probably not used frequently because it arrived in the early morning hours. An amusement park existed on the Southwest side of town.
As Enid FadesToday it is obvious that Enid is dying. The oil business has moved to Houston and overseas. In fact, the Champlin refinery has been dismantled and moved to Houston. Gold Spot dairy has closed after being merged with corporate conglomerate AMPI (American Milk Producers Incorporated).
While not a large dairy, Gold Spot did have an effect and local presence in the town. The milk tanks have been removed and a thrift store has replaced the corporate offices. Bond bread is gone. Geronimo cars were only produced for a short time because after the plant burned, no one bothered to rebuild. The downtown square looks like a ghost town. One expects a tumble weed to roll by at any minute.
Parking is no problem as it was in the 1960's and 1970's. Only three railroads still remain in town. Farmrail, the Burlington Northern Santa Fe, and the Union Pacific. The Union Pacific runs through town on a north south route. The Burlington Northern Santa Fe runs east west. Farmrail's deteriorating tracks run southwest of town. There are no local railroad offices remaining.
Many elevators sit empty while grain piles up outside other active elevators. The railroad no longer sees grain transport as a volume business in Enid so much of it is moved by semi trailers. Storage of grain is no longer seen as necessary in this town which is far removed from export grain sea ports. The oil business in Oklahoma has been dead for nearly fifteen years.
The result: Enid is collapsing. The loss of business has forced Phillips University to close its doors and liquidate its assets. The mall that was built to try and attract retail business is suffering. Even more the small businessman has changed. The Ma and Pa business have given way to national franchises. When was the last time you had a good Lotta Burger or Gold Spot hot fudge sundae?
Corporate AmericaWhat does this have to do with Corporate America? Corporate America has one goal; to please the stockholder. The customer and employee are left to suffer the consequences and, in turn, the nation suffers.
The big cities get bigger and the small cities die.
Corporate America is a silent invasion that takes families captive. These families are forced to move to the dangerous metro centers where gangs, crime and a general hectic pace of life prevail.
But that is another story.
The problem is that Corporate America has lost touch with general moral values upon which this country was built. Corporate America has become the Land of the Greed. Honesty, Quality, Company Loyalty to the employee and by the employee to the company, modest growth, customer satisfaction, and life-long careers all seem to be worthless in today's rat race. As a society we have become all too willing to purchase products that lack quality. Note the phrase "we live in a throwaway society."
What has caused this lack of quality? There are numerous reasons. Employees are forced to leave small cities like Enid and live in the traffic choked, family unfriendly, dirty "mega"tropolises. Mergers always loom on the horizon with the prospect of confusion and layoffs. Why go the extra mile when you are just running in circles?
The proposed four day week that was rumored in the 1970's has become the six day 70 hour work week for many of us and unemployment for others. Salaries have not kept pace with business growth so both household heads have to work. Employees suffer burnout as a record pace. Did someone say stress? All of this is caused by one trend.
Empires Over SatisfactionCorporate CEO's are more interested in Empire Building than Customer Satisfaction. Merging Corporations seems to be the new goal of the "head cheese." I know of some businesspersons who have left the same company several times only to return when the latest merger is announced. These major corporations are located in tier one cities for the most part and therefore good jobs are being sucked out of small cities at a record pace. This is why Enid is dying and the "mega"troplises are choking on their own consumption.
This devouring of the small town spirit is why gangs are becoming more violent as jobs in the heartland disappear and reappear in big cities. Mergers cause mass confusion on a corporate scale. People are displaced from their niche on both sides; buyer and buyee. The company expends resources on assimilation and consolidation rather than competition and quality. Mergers are sometimes a necessary evil. However, our government leaders seem blind to the effect on society as their approval is only a rubber stamp away.
ConclusionI would urge any politician reading this to think twice and read the facts before signing on the dotted line the next time you review a merger request. Stockholders beware: Not every merger is good. Consumers... drive past that national burger franchise and eat a Lotta Burger if you can find one.
Corporate Greed in America
The Issue: Corporate Greed in America
The Facts:
$ While the average worker in America makes $25 thousand per year, the average CEO salary is $14 million and climbing.
$ These same, overpriced CEOs have shifted millions of American jobs overseas, where child labor, worker coercion and slave wages are the rule.
$ Due to tax cuts Republicans have doled out to their Big Business friends, corporate tax receipts are now only 7.4% of overall federal revenue.
$ In 2002, the CEOs of the 50 U.S. companies that laid off the most workers got an average pay raise of 44%.
$ In 2002, CEOs for the 30 companies with the biggest shortfalls in employee pension funds were paid 59% more than CEOs at other companies.
What Republicans Claim:
$ They say that agencies like the Securities & Exchange Commission should be controlled by the same corporations they are supposed to be regulating.
$ They say that taking huge “campaign contributions” and then writing laws that benefit those same “contributors” isn’t really legalized bribery.
The Truth Of The Matter:
$ Corporate compensation for all executives must be reported as a separate item in all financial statements.
$ Even though shipping jobs to countries with low wages is good for CEO stock options and bonuses, it’s bad for America and just plain wrong.
$ Corporate campaign contributions must be reined in and regulated.
Fun Facts To Know And Tell:
$ Until Enron went bankrupt and Ken Lay’s crimes were exposed in the media, Mr. Lay was extremely influential with the current administration.
$ Bush’s pet name for Ken Lay was “Kenny Boy!”
The Facts:
$ While the average worker in America makes $25 thousand per year, the average CEO salary is $14 million and climbing.
$ These same, overpriced CEOs have shifted millions of American jobs overseas, where child labor, worker coercion and slave wages are the rule.
$ Due to tax cuts Republicans have doled out to their Big Business friends, corporate tax receipts are now only 7.4% of overall federal revenue.
$ In 2002, the CEOs of the 50 U.S. companies that laid off the most workers got an average pay raise of 44%.
$ In 2002, CEOs for the 30 companies with the biggest shortfalls in employee pension funds were paid 59% more than CEOs at other companies.
What Republicans Claim:
$ They say that agencies like the Securities & Exchange Commission should be controlled by the same corporations they are supposed to be regulating.
$ They say that taking huge “campaign contributions” and then writing laws that benefit those same “contributors” isn’t really legalized bribery.
The Truth Of The Matter:
$ Corporate compensation for all executives must be reported as a separate item in all financial statements.
$ Even though shipping jobs to countries with low wages is good for CEO stock options and bonuses, it’s bad for America and just plain wrong.
$ Corporate campaign contributions must be reined in and regulated.
Fun Facts To Know And Tell:
$ Until Enron went bankrupt and Ken Lay’s crimes were exposed in the media, Mr. Lay was extremely influential with the current administration.
$ Bush’s pet name for Ken Lay was “Kenny Boy!”
The great overpaid CEO debate
Get Real
I don't mind CEO's making more than I do. What gripes me is when their salaries are in the millions and they are getting annual bonuses while at the same time I am being told that the highest annual pay raise I can receive is 4%, which is less than the cost of living increase. What planet do you live on?
Are CEOs overpaid? Many people think so.
Many potential causes of overpayment have been identified: CEOs with too much power, inattentive boards of directors, conflicts of interest by compensation consultants, the use of stock options--the list goes on.
Some studies show the average CEO was paid $10 million to $15 million in 2005. This includes their salary, bonus, stock option gains, stock grants, and various executive benefits and perquisites.
Are rank-and-file workers underpaid? Everyone, I suppose, feels a little underpaid. Some data sources indicate the average American worker was paid about $40,000 in 2005. Anyone working in the technology sector knows this average pay level would barely hire a below-average administrative assistant in any of the technology hot spots in the U.S. And the average CEO pay has been earned by more than a few average technology company workers who had stock options in the right company at the right time.
So, are CEOs overpaid compared to rank-and-file workers? If you read the media stories this year, and in previous years, you might conclude that they are. Some interest groups have determined that the ratio of CEO pay to average worker pay is an appropriate measure of this problem. Some Web sites allow you to calculate how underpaid you are compared with your CEO. According to these sources, chief executive pay is between 250 and 500 times that of the average worker.
If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations.
Who are these CEOs who are purportedly paid hundreds of times more than the average worker? In most analyses, they are CEOs managing the largest public companies in America--usually the top 200 to 500. These are largest of the thousands of public corporations in the country. Given that executives typically earn more pay for managing larger organizations, we might expect these individuals to be at the top of the pay hierarchy.
It's more difficult to determine the relative value of the individuals in a job. Most CEOs I've dealt with are highly intelligent, have advanced degrees--often from one of the top universities in this country or elsewhere in the world--and have worked 70 or more hours per week for most of their career. Even if they weren't CEO of a public company, people with a background like that get paid much more than the average person.
Measuring worker pay If we want to understand the pay level of the average worker in America, we would have to ensure we included all forms of their pay--wage or salary, shift differential, overtime pay, bonuses, tips, commission, stock-based compensation, hiring bonuses, retention bonuses, and so forth. Without digressing into which data sources do and do not capture all of this (hint: none do), this would provide a good portrayal of how much the average worker is paid for his work. We would assume that this data reflects average performers with average levels of education, and so forth. But that's not the data that's being used in these comparisons.
I can't recall seeing a comparison of how much software engineers are paid compared with postal workers, or database administrators compared with bank tellers. This might mean that no one believes these would be relevant comparisons, because different jobs with different educational requirements and different levels of responsibility should be paid differently. We don't always know or agree how differently, but differently.
It still would be completely meaningless, however--just like comparing CEO pay to average worker pay.
I am in no way trying to serve as an apologist for high executive pay levels. After more than 20 years in the field of executive compensation, I have seen numerous examples of inappropriate pay for executives--not only in amount, but in reason and in form. Billions of dollars have been paid to thousands of executives who have destroyed companies and ruined workers' lives. I have seen executives join a company shortly before a takeover and get millions in "change in control" payments.
I also have seen numerous examples of inappropriate pay for nonexecutives--the so-called average worker. I have seen software sales representatives who made far too much commission due to a flawed incentive plan; a receptionist earning more than double the market rate because she had been with the company for decades, and there was no pay cap for any position; software engineers who joined a company at just the right time, and cashed out their stock options just before the stock price crashed and the company went out of business, due to a poorly developed software product.
Fixing the right problem If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations. That only will encourage misguided legislation, and we've had plenty of that. It also might encourage big shareholders and their advisors to begin bullying companies into change using arbitrary standards, and we've had plenty of that, too.
Disclosure and publicity of pay allows us to identify the egregious situations and apply pressure to fix them, but only when the data seem accurate to reasonable people.
I just read that U2 made $260 million in gross receipts on their 2005 tour. That's $3 million per show (about $1 million per hour)--far above Motley Crue's $33 million for a similar number of shows (a paltry $400,000 per show, well under $200,000 per hour). I don't think most Americans want to impose an arbitrary cap on CEO pay any more than we want to impose a cap on U2's concert tour receipts because we know U2 would stop touring, and good CEOs would stop CEO-ing, and neither of those is to our benefit.
Let's focus on the real problem and not on concocted metrics rooted in sociopolitical sentiments. There is a lot of fixing needed in executive pay practices, and these average worker pay ratios have the potential to send us in the wrong direction.
I don't mind CEO's making more than I do. What gripes me is when their salaries are in the millions and they are getting annual bonuses while at the same time I am being told that the highest annual pay raise I can receive is 4%, which is less than the cost of living increase. What planet do you live on?
Are CEOs overpaid? Many people think so.
Many potential causes of overpayment have been identified: CEOs with too much power, inattentive boards of directors, conflicts of interest by compensation consultants, the use of stock options--the list goes on.
Some studies show the average CEO was paid $10 million to $15 million in 2005. This includes their salary, bonus, stock option gains, stock grants, and various executive benefits and perquisites.
Are rank-and-file workers underpaid? Everyone, I suppose, feels a little underpaid. Some data sources indicate the average American worker was paid about $40,000 in 2005. Anyone working in the technology sector knows this average pay level would barely hire a below-average administrative assistant in any of the technology hot spots in the U.S. And the average CEO pay has been earned by more than a few average technology company workers who had stock options in the right company at the right time.
So, are CEOs overpaid compared to rank-and-file workers? If you read the media stories this year, and in previous years, you might conclude that they are. Some interest groups have determined that the ratio of CEO pay to average worker pay is an appropriate measure of this problem. Some Web sites allow you to calculate how underpaid you are compared with your CEO. According to these sources, chief executive pay is between 250 and 500 times that of the average worker.
If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations.
Who are these CEOs who are purportedly paid hundreds of times more than the average worker? In most analyses, they are CEOs managing the largest public companies in America--usually the top 200 to 500. These are largest of the thousands of public corporations in the country. Given that executives typically earn more pay for managing larger organizations, we might expect these individuals to be at the top of the pay hierarchy.
It's more difficult to determine the relative value of the individuals in a job. Most CEOs I've dealt with are highly intelligent, have advanced degrees--often from one of the top universities in this country or elsewhere in the world--and have worked 70 or more hours per week for most of their career. Even if they weren't CEO of a public company, people with a background like that get paid much more than the average person.
Measuring worker pay If we want to understand the pay level of the average worker in America, we would have to ensure we included all forms of their pay--wage or salary, shift differential, overtime pay, bonuses, tips, commission, stock-based compensation, hiring bonuses, retention bonuses, and so forth. Without digressing into which data sources do and do not capture all of this (hint: none do), this would provide a good portrayal of how much the average worker is paid for his work. We would assume that this data reflects average performers with average levels of education, and so forth. But that's not the data that's being used in these comparisons.
I can't recall seeing a comparison of how much software engineers are paid compared with postal workers, or database administrators compared with bank tellers. This might mean that no one believes these would be relevant comparisons, because different jobs with different educational requirements and different levels of responsibility should be paid differently. We don't always know or agree how differently, but differently.
It still would be completely meaningless, however--just like comparing CEO pay to average worker pay.
I am in no way trying to serve as an apologist for high executive pay levels. After more than 20 years in the field of executive compensation, I have seen numerous examples of inappropriate pay for executives--not only in amount, but in reason and in form. Billions of dollars have been paid to thousands of executives who have destroyed companies and ruined workers' lives. I have seen executives join a company shortly before a takeover and get millions in "change in control" payments.
I also have seen numerous examples of inappropriate pay for nonexecutives--the so-called average worker. I have seen software sales representatives who made far too much commission due to a flawed incentive plan; a receptionist earning more than double the market rate because she had been with the company for decades, and there was no pay cap for any position; software engineers who joined a company at just the right time, and cashed out their stock options just before the stock price crashed and the company went out of business, due to a poorly developed software product.
Fixing the right problem If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations. That only will encourage misguided legislation, and we've had plenty of that. It also might encourage big shareholders and their advisors to begin bullying companies into change using arbitrary standards, and we've had plenty of that, too.
Disclosure and publicity of pay allows us to identify the egregious situations and apply pressure to fix them, but only when the data seem accurate to reasonable people.
I just read that U2 made $260 million in gross receipts on their 2005 tour. That's $3 million per show (about $1 million per hour)--far above Motley Crue's $33 million for a similar number of shows (a paltry $400,000 per show, well under $200,000 per hour). I don't think most Americans want to impose an arbitrary cap on CEO pay any more than we want to impose a cap on U2's concert tour receipts because we know U2 would stop touring, and good CEOs would stop CEO-ing, and neither of those is to our benefit.
Let's focus on the real problem and not on concocted metrics rooted in sociopolitical sentiments. There is a lot of fixing needed in executive pay practices, and these average worker pay ratios have the potential to send us in the wrong direction.
Why Departing Executives Don't Deserve Lavish Deals
Despite a rash of new corporate-governance guidelines, chief executives are still reaping huge severance deals, even when they are forced out.
Richard H. Brown, 55 years old, who was ousted in March as chairman and CEO of Electronic Data Systems, Plano, Texas, will receive severance totaling more than $32 million in cash and stock. The package will require the computer-services company to take a charge of six cents a share in the first quarter. EDS's share price, meanwhile, has fallen 75% in the past year as a push into the now troubled airline and telecommunications industries went awry. In addition, the Securities and Exchange Commission is investigating EDS's financial dealings and disclosures.
Milan Panic, 72, founder and decades-long CEO of ICN Pharmaceuticals, Costa Mesa, Calif., resigned in the summer of 2002 after his slate of directors was defeated in a proxy fight. He is still wrangling for a richer severance than is in his contract.
Under that agreement, he is entitled to receive a $5 million lump-sum severance payment and a $670,000 annual consulting fee for the remainder of his life. That is on top of the $33 million bonus Mr. Milan received in April 2002 after completing the sale to the public of a 20% stake in ICN's Ribapharm unit, which holds rights to a valuable drug used in treating hepatitis C.
Richard J. Kogan, 61, departing CEO of Schering-Plough, is entitled to receive $13.2 million in severance and $26.4 million in retirement payments when he steps down soon, despite a slumped share price and a pending SEC investigation at the pharmaceuticals company.
J. Harold Chandler, 53, fired recently as chairman and CEO of UnumProvident, the nation's largest disability-income insurer, will receive severance of $8.5 million and pension benefits of $8.5 million. Share price of the company, based in Chattanooga, Tenn., has plummeted in recent months as regulators question its claims-handling practices and investment portfolio.
Many of these severance deals, to be sure, were negotiated years ago when the CEOs were first recruited or promoted to the corner office, and can't be rescinded without a legal battle. "They are the residual effects of the boom years when CEOs were treated like star athletes and celebrities," says Carol Bowie, director of governance research services at the Investor Responsibility Research Center in Washington.
Yet corporate directors still haven't put the brakes on runaway executive pay and the practice of guaranteeing CEOs golden parachutes even before they prove their worth. They are out of step with investors and employees, who are angry over watching big payouts for sometimes inept performances, while their investments shrivel, their jobs are cut and they must leave their work with no package at all.
Their anger is showing up in a spate of shareholder resolutions aimed at restricting lush severance deals and seeking the right of investors to vote on golden parachutes.
Recently, Hewlett-Packard's shareholders narrowly approved a proposal urging directors to seek investor approval for any severance package valued at more than three times the executive's base salary plus bonuses. H-P said its board would "duly consider" the nonbinding recommendation, which is all it is required to do. CEO Carly Fiorina had opposed the proposal on the grounds that it could put the company's recruitment efforts at a "competitive disadvantage."
In March, shareholders at Tyco also passed a resolution seeking the right to vote on executive severance deals. Similar resolutions will be voted on soon at United Technologies, Citigroup and Alcoa. Ms. Bowie says she and her colleagues at the Investor Responsibility Research Center are monitoring such resolutions at a total of 18 companies this year. "It's a sign that boards are under more scrutiny -- but we're not yet out of the environment that anything goes when it comes to executive pay," she says.
More than limiting lush severance deals for executives, it's time to do away with them altogether. "If a prospective CEO on the way in to the job demands this, he or she may not be the right person to begin with," says Charles Elson, director of the University of Delaware business school's Weinberg Center for Corporate Governance.
He disagrees with Ms. Fiorina that eliminating severance will hurt companies' ability to attract executive talent. "I don't believe someone will turn down a top job offer because there is no guaranteed multimillion-dollar severance," he says. "Very few of us are assured that we will be paid for failure -- and directors have to start saying no, which takes some strength and independence."
That is what he and other directors at Nuevo Energy in Houston found when they recruited James L. Payne, 66, to become chairman, president and CEO two years ago. Mr. Payne, former vice chairman of Devon Energy, agreed to the take the job at Nuevo Energy without a severance agreement or other special perks. He also received Nuevo common stock, rather than cash, in compensation in 2002, equal to about $400,000 in salary and $200,000 in bonuses.
Richard H. Brown, 55 years old, who was ousted in March as chairman and CEO of Electronic Data Systems, Plano, Texas, will receive severance totaling more than $32 million in cash and stock. The package will require the computer-services company to take a charge of six cents a share in the first quarter. EDS's share price, meanwhile, has fallen 75% in the past year as a push into the now troubled airline and telecommunications industries went awry. In addition, the Securities and Exchange Commission is investigating EDS's financial dealings and disclosures.
Milan Panic, 72, founder and decades-long CEO of ICN Pharmaceuticals, Costa Mesa, Calif., resigned in the summer of 2002 after his slate of directors was defeated in a proxy fight. He is still wrangling for a richer severance than is in his contract.
Under that agreement, he is entitled to receive a $5 million lump-sum severance payment and a $670,000 annual consulting fee for the remainder of his life. That is on top of the $33 million bonus Mr. Milan received in April 2002 after completing the sale to the public of a 20% stake in ICN's Ribapharm unit, which holds rights to a valuable drug used in treating hepatitis C.
Richard J. Kogan, 61, departing CEO of Schering-Plough, is entitled to receive $13.2 million in severance and $26.4 million in retirement payments when he steps down soon, despite a slumped share price and a pending SEC investigation at the pharmaceuticals company.
J. Harold Chandler, 53, fired recently as chairman and CEO of UnumProvident, the nation's largest disability-income insurer, will receive severance of $8.5 million and pension benefits of $8.5 million. Share price of the company, based in Chattanooga, Tenn., has plummeted in recent months as regulators question its claims-handling practices and investment portfolio.
Many of these severance deals, to be sure, were negotiated years ago when the CEOs were first recruited or promoted to the corner office, and can't be rescinded without a legal battle. "They are the residual effects of the boom years when CEOs were treated like star athletes and celebrities," says Carol Bowie, director of governance research services at the Investor Responsibility Research Center in Washington.
Yet corporate directors still haven't put the brakes on runaway executive pay and the practice of guaranteeing CEOs golden parachutes even before they prove their worth. They are out of step with investors and employees, who are angry over watching big payouts for sometimes inept performances, while their investments shrivel, their jobs are cut and they must leave their work with no package at all.
Their anger is showing up in a spate of shareholder resolutions aimed at restricting lush severance deals and seeking the right of investors to vote on golden parachutes.
Recently, Hewlett-Packard's shareholders narrowly approved a proposal urging directors to seek investor approval for any severance package valued at more than three times the executive's base salary plus bonuses. H-P said its board would "duly consider" the nonbinding recommendation, which is all it is required to do. CEO Carly Fiorina had opposed the proposal on the grounds that it could put the company's recruitment efforts at a "competitive disadvantage."
In March, shareholders at Tyco also passed a resolution seeking the right to vote on executive severance deals. Similar resolutions will be voted on soon at United Technologies, Citigroup and Alcoa. Ms. Bowie says she and her colleagues at the Investor Responsibility Research Center are monitoring such resolutions at a total of 18 companies this year. "It's a sign that boards are under more scrutiny -- but we're not yet out of the environment that anything goes when it comes to executive pay," she says.
More than limiting lush severance deals for executives, it's time to do away with them altogether. "If a prospective CEO on the way in to the job demands this, he or she may not be the right person to begin with," says Charles Elson, director of the University of Delaware business school's Weinberg Center for Corporate Governance.
He disagrees with Ms. Fiorina that eliminating severance will hurt companies' ability to attract executive talent. "I don't believe someone will turn down a top job offer because there is no guaranteed multimillion-dollar severance," he says. "Very few of us are assured that we will be paid for failure -- and directors have to start saying no, which takes some strength and independence."
That is what he and other directors at Nuevo Energy in Houston found when they recruited James L. Payne, 66, to become chairman, president and CEO two years ago. Mr. Payne, former vice chairman of Devon Energy, agreed to the take the job at Nuevo Energy without a severance agreement or other special perks. He also received Nuevo common stock, rather than cash, in compensation in 2002, equal to about $400,000 in salary and $200,000 in bonuses.
How Overpaid CEOs Can Hurt Employees !!!
Too many chief executives still don't understand how they undermine investor trust and employee morale when they negotiate steep compensation deals for themselves, regardless of performance. And too often, directors go along with them, despite the current focus on corporate governance.
That is what dozens of readers said in response to my recent column on rich severance deals for recently fired CEOs. They offered thoughts on what must be done to restore trust in corporate management.
Here are some of their views.
All board directors know that the "necessary to recruit" argument (to justify executive compensation deals) is really bogus. There are lots of good managers, and a CEO's job is highly sought after.
There needs to be a serious effort to reverse the runaway growth of executive pay and pension schemes and, particularly, severance payments. It is just greed.
Who really deserves to earn more than a million dollars a year while their shareholders are getting poorer? A good start would be to ban interlocking directorships. Mutual back-scratching at our expense.
How do CEOs of big U.S. banks get away with paying themselves excessively while pleading "no contest" and paying hundreds of millions in fines for offenses that occurred while they were in charge? We, the shareholders, pay the fines and we should be able to penalize the management accordingly.
Charles BowenRetired CEOWilliamsburg, Va.
That is what dozens of readers said in response to my recent column on rich severance deals for recently fired CEOs. They offered thoughts on what must be done to restore trust in corporate management.
Here are some of their views.
All board directors know that the "necessary to recruit" argument (to justify executive compensation deals) is really bogus. There are lots of good managers, and a CEO's job is highly sought after.
There needs to be a serious effort to reverse the runaway growth of executive pay and pension schemes and, particularly, severance payments. It is just greed.
Who really deserves to earn more than a million dollars a year while their shareholders are getting poorer? A good start would be to ban interlocking directorships. Mutual back-scratching at our expense.
How do CEOs of big U.S. banks get away with paying themselves excessively while pleading "no contest" and paying hundreds of millions in fines for offenses that occurred while they were in charge? We, the shareholders, pay the fines and we should be able to penalize the management accordingly.
Charles BowenRetired CEOWilliamsburg, Va.
Are CEO's overpaid?
Are CEO's overpaid?
Tyler Cowen has a NY Times column supposedly offering a "contrarian" take on the issue (also see his blog post).
Cowen's viewpoint is that CEOs are paid according to their value, and I don't see why that's contrarian because it's the standard line spouted by pro-free market people.
The proper way to understand CEO pay is to look at it as a winner-takes-all market. A small increase in ability, or luck, results in massively greater earnings. So whether or not CEOs are overpaid depends on how you define "overpaid." Winner-takes-all markets happen to be a naturally occurring phenomena, but if you define "overpaid" as meaning someone makes far more money than someone else without actually contributing any additional value to the economy, then yes, CEOs are certainly overpaid.
As I explained in my post about baseball and Atlas Shrugged, the loss of the world's top baseball players would have little effect on the economy, and the same would apply to the loss of the highest paid CEOs. Other people would step into their roles, and it's doubtful that there would be any noticeable ability difference between the two.
We don't even know how good the selection criteria are for CEOs. Maybe the skills and abilities needed to get hired are not the same skills and abilities need to do the job? In fact, it seems likely to me that in order to make the really big bucks as CEO one must focus on self-promotion at the expense of the interests of shareholders. So by the very nature of the selection process, the highest paid CEOs are inevitably not the best people for the job.
Tyler Cowen explains that CEO pay has risen with market capitalization of companies. Some commenters to his blog have asked why the CEO pay should rise based on external factors (such as the increase in the P/E ratios of all publicly traded companies) which the CEO has no contol over? If CEO pay is based on their contribution to the economy, then they shouldn't get any more money for doing the same job they were doing before. But in fact, CEO pay is not based on what they contribute, but rather what's available in the pool. So rising market capitalizations increase the amount of money available for CEOs to take from the pool. In the same manner, increased profits for baseball enable the best baseball players to earn more money even though their batting average hasn't changed. Increased box office revenues enable the most popular actors to make more money even though their acting skills remain constant.
It's certainly understandable for the average worker to feel that winner-takes-all compensation schemes are unfair, because the people at the top are gettinging paid for all the hard work of the people at the bottom who receive little benefit from the increasing fortunes of their employers.
Tyler Cowen has a NY Times column supposedly offering a "contrarian" take on the issue (also see his blog post).
Cowen's viewpoint is that CEOs are paid according to their value, and I don't see why that's contrarian because it's the standard line spouted by pro-free market people.
The proper way to understand CEO pay is to look at it as a winner-takes-all market. A small increase in ability, or luck, results in massively greater earnings. So whether or not CEOs are overpaid depends on how you define "overpaid." Winner-takes-all markets happen to be a naturally occurring phenomena, but if you define "overpaid" as meaning someone makes far more money than someone else without actually contributing any additional value to the economy, then yes, CEOs are certainly overpaid.
As I explained in my post about baseball and Atlas Shrugged, the loss of the world's top baseball players would have little effect on the economy, and the same would apply to the loss of the highest paid CEOs. Other people would step into their roles, and it's doubtful that there would be any noticeable ability difference between the two.
We don't even know how good the selection criteria are for CEOs. Maybe the skills and abilities needed to get hired are not the same skills and abilities need to do the job? In fact, it seems likely to me that in order to make the really big bucks as CEO one must focus on self-promotion at the expense of the interests of shareholders. So by the very nature of the selection process, the highest paid CEOs are inevitably not the best people for the job.
Tyler Cowen explains that CEO pay has risen with market capitalization of companies. Some commenters to his blog have asked why the CEO pay should rise based on external factors (such as the increase in the P/E ratios of all publicly traded companies) which the CEO has no contol over? If CEO pay is based on their contribution to the economy, then they shouldn't get any more money for doing the same job they were doing before. But in fact, CEO pay is not based on what they contribute, but rather what's available in the pool. So rising market capitalizations increase the amount of money available for CEOs to take from the pool. In the same manner, increased profits for baseball enable the best baseball players to earn more money even though their batting average hasn't changed. Increased box office revenues enable the most popular actors to make more money even though their acting skills remain constant.
It's certainly understandable for the average worker to feel that winner-takes-all compensation schemes are unfair, because the people at the top are gettinging paid for all the hard work of the people at the bottom who receive little benefit from the increasing fortunes of their employers.
Who's the most overpaid CEO? The most underpaid?
Boston Business Journal - August 26, 2004
by Tom Witkowski
Boston Business JournalWe list the highest-paid CEOs and rank them according to how their company performed compared with their peers'
During the past three years, as Cognex Corp.'s annual revenue dropped 19 percent then climbed back to above its 2001 level, CEO Robert Shillman went home without a paycheck.
Shillman forfeited his salary for two of those years as Natick-based Cognex, which sells machine vision systems used in making semiconductors -- suffered through a chip industry slowdown, putting him among the five most underpaid CEOs in Massachusetts.
In a study of CEO compensation, the Boston Business Journal examined the 100 highest-paid CEOs in Massachusetts and ranked them according to the performance of their companies. The result appeared in our CEOs of Massachusetts supplement to the BBJ. It showed which CEOs were paid handsomely while running companies that did poorly last year -- landing those CEOs in the category of overpaid executives -- and also showed which CEOs were more modestly compensated while leading their firms to stellar heights, becoming the region's "underpaid" CEOs.
The criteria for the rankings compared each CEO's pay against that of the other top 100 paid CEOs. Then we ranked their companies' performances against each other. To determine whether a CEO was relatively overpaid, fairly paid or underpaid, we subtracted each CEO's pay rank from his or her company's combined performance rank to find a resulting pay/performance figure. See the chart below.
For example, Shillman's compensation put him among the top five underpaid chief executives in terms of pay vs. company performance: His company's performance was 30th out of 100 companies, but among the highest paid execs, Shillman was listed at 97 -- a differential of 67, a gap bested by only four other execs on our list.
The Cognex CEO's compensation last year totaled $574,295, most of it coming from exercised stock options. He also received a $21,450 bonus from the company. Shillman's most recent annual salary, $89,190 in 2001, is low compared to the six- and seven-figure standards set by his peers. His decision to go without that salary also sets him apart from his local corner-office colleagues.
Likewise, Candela Corp. CEO Gerard Puorro's compensation put him at the bottom of the list among the 100 highest-paid chief execs, yet his Wayland-based laser company's performance was near the top, ranked fourth in our performance index, which took into account revenue growth, return on equity and stock appreciation.
With comparatively low compensation in a year his company did so well, at $649,939, he was (relatively speaking) the most underpaid chief executive in Massachusetts. In 2002, Puorro recommended his salary be lowered as a cost-cutting measure. His salary was restored to its previous level last year as the company became profitable again. Exercising options
Exercised stock options were a portion of the compensation of many underpaid and overpaid CEOs in Massachusetts in 2003. Despite possible changes in corporate accounting that would mandate expensing stock options, executive pay experts said that those options remain part of companies' compensation plans for now. And in a year when the public markets were on the upswing, as in 2003, option grants from earlier years gave some CEOs the extra fuel to make it to the top of the pile of overpaid CEOs.
Vertex Pharmaceuticals Inc. CEO Joshua Boger went home with $2.1 million in total compensation, ranking him 34th on the list of top-paid CEOs. His Cambridge-based drug company, however, finished last as No. 100 in terms of performance. Boger realized $1.5 million from the sale of stock, on top of his $525,000 salary. But Boger also asked not to receive a bonus for the year, even though the compensation committee of his company's board of directors evaluated his performance as "excellent" for the year, according to the 2003 proxy statement.
"The committee and the full board of directors' subjective view of Dr. Boger has consistently been that he is an outstanding scientist who has demonstrated exceptional ability to guide the company and to manage well not only the company's scientific progress, but its strategic business efforts," the committee said in the filing with the U.S. Securities and Exchange Commission.
Arnold Zetcher, CEO of Hingham-based clothing retailer Talbots Inc., went home last year with $7.4 million in total compensation, $5.3 million of it from options exercised and $809,000 of it in bonus. When you consider the company's performance, that pay scale stamps Zetcher's ticket into the overpaid club.
When a significant portion of an executive's compensation comes from exercising options, the argument can be made that the return is partially compensation and partially a return on investment, said William Caporizzo, co-chair of the tax department with William Cutler Pickering Hale and Dorr LLP.
"The new accounting rules would argue that if we're going to expense options based on the value on the day it was granted, that's the compensation. Anything beyond that is more investment," Caporizzo said, referring to yet-to-be implemented rules.
Larry Liebenow, the chief executive of textile manufacturer Quaker Fabric Corp., has the distinction of being the most overpaid CEO in the state, according to our rankings, with the bulk of Liebenow's 2003 compensation coming from $2.2 million in exercised options.
Among the companies of the 100 top-paid chief executives, Fall River-based Quaker ranked No. 92 for its 2003 performance. Liebenow's pay, however, came in at No. 23 on the compensation list.
Boston-based State Street Corp.'s David Spina, with $7.1 million in compensation, was the No. 8 highest-paid CEO, and Boston-based Nstar's Thomas May, with $4 million, was the No. 14 highest-paid CEO. When the performance of State Street and Nstar is taken into consideration, both Spina and May were also overpaid: State Street's performance ranking was 67th out of the 100 and Nstar's ranking landed at No. 71, according to our research.
Despite the potential changes in how they account for options, companies are in a holding pattern and not making any sudden moves to eliminate stock options. Under today's accounting rules, options are not considered an expense, and thus, are a long-term incentive for an executive and still considered free for the company, experts said.
"Make the expensing happen and I think you'll end up with a more rational compensation environment that allows boards and executives to really evaluate the strategic usefulness of each instrument, without the problem that one of the instruments is free and all the others aren't," said Joseph Rich, Marlborough-based vice chairman of Pearl Meyer & Partners, which counsels boards of directors on compensation.
Change is coming, however. The current trend is toward offering executives a mix of stock options and restricted stock. An analysis of 2004 proxy statements by Pearl Meyer showed that executives last year took home 23 percent more in cash and restricted stock, although their total compensation fell.
by Tom Witkowski
Boston Business JournalWe list the highest-paid CEOs and rank them according to how their company performed compared with their peers'
During the past three years, as Cognex Corp.'s annual revenue dropped 19 percent then climbed back to above its 2001 level, CEO Robert Shillman went home without a paycheck.
Shillman forfeited his salary for two of those years as Natick-based Cognex, which sells machine vision systems used in making semiconductors -- suffered through a chip industry slowdown, putting him among the five most underpaid CEOs in Massachusetts.
In a study of CEO compensation, the Boston Business Journal examined the 100 highest-paid CEOs in Massachusetts and ranked them according to the performance of their companies. The result appeared in our CEOs of Massachusetts supplement to the BBJ. It showed which CEOs were paid handsomely while running companies that did poorly last year -- landing those CEOs in the category of overpaid executives -- and also showed which CEOs were more modestly compensated while leading their firms to stellar heights, becoming the region's "underpaid" CEOs.
The criteria for the rankings compared each CEO's pay against that of the other top 100 paid CEOs. Then we ranked their companies' performances against each other. To determine whether a CEO was relatively overpaid, fairly paid or underpaid, we subtracted each CEO's pay rank from his or her company's combined performance rank to find a resulting pay/performance figure. See the chart below.
For example, Shillman's compensation put him among the top five underpaid chief executives in terms of pay vs. company performance: His company's performance was 30th out of 100 companies, but among the highest paid execs, Shillman was listed at 97 -- a differential of 67, a gap bested by only four other execs on our list.
The Cognex CEO's compensation last year totaled $574,295, most of it coming from exercised stock options. He also received a $21,450 bonus from the company. Shillman's most recent annual salary, $89,190 in 2001, is low compared to the six- and seven-figure standards set by his peers. His decision to go without that salary also sets him apart from his local corner-office colleagues.
Likewise, Candela Corp. CEO Gerard Puorro's compensation put him at the bottom of the list among the 100 highest-paid chief execs, yet his Wayland-based laser company's performance was near the top, ranked fourth in our performance index, which took into account revenue growth, return on equity and stock appreciation.
With comparatively low compensation in a year his company did so well, at $649,939, he was (relatively speaking) the most underpaid chief executive in Massachusetts. In 2002, Puorro recommended his salary be lowered as a cost-cutting measure. His salary was restored to its previous level last year as the company became profitable again. Exercising options
Exercised stock options were a portion of the compensation of many underpaid and overpaid CEOs in Massachusetts in 2003. Despite possible changes in corporate accounting that would mandate expensing stock options, executive pay experts said that those options remain part of companies' compensation plans for now. And in a year when the public markets were on the upswing, as in 2003, option grants from earlier years gave some CEOs the extra fuel to make it to the top of the pile of overpaid CEOs.
Vertex Pharmaceuticals Inc. CEO Joshua Boger went home with $2.1 million in total compensation, ranking him 34th on the list of top-paid CEOs. His Cambridge-based drug company, however, finished last as No. 100 in terms of performance. Boger realized $1.5 million from the sale of stock, on top of his $525,000 salary. But Boger also asked not to receive a bonus for the year, even though the compensation committee of his company's board of directors evaluated his performance as "excellent" for the year, according to the 2003 proxy statement.
"The committee and the full board of directors' subjective view of Dr. Boger has consistently been that he is an outstanding scientist who has demonstrated exceptional ability to guide the company and to manage well not only the company's scientific progress, but its strategic business efforts," the committee said in the filing with the U.S. Securities and Exchange Commission.
Arnold Zetcher, CEO of Hingham-based clothing retailer Talbots Inc., went home last year with $7.4 million in total compensation, $5.3 million of it from options exercised and $809,000 of it in bonus. When you consider the company's performance, that pay scale stamps Zetcher's ticket into the overpaid club.
When a significant portion of an executive's compensation comes from exercising options, the argument can be made that the return is partially compensation and partially a return on investment, said William Caporizzo, co-chair of the tax department with William Cutler Pickering Hale and Dorr LLP.
"The new accounting rules would argue that if we're going to expense options based on the value on the day it was granted, that's the compensation. Anything beyond that is more investment," Caporizzo said, referring to yet-to-be implemented rules.
Larry Liebenow, the chief executive of textile manufacturer Quaker Fabric Corp., has the distinction of being the most overpaid CEO in the state, according to our rankings, with the bulk of Liebenow's 2003 compensation coming from $2.2 million in exercised options.
Among the companies of the 100 top-paid chief executives, Fall River-based Quaker ranked No. 92 for its 2003 performance. Liebenow's pay, however, came in at No. 23 on the compensation list.
Boston-based State Street Corp.'s David Spina, with $7.1 million in compensation, was the No. 8 highest-paid CEO, and Boston-based Nstar's Thomas May, with $4 million, was the No. 14 highest-paid CEO. When the performance of State Street and Nstar is taken into consideration, both Spina and May were also overpaid: State Street's performance ranking was 67th out of the 100 and Nstar's ranking landed at No. 71, according to our research.
Despite the potential changes in how they account for options, companies are in a holding pattern and not making any sudden moves to eliminate stock options. Under today's accounting rules, options are not considered an expense, and thus, are a long-term incentive for an executive and still considered free for the company, experts said.
"Make the expensing happen and I think you'll end up with a more rational compensation environment that allows boards and executives to really evaluate the strategic usefulness of each instrument, without the problem that one of the instruments is free and all the others aren't," said Joseph Rich, Marlborough-based vice chairman of Pearl Meyer & Partners, which counsels boards of directors on compensation.
Change is coming, however. The current trend is toward offering executives a mix of stock options and restricted stock. An analysis of 2004 proxy statements by Pearl Meyer showed that executives last year took home 23 percent more in cash and restricted stock, although their total compensation fell.
CEOs are paid too much for what they do; too much more than their average worker
CEOs Are Overpaid
From F. John Reh,Your Guide to Management.FREE Newsletter. Sign Up Now!
CEOs are paid too much for what they do; too much more than their average worker
Pay for Performance According to Business Week, the average CEO of a major corporation made 42 times the average hourly worker's pay in 1980. By 1990 that had almost doubled to 85 times. In 2000, the average CEO salary reached an unbelievable 531 times that of the average hourly worker.
"Pay for performance", tying executive compensation to the financial success of their company, has become very popular in the past decade. In the face of the largest bull market ever, that isn't surprising. It also isn't realistic. What CEO honestly believes that all or most of the appreciation in value of their company is due to their own talent?
ZD Net's Total Compensation Vs. Total Return To Shareholders chart (no longer online), shows that total return to shareholders was higher for many companies whose CEO compensation was under $500,000 than for companies who paid their CEOs multi-million dollar compensation.
Workers Unite The AFL-CIO Executive Paywatch site gives people a lot of information about what they consider "the excessive salaries, bonuses and perks of the CEOs of major corporations".
The site features a calculator that shows how your salary increase over the past five years compares to that of a CEO. They also give you tools to "take action to stop runaway CEO pay."
Is It Justified? John Mariotti, president and founder of The Enterprise Group, asks "CEO Pay: How Much is Too Much?" and answers the question himself. Citing Derek Bok, he points out that as business becomes more complex, the demand for top executives increases and thus they command greater and greater pay. He also noted that such huge awards do little to motivate these outstanding performers, who are generally more motivated by challenge.
Mike Hughlett, Staff Writer for PioneerPlanet, thinks the reason why CEO pay soars so high is that CEO's pay generally is set by the compensation committee, usually comprised of other chief executives.
Graef Crystal, writing for the San Francisco Business Times, Uses Steven Jobs, co-founder of Apple Computer to prove his point on CEO compensation: the composition of a CEO's pay package has nothing to do with his future performance and the CEO may not make all that much of a difference in whether the company is a success or a failure.
In her article "Lowering the Bar", WSJ writer Joann S. Lublin notes "Pay for performance? Forget it. These days, CEOs are assured of getting rich -- however the company does."
So Why Bother? CEOs are paid too much. It has minimal effect on their performance. It has no quantifiable effect on the performance of their companies. The only measurable effect is to drive an ever widening gap between the CEOs and the people they depend on to produce results.
It is up to us as Management Professionals to return some equity to compensation of upper management and the individual contributors while trust and respect between the two parties still can be salvaged. If we don't, worker motivation, and resultant innovation, will plummet.
From F. John Reh,Your Guide to Management.FREE Newsletter. Sign Up Now!
CEOs are paid too much for what they do; too much more than their average worker
Pay for Performance According to Business Week, the average CEO of a major corporation made 42 times the average hourly worker's pay in 1980. By 1990 that had almost doubled to 85 times. In 2000, the average CEO salary reached an unbelievable 531 times that of the average hourly worker.
"Pay for performance", tying executive compensation to the financial success of their company, has become very popular in the past decade. In the face of the largest bull market ever, that isn't surprising. It also isn't realistic. What CEO honestly believes that all or most of the appreciation in value of their company is due to their own talent?
ZD Net's Total Compensation Vs. Total Return To Shareholders chart (no longer online), shows that total return to shareholders was higher for many companies whose CEO compensation was under $500,000 than for companies who paid their CEOs multi-million dollar compensation.
Workers Unite The AFL-CIO Executive Paywatch site gives people a lot of information about what they consider "the excessive salaries, bonuses and perks of the CEOs of major corporations".
The site features a calculator that shows how your salary increase over the past five years compares to that of a CEO. They also give you tools to "take action to stop runaway CEO pay."
Is It Justified? John Mariotti, president and founder of The Enterprise Group, asks "CEO Pay: How Much is Too Much?" and answers the question himself. Citing Derek Bok, he points out that as business becomes more complex, the demand for top executives increases and thus they command greater and greater pay. He also noted that such huge awards do little to motivate these outstanding performers, who are generally more motivated by challenge.
Mike Hughlett, Staff Writer for PioneerPlanet, thinks the reason why CEO pay soars so high is that CEO's pay generally is set by the compensation committee, usually comprised of other chief executives.
Graef Crystal, writing for the San Francisco Business Times, Uses Steven Jobs, co-founder of Apple Computer to prove his point on CEO compensation: the composition of a CEO's pay package has nothing to do with his future performance and the CEO may not make all that much of a difference in whether the company is a success or a failure.
In her article "Lowering the Bar", WSJ writer Joann S. Lublin notes "Pay for performance? Forget it. These days, CEOs are assured of getting rich -- however the company does."
So Why Bother? CEOs are paid too much. It has minimal effect on their performance. It has no quantifiable effect on the performance of their companies. The only measurable effect is to drive an ever widening gap between the CEOs and the people they depend on to produce results.
It is up to us as Management Professionals to return some equity to compensation of upper management and the individual contributors while trust and respect between the two parties still can be salvaged. If we don't, worker motivation, and resultant innovation, will plummet.
The great overpaid CEO debate
The great overpaid CEO debate
By Fred Whittlesey
http://news.com.com/The+great+overpaid+CEO+debate/2010-1014_3-6078739.html
Are CEOs overpaid? Many people think so.
Many potential causes of overpayment have been identified: CEOs with too much power, inattentive boards of directors, conflicts of interest by compensation consultants, the use of stock options--the list goes on.
Some studies show the average CEO was paid $10 million to $15 million in 2005. This includes their salary, bonus, stock option gains, stock grants, and various executive benefits and perquisites.
Are rank-and-file workers underpaid? Everyone, I suppose, feels a little underpaid. Some data sources indicate the average American worker was paid about $40,000 in 2005. Anyone working in the technology sector knows this average pay level would barely hire a below-average administrative assistant in any of the technology hot spots in the U.S. And the average CEO pay has been earned by more than a few average technology company workers who had stock options in the right company at the right time.
So, are CEOs overpaid compared to rank-and-file workers? If you read the media stories this year, and in previous years, you might conclude that they are. Some interest groups have determined that the ratio of CEO pay to average worker pay is an appropriate measure of this problem. Some Web sites allow you to calculate how underpaid you are compared with your CEO. According to these sources, chief executive pay is between 250 and 500 times that of the average worker.
If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations.
Who are these CEOs who are purportedly paid hundreds of times more than the average worker? In most analyses, they are CEOs managing the largest public companies in America--usually the top 200 to 500. These are largest of the thousands of public corporations in the country. Given that executives typically earn more pay for managing larger organizations, we might expect these individuals to be at the top of the pay hierarchy.
It's more difficult to determine the relative value of the individuals in a job. Most CEOs I've dealt with are highly intelligent, have advanced degrees--often from one of the top universities in this country or elsewhere in the world--and have worked 70 or more hours per week for most of their career. Even if they weren't CEO of a public company, people with a background like that get paid much more than the average person.
Measuring worker pay If we want to understand the pay level of the average worker in America, we would have to ensure we included all forms of their pay--wage or salary, shift differential, overtime pay, bonuses, tips, commission, stock-based compensation, hiring bonuses, retention bonuses, and so forth. Without digressing into which data sources do and do not capture all of this (hint: none do), this would provide a good portrayal of how much the average worker is paid for his work. We would assume that this data reflects average performers with average levels of education, and so forth. But that's not the data that's being used in these comparisons.
I can't recall seeing a comparison of how much software engineers are paid compared with postal workers, or database administrators compared with bank tellers. This might mean that no one believes these would be relevant comparisons, because different jobs with different educational requirements and different levels of responsibility should be paid differently. We don't always know or agree how differently, but differently.
It still would be completely meaningless, however--just like comparing CEO pay to average worker pay.
I am in no way trying to serve as an apologist for high executive pay levels. After more than 20 years in the field of executive compensation, I have seen numerous examples of inappropriate pay for executives--not only in amount, but in reason and in form. Billions of dollars have been paid to thousands of executives who have destroyed companies and ruined workers' lives. I have seen executives join a company shortly before a takeover and get millions in "change in control" payments.
I also have seen numerous examples of inappropriate pay for nonexecutives--the so-called average worker. I have seen software sales representatives who made far too much commission due to a flawed incentive plan; a receptionist earning more than double the market rate because she had been with the company for decades, and there was no pay cap for any position; software engineers who joined a company at just the right time, and cashed out their stock options just before the stock price crashed and the company went out of business, due to a poorly developed software product.
Fixing the right problem If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations. That only will encourage misguided legislation, and we've had plenty of that. It also might encourage big shareholders and their advisors to begin bullying companies into change using arbitrary standards, and we've had plenty of that, too.
Disclosure and publicity of pay allows us to identify the egregious situations and apply pressure to fix them, but only when the data seem accurate to reasonable people.
I just read that U2 made $260 million in gross receipts on their 2005 tour. That's $3 million per show (about $1 million per hour)--far above Motley Crue's $33 million for a similar number of shows (a paltry $400,000 per show, well under $200,000 per hour). I don't think most Americans want to impose an arbitrary cap on CEO pay any more than we want to impose a cap on U2's concert tour receipts because we know U2 would stop touring, and good CEOs would stop CEO-ing, and neither of those is to our benefit.
Let's focus on the real problem and not on concocted metrics rooted in sociopolitical sentiments. There is a lot of fixing needed in executive pay practices, and these average worker pay ratios have the potential to send us in the wrong direction.
By Fred Whittlesey
http://news.com.com/The+great+overpaid+CEO+debate/2010-1014_3-6078739.html
Are CEOs overpaid? Many people think so.
Many potential causes of overpayment have been identified: CEOs with too much power, inattentive boards of directors, conflicts of interest by compensation consultants, the use of stock options--the list goes on.
Some studies show the average CEO was paid $10 million to $15 million in 2005. This includes their salary, bonus, stock option gains, stock grants, and various executive benefits and perquisites.
Are rank-and-file workers underpaid? Everyone, I suppose, feels a little underpaid. Some data sources indicate the average American worker was paid about $40,000 in 2005. Anyone working in the technology sector knows this average pay level would barely hire a below-average administrative assistant in any of the technology hot spots in the U.S. And the average CEO pay has been earned by more than a few average technology company workers who had stock options in the right company at the right time.
So, are CEOs overpaid compared to rank-and-file workers? If you read the media stories this year, and in previous years, you might conclude that they are. Some interest groups have determined that the ratio of CEO pay to average worker pay is an appropriate measure of this problem. Some Web sites allow you to calculate how underpaid you are compared with your CEO. According to these sources, chief executive pay is between 250 and 500 times that of the average worker.
If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations.
Who are these CEOs who are purportedly paid hundreds of times more than the average worker? In most analyses, they are CEOs managing the largest public companies in America--usually the top 200 to 500. These are largest of the thousands of public corporations in the country. Given that executives typically earn more pay for managing larger organizations, we might expect these individuals to be at the top of the pay hierarchy.
It's more difficult to determine the relative value of the individuals in a job. Most CEOs I've dealt with are highly intelligent, have advanced degrees--often from one of the top universities in this country or elsewhere in the world--and have worked 70 or more hours per week for most of their career. Even if they weren't CEO of a public company, people with a background like that get paid much more than the average person.
Measuring worker pay If we want to understand the pay level of the average worker in America, we would have to ensure we included all forms of their pay--wage or salary, shift differential, overtime pay, bonuses, tips, commission, stock-based compensation, hiring bonuses, retention bonuses, and so forth. Without digressing into which data sources do and do not capture all of this (hint: none do), this would provide a good portrayal of how much the average worker is paid for his work. We would assume that this data reflects average performers with average levels of education, and so forth. But that's not the data that's being used in these comparisons.
I can't recall seeing a comparison of how much software engineers are paid compared with postal workers, or database administrators compared with bank tellers. This might mean that no one believes these would be relevant comparisons, because different jobs with different educational requirements and different levels of responsibility should be paid differently. We don't always know or agree how differently, but differently.
It still would be completely meaningless, however--just like comparing CEO pay to average worker pay.
I am in no way trying to serve as an apologist for high executive pay levels. After more than 20 years in the field of executive compensation, I have seen numerous examples of inappropriate pay for executives--not only in amount, but in reason and in form. Billions of dollars have been paid to thousands of executives who have destroyed companies and ruined workers' lives. I have seen executives join a company shortly before a takeover and get millions in "change in control" payments.
I also have seen numerous examples of inappropriate pay for nonexecutives--the so-called average worker. I have seen software sales representatives who made far too much commission due to a flawed incentive plan; a receptionist earning more than double the market rate because she had been with the company for decades, and there was no pay cap for any position; software engineers who joined a company at just the right time, and cashed out their stock options just before the stock price crashed and the company went out of business, due to a poorly developed software product.
Fixing the right problem If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations. That only will encourage misguided legislation, and we've had plenty of that. It also might encourage big shareholders and their advisors to begin bullying companies into change using arbitrary standards, and we've had plenty of that, too.
Disclosure and publicity of pay allows us to identify the egregious situations and apply pressure to fix them, but only when the data seem accurate to reasonable people.
I just read that U2 made $260 million in gross receipts on their 2005 tour. That's $3 million per show (about $1 million per hour)--far above Motley Crue's $33 million for a similar number of shows (a paltry $400,000 per show, well under $200,000 per hour). I don't think most Americans want to impose an arbitrary cap on CEO pay any more than we want to impose a cap on U2's concert tour receipts because we know U2 would stop touring, and good CEOs would stop CEO-ing, and neither of those is to our benefit.
Let's focus on the real problem and not on concocted metrics rooted in sociopolitical sentiments. There is a lot of fixing needed in executive pay practices, and these average worker pay ratios have the potential to send us in the wrong direction.
4 ways you can fight greedy CEOs
Don't just fume about grossly overpaid execs and other corporate scams. You can make a concrete difference. Here are the people to contact and steps to take to get reforms under way.
By Michael Brush
The boss has always made a bundle. In 1940, U.S. corporations paid their chief executives 48 times as much as the average worker, on average. No small gap.
But that doesn't come close to today's great pay divide. CEOs earned $11.3 million on average last year, a 27% increase from the prior year and a huge 262 times more than the average worker. Barry Diller, the chairman and chief executive of the IAC/InterActiveCorp (IACI, news, msgs), took home $295 million last year, including pay, bonus and options cashed in, according to the Corporate Library.
What's worse? The CEOs don't seem to see anything wrong with that type of compensation. Diller recently said critics of his pay and similar packages are "birdbrains."
The momentum of CEO pay, obviously, isn't headed in the right direction. But you don't have to be a Democrat to appreciate that the party about to take power may give the little guy a bit more say in how much the big guy gets paid.
In a minute, I'll give you a set of four steps you can take to help get executive compensation back under control. First, another quick look at why such action is needed.
According to the Corporate Library, a corporate governance research firm, here's what the five highest-paid CEOs made last year:
1. IAC/InterActiveCorp's Diller got $295 million.
2. Capital One Financial (COF, news, msgs) CEO Richard Fairbank got $249 million by cashing in options.
3. Nabors Industries (NBR, news, msgs) CEO Eugene Isenberg got $203 million in pay, bonus, cashed-in options and restricted stock.
4. Yahoo (YHOO, news, msgs) CEO Terry Semel pocketed $183 million in pay, cashed-in options and restricted stock.
5. KB Home (KBH, news, msgs) chief Bruce Karaz got $156 million in pay, bonus, cashed-in options, restricted stock and incentive grants.
If these kinds of giveaways to CEOs tick you off, you don't have to just sit and fume about it.
Congress, regulators and companies themselves are considering a slate of reforms that would go a long way to correct the problem -- and you can take several concrete steps to support these changes.
Here's a list of whom to contact (click a name to send an e-mail):
SEC Chairman Christopher Cox's office. (Click the name to send an e-mail to Cox.)
Your representatives in the U.S. House and Senate.
Rep. Barney Frank, D-Mass., who will chair the House Committee on Financial Services, and Sen. Chris Dodd, D-Conn., who will head up the Senate Committee on Banking, Housing and Urban Affairs next year. (Please, e-mail MSN Money a copy of whatever you send to any member of Congress.)
And here's my quick list of reforms that you can try and do something about:
Boot the directors The real culprits behind enormous salary increases for CEOs are boards that approve these egregious pay packages in the first place. So it's important to vote against board members on pay committees that let these bloated pay packages through. "Unless you boot off directors who agree to these outrageous pay plans, there is no way to stop it," says Nell Minow of the Corporate Library.
"Don't just discipline board members, change them," says Patrick McGurn, special counsel for Institutional Shareholder Services. Shareholders may soon get more power to do so -- but you'll need to support reform efforts aimed at getting greater "proxy access" for shareholders, as the reform effort is called.
The Securities and Exchange Commission recently sided with a company that rejected a shareholder proposal which would have given shareholders holding more than 3% of its shares the right to nominate board candidates. But a federal court has told the SEC to reconsider its ruling, which may give shareholders more say in policing boards that play too loose with corporate checkbooks.
Get a clearer view What you can do -- Step #1: Contact the SEC and tell them you support the rights of shareholders to use the corporate proxy machine to propose changes in the rules on how board members are elected. "This should be on top of the list," says McGurn. Tell your representatives in Congress, too, since they have the power to influence SEC policy. The case involves American International Group (AIG, news, msgs) and the American Federation of State, County and Municipal Employees (AFSCME), which wants the bylaws change.
The good news is that it will be much easier to see how much executives make come springtime, when companies file proxy materials -- the documents containing details of executive pay.
The SEC recently adopted rules calling for better clarity, and pay experts are expecting some big surprises. "That in and of itself will have a chilling effect," says Minow, "although these people seem incapable of embarrassment."
But there's still room for improvement in disclosure. One shortcoming is that the SEC doesn't require companies to reveal the targets (such as company profits, revenues, etc.) executives have to hit to receive performance-based pay. This is a problem, since options often account for the lion's share of bloated pay packages.
Outgoing UnitedHealth Group (UNH, news, msgs) CEO William McGuire racked up an awesome $1.6 billion worth of exercisable options and $174.9 million out-of-the-money options during his tenure at the helm. That's on top of a salary, bonus and "other pay" package worth $10.6 million in 2005 alone, according to the Corporate Library.
Unmask the consultants What you can do -- Step #2: Tell the regulators and your representatives that you want more detail about what targets CEOs have to hit to increase the size of their paychecks.
Companies hire compensation consultants to help determine how much to pay their executives. The question is whether that advice is objective. For instance, those same consultants try to get business from the companies to advise on their employees' retirement plans. If they give the CEO a healthy pay raise, does that help them land or keep other consulting jobs?
What you can do -- Step #3: Ask the SEC and your representatives to require disclosure of all relationships between compensation consultants and the companies whose executive pay packages they design.
Fantasy shareholding If you hold just $2,000 worth of a company's stock for over a year, you have the right to submit votes to fellow shareholders. "For $2,000 you get a seat at the table with the board of directors and the CEO," says McGurn. "It's like fantasy baseball."
You can't force companies to ask shareholders to vote on anything (see Step #1). One area that's strictly off limits: votes that would constrain management on day-to-day business decisions. (That's fair enough. You wouldn't want shareholders micromanaging companies.)
But you can get proposals that ask shareholders to vote on several changes that can improve the quality of boards and help reign in executive pay, says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
For several years, for example, Bristol-Myers Squibb (BMY, news, msgs) shareholder Dundas Flaherty filed proposals that asked shareholders if they wanted the office of chairman and chief executive to be split. Having the same person in both roles, some critics say, compromises board independence. About 40% of shareholders approved the proposal each time, says Cornish Hitchcock, a Washington D.C.-based attorney who helped Flaherty. In 2005, Bristol-Myers Squibb agreed to split the jobs.
What you can do -- Step # 4: As a shareholder, ask companies to put pay-related reforms to a vote -- or at least be sure to look for pay-related proposals from other activist shareholders and vote "yes."
For example, watch for proposals asking you to vote against excessive golden parachutes, excessive pay packages and the compensation committee reports that justify them, says Hitchcock, who also advises Amalgamated Bank's LongView index funds on how to use shareholder proposals.
Elson says proposals that require majority voting for directors are crucial. This change means that directors have to get a majority of all votes cast to win -- not just the largest number among several candidates. This makes it harder for boards and managers to get a rubber stamp on their favored candidates when the broader shareholder base is apathetic.
There are, of course, other steps to take. And anytime you go head to head with a corporation, it can be an uphill fight. But with the political winds swinging toward shareholders' favor, now's the time to give it a try.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
By Michael Brush
The boss has always made a bundle. In 1940, U.S. corporations paid their chief executives 48 times as much as the average worker, on average. No small gap.
But that doesn't come close to today's great pay divide. CEOs earned $11.3 million on average last year, a 27% increase from the prior year and a huge 262 times more than the average worker. Barry Diller, the chairman and chief executive of the IAC/InterActiveCorp (IACI, news, msgs), took home $295 million last year, including pay, bonus and options cashed in, according to the Corporate Library.
What's worse? The CEOs don't seem to see anything wrong with that type of compensation. Diller recently said critics of his pay and similar packages are "birdbrains."
The momentum of CEO pay, obviously, isn't headed in the right direction. But you don't have to be a Democrat to appreciate that the party about to take power may give the little guy a bit more say in how much the big guy gets paid.
In a minute, I'll give you a set of four steps you can take to help get executive compensation back under control. First, another quick look at why such action is needed.
According to the Corporate Library, a corporate governance research firm, here's what the five highest-paid CEOs made last year:
1. IAC/InterActiveCorp's Diller got $295 million.
2. Capital One Financial (COF, news, msgs) CEO Richard Fairbank got $249 million by cashing in options.
3. Nabors Industries (NBR, news, msgs) CEO Eugene Isenberg got $203 million in pay, bonus, cashed-in options and restricted stock.
4. Yahoo (YHOO, news, msgs) CEO Terry Semel pocketed $183 million in pay, cashed-in options and restricted stock.
5. KB Home (KBH, news, msgs) chief Bruce Karaz got $156 million in pay, bonus, cashed-in options, restricted stock and incentive grants.
If these kinds of giveaways to CEOs tick you off, you don't have to just sit and fume about it.
Congress, regulators and companies themselves are considering a slate of reforms that would go a long way to correct the problem -- and you can take several concrete steps to support these changes.
Here's a list of whom to contact (click a name to send an e-mail):
SEC Chairman Christopher Cox's office. (Click the name to send an e-mail to Cox.)
Your representatives in the U.S. House and Senate.
Rep. Barney Frank, D-Mass., who will chair the House Committee on Financial Services, and Sen. Chris Dodd, D-Conn., who will head up the Senate Committee on Banking, Housing and Urban Affairs next year. (Please, e-mail MSN Money a copy of whatever you send to any member of Congress.)
And here's my quick list of reforms that you can try and do something about:
Boot the directors The real culprits behind enormous salary increases for CEOs are boards that approve these egregious pay packages in the first place. So it's important to vote against board members on pay committees that let these bloated pay packages through. "Unless you boot off directors who agree to these outrageous pay plans, there is no way to stop it," says Nell Minow of the Corporate Library.
"Don't just discipline board members, change them," says Patrick McGurn, special counsel for Institutional Shareholder Services. Shareholders may soon get more power to do so -- but you'll need to support reform efforts aimed at getting greater "proxy access" for shareholders, as the reform effort is called.
The Securities and Exchange Commission recently sided with a company that rejected a shareholder proposal which would have given shareholders holding more than 3% of its shares the right to nominate board candidates. But a federal court has told the SEC to reconsider its ruling, which may give shareholders more say in policing boards that play too loose with corporate checkbooks.
Get a clearer view What you can do -- Step #1: Contact the SEC and tell them you support the rights of shareholders to use the corporate proxy machine to propose changes in the rules on how board members are elected. "This should be on top of the list," says McGurn. Tell your representatives in Congress, too, since they have the power to influence SEC policy. The case involves American International Group (AIG, news, msgs) and the American Federation of State, County and Municipal Employees (AFSCME), which wants the bylaws change.
The good news is that it will be much easier to see how much executives make come springtime, when companies file proxy materials -- the documents containing details of executive pay.
The SEC recently adopted rules calling for better clarity, and pay experts are expecting some big surprises. "That in and of itself will have a chilling effect," says Minow, "although these people seem incapable of embarrassment."
But there's still room for improvement in disclosure. One shortcoming is that the SEC doesn't require companies to reveal the targets (such as company profits, revenues, etc.) executives have to hit to receive performance-based pay. This is a problem, since options often account for the lion's share of bloated pay packages.
Outgoing UnitedHealth Group (UNH, news, msgs) CEO William McGuire racked up an awesome $1.6 billion worth of exercisable options and $174.9 million out-of-the-money options during his tenure at the helm. That's on top of a salary, bonus and "other pay" package worth $10.6 million in 2005 alone, according to the Corporate Library.
Unmask the consultants What you can do -- Step #2: Tell the regulators and your representatives that you want more detail about what targets CEOs have to hit to increase the size of their paychecks.
Companies hire compensation consultants to help determine how much to pay their executives. The question is whether that advice is objective. For instance, those same consultants try to get business from the companies to advise on their employees' retirement plans. If they give the CEO a healthy pay raise, does that help them land or keep other consulting jobs?
What you can do -- Step #3: Ask the SEC and your representatives to require disclosure of all relationships between compensation consultants and the companies whose executive pay packages they design.
Fantasy shareholding If you hold just $2,000 worth of a company's stock for over a year, you have the right to submit votes to fellow shareholders. "For $2,000 you get a seat at the table with the board of directors and the CEO," says McGurn. "It's like fantasy baseball."
You can't force companies to ask shareholders to vote on anything (see Step #1). One area that's strictly off limits: votes that would constrain management on day-to-day business decisions. (That's fair enough. You wouldn't want shareholders micromanaging companies.)
But you can get proposals that ask shareholders to vote on several changes that can improve the quality of boards and help reign in executive pay, says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
For several years, for example, Bristol-Myers Squibb (BMY, news, msgs) shareholder Dundas Flaherty filed proposals that asked shareholders if they wanted the office of chairman and chief executive to be split. Having the same person in both roles, some critics say, compromises board independence. About 40% of shareholders approved the proposal each time, says Cornish Hitchcock, a Washington D.C.-based attorney who helped Flaherty. In 2005, Bristol-Myers Squibb agreed to split the jobs.
What you can do -- Step # 4: As a shareholder, ask companies to put pay-related reforms to a vote -- or at least be sure to look for pay-related proposals from other activist shareholders and vote "yes."
For example, watch for proposals asking you to vote against excessive golden parachutes, excessive pay packages and the compensation committee reports that justify them, says Hitchcock, who also advises Amalgamated Bank's LongView index funds on how to use shareholder proposals.
Elson says proposals that require majority voting for directors are crucial. This change means that directors have to get a majority of all votes cast to win -- not just the largest number among several candidates. This makes it harder for boards and managers to get a rubber stamp on their favored candidates when the broader shareholder base is apathetic.
There are, of course, other steps to take. And anytime you go head to head with a corporation, it can be an uphill fight. But with the political winds swinging toward shareholders' favor, now's the time to give it a try.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
Overpaid CEO? Here's how to find out
Is the chief of a company collecting a treasure he doesn't deserve? Here's how to peek at his paycheck -- and a standard to guide you.
By Michael Brush
Few injustices tick off our readers like corporate bosses who make too much money while their shareholders go bust.
One of my columns on the subject, "The 5 most outrageously overpaid CEOs," brought in a torrent of mail.
"No one person is worth several hundred times what the average worker makes," wrote one reader. Another likened juicy CEO pay packages to "legal theft from the shareholders."
But many readers had a more practical bent. "Thanks for your article! Not because we love to hate these guys, but because it gives us another tool to check before we invest," wrote one reader.
Whether you're simply interested in checking what your employer pays its chief or you're using executive pay as a variable in your investing strategy, there's a fairly easy way to discover what a CEO makes. Below, I'll give you a step-by-step guide in how to use that tool.
Who's watching the boss? Here's why investors should care: Corporate governance experts say that when boards dole out excessive pay to top execs, it is a sure sign that those boards aren't working hard enough for shareholders.
"The decision of what to pay a top executive is one of the best indicators of what a board is doing and thinking," says Ric Marshall, chief analyst at The Corporate Library, an independent research firm that provides corporate governance analysis. "A board that can't say no to top executives, or feels executives should be entitled to some level of compensation that is far above the median, is an ineffective board."
A recent study by Moody's Investors Service confirms Marshall's analysis. The study, called CEO Compensation and Credit Risk, found that excessive pay packages are linked to credit-default risk and credit-ratings downgrades.
Out-of-line bonuses and options grants were more telling than excessive base salaries, says Chris Mann, an author of the Moody's study. This makes sense, because highly paid CEOs tend to get most of their pay in the form of bonuses and options. So that's where you're likely to see the excesses, too.
A CEO with too much influence over a company's board has little incentive to work hard or make smart decisions, because he or she will be raking in millions regardless of how the company performs, concludes the Moody's study.
Do your own detective work As an investor, how do you gauge whether a board is overpaying a CEO? A complete analysis seems tough, since boards compensate execs with a dizzying array of base salaries, bonuses, options, severance packages and retirement plans. And then there are the perks, such as access to the company jet for personal use, or payments to cover pet grooming.
The good news is that you can get at a lot of basic information on a CEO's pay package by checking a single document companies file with the U.S. Securities and Exchange Commission. This is the proxy statement -- which is meant to update shareholders on the state of a company prior to its annual meeting.
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Finding the proxy is easy. Just go to the "company search" page at the SEC Web site, type in your company's name or ticker, and look for the Def 14A form -- the code name for the proxy.
Once you've opened the proxy, find the section titled "executive compensation." Here, you'll find a table laying out the pay packages for the five highest paid execs for the past three years.
As an example, let's take a look at the proxy for Cendant (CD, news, msgs). Cendant is a travel and real-estate services company whose Chief Executive Henry Silverman regularly comes under attack for getting paid too much as the shares of his company lag the market. Over the past two years, Cendant shares are up 10%, compared to gains of 20% for the S&P 500 ($INX). The stock price is roughly where it was in 1998.
On page 21 of the company's most recent proxy statement, filed on March 2, 2005, you'll find a table with all the major components of Silverman's pay package: base salary, bonus, options, restricted stock grants and "other" compensation.
You'll see that Silverman earned a base salary of more than $3 million each of the past three years, bonuses in the $7.8 million-to-$15.2 million range and "other" compensation -- like retirement plan and insurance payments -- of anywhere from $3.3 million to $5 million each year.
How much is too much? It seems like a lot, but how do you know for sure?
There are no hard and fast rules. But one way to size up a pay package is to compare it to what others in the industry got. Silverman received total direct compensation of $23.9 million last year, compared to a median of $4 million at 12 similar companies, says Institutional Shareholder Services, which advises institutional investors on proxy voting and corporate governance matters.
Since individual investors don't have access to industry averages, here's a basic rule of thumb. The Corporate Library gets suspicious whenever CEO pay packages are more than 20% above the median for similar size companies. "We have found that companies that pay more than 20% above the median are consistently the ones that end up in scandal, in an investigation or in bankruptcy," says Marshall.
To help you make the calculation, see the box below for a breakdown of the median level of pay -- including base pay, bonus, restricted stock grants, options and "other" pay -- at companies based on their market capitalization, thanks to Moody's.
Median CEO pay levels at U.S. companies, by market capitalization
Company market cap
Total Compensation
Bonus
Options
$250 million to $1 billion
$1,843,000
$254,300
$717,000
$1 billion to $3 billion
$3,133,000
$550,000
$1,419,000
$3 billion to $5 billion
$5,372,000
$850,000
$2,345,000
$5 billion to $10 billion
$6,199,000
$1,030,000
$3,155,000
$10 billion +
$9,389,000
$987,000
$6,176,000
Source: Moody's Investors Services
To be fair to Cendant, the board at that company has trimmed Silverman's pay package and taken steps to better link pay to performance. But ISS still thinks the package is excessive because pay-for-performance hurdles are too low, and his pay too high. "Over the past year, Cendant underperformed both its index and its peers. Yet, the company's CEO is one of the highest paid in terms of salary and in terms of bonus," says ISS. Cendant declined comment.
Watch the perks Though they don't cost as much as lavish bonuses and pay packages, excessive perks are another red flag. Perks are typically, but not always, summarized in a footnote to "other compensation" in the proxy.
The Corporate Library, for example, chides American Express (AXP, news, msgs), Cendant and Honeywell International (HON, news, msgs) for giving their CEOs from $100,000 to $200,000 a year to subsidize personal use of corporate aircraft. At Dominion Resources (D, news, msgs), Chief Executive Thomas Capps recently got $385,510 in tax reimbursements.
Sometimes, companies slip top execs nice perks but you can't find them in the proxy statement. The Corporate Library, for example, takes Colgate Palmolive (CL, news, msgs) to task for releasing its "Above and Beyond" perk plan as part of a quarterly statement in November 2004, even though most investors expect to find such information in the proxy. The plan offers 800 executives anywhere from $2,000 to $11,500 a year to spend on personal services including housekeeping, fitness center membership dues (plus the cost of personal trainers and running shoes), tickets for entertainment events, club membership, and even pet grooming.
Chief Executive Reuben Mark said that Colgate is frugal when it comes to perks -- forgoing extravagances like corporate aircraft or subsidized housing for top brass. He says the Above and Beyond plan was part of an overhaul of company perks that reduced spending on such goodies by over 50%. The $2,000 to $11,500 annual Above and Beyond payments to 800 execs is too small to warrant a mention in the company's proxy statement, says Mark.
Other companies mentioned in this column declined to comment.
Advance detective work Corporate-governance experts also like to dig into the details of severance packages and retirement plans -- often a back door way for boards to hand CEOs sweet reimbursement packages.
For severance packages, generally anything more than three times annual compensation is out of line, says Patrick McGurn, special counsel for Institutional Shareholder Services. Institutional Shareholder Services also dings companies if they offer top brass severance packages even when they are terminated for poor performance.
Special Coverage
MSN Money exposes bloated CEO salaries and compromised corporate ethics. Read about what impact it has on your finances and join the discussion in our message board. Click here to go to our special coverage.
It's a lot harder to figure out what's going on with executive retirement packages like deferred compensation or supplemental benefit payout programs. Some details are in the proxy statements, but they are "extremely sketchy," says McGurn. "It takes someone with a lifetime of experience to estimate what the potential payouts would be. We were hoping to get some rules from the SEC to force greater clarity, but we haven't seen them yet."
McGurn would also like to see the SEC force companies to provide what he calls the "holy cow" numbers. That's a simple set of figures that would make it easy for investors to understand the sometimes stunning total pay and benefits package. "We are not seeing a lot of companies provide that on a voluntary basis," laments McGurn. "We would love to see the SEC require it."
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.
By Michael Brush
Few injustices tick off our readers like corporate bosses who make too much money while their shareholders go bust.
One of my columns on the subject, "The 5 most outrageously overpaid CEOs," brought in a torrent of mail.
"No one person is worth several hundred times what the average worker makes," wrote one reader. Another likened juicy CEO pay packages to "legal theft from the shareholders."
But many readers had a more practical bent. "Thanks for your article! Not because we love to hate these guys, but because it gives us another tool to check before we invest," wrote one reader.
Whether you're simply interested in checking what your employer pays its chief or you're using executive pay as a variable in your investing strategy, there's a fairly easy way to discover what a CEO makes. Below, I'll give you a step-by-step guide in how to use that tool.
Who's watching the boss? Here's why investors should care: Corporate governance experts say that when boards dole out excessive pay to top execs, it is a sure sign that those boards aren't working hard enough for shareholders.
"The decision of what to pay a top executive is one of the best indicators of what a board is doing and thinking," says Ric Marshall, chief analyst at The Corporate Library, an independent research firm that provides corporate governance analysis. "A board that can't say no to top executives, or feels executives should be entitled to some level of compensation that is far above the median, is an ineffective board."
A recent study by Moody's Investors Service confirms Marshall's analysis. The study, called CEO Compensation and Credit Risk, found that excessive pay packages are linked to credit-default risk and credit-ratings downgrades.
Out-of-line bonuses and options grants were more telling than excessive base salaries, says Chris Mann, an author of the Moody's study. This makes sense, because highly paid CEOs tend to get most of their pay in the form of bonuses and options. So that's where you're likely to see the excesses, too.
A CEO with too much influence over a company's board has little incentive to work hard or make smart decisions, because he or she will be raking in millions regardless of how the company performs, concludes the Moody's study.
Do your own detective work As an investor, how do you gauge whether a board is overpaying a CEO? A complete analysis seems tough, since boards compensate execs with a dizzying array of base salaries, bonuses, options, severance packages and retirement plans. And then there are the perks, such as access to the company jet for personal use, or payments to cover pet grooming.
The good news is that you can get at a lot of basic information on a CEO's pay package by checking a single document companies file with the U.S. Securities and Exchange Commission. This is the proxy statement -- which is meant to update shareholders on the state of a company prior to its annual meeting.
Special Coverage
MSN Money exposes bloated CEO salaries and compromised corporate ethics. Read about what impact it has on your finances and join the discussion in our message board. Click here to go to our special coverage.
Finding the proxy is easy. Just go to the "company search" page at the SEC Web site, type in your company's name or ticker, and look for the Def 14A form -- the code name for the proxy.
Once you've opened the proxy, find the section titled "executive compensation." Here, you'll find a table laying out the pay packages for the five highest paid execs for the past three years.
As an example, let's take a look at the proxy for Cendant (CD, news, msgs). Cendant is a travel and real-estate services company whose Chief Executive Henry Silverman regularly comes under attack for getting paid too much as the shares of his company lag the market. Over the past two years, Cendant shares are up 10%, compared to gains of 20% for the S&P 500 ($INX). The stock price is roughly where it was in 1998.
On page 21 of the company's most recent proxy statement, filed on March 2, 2005, you'll find a table with all the major components of Silverman's pay package: base salary, bonus, options, restricted stock grants and "other" compensation.
You'll see that Silverman earned a base salary of more than $3 million each of the past three years, bonuses in the $7.8 million-to-$15.2 million range and "other" compensation -- like retirement plan and insurance payments -- of anywhere from $3.3 million to $5 million each year.
How much is too much? It seems like a lot, but how do you know for sure?
There are no hard and fast rules. But one way to size up a pay package is to compare it to what others in the industry got. Silverman received total direct compensation of $23.9 million last year, compared to a median of $4 million at 12 similar companies, says Institutional Shareholder Services, which advises institutional investors on proxy voting and corporate governance matters.
Since individual investors don't have access to industry averages, here's a basic rule of thumb. The Corporate Library gets suspicious whenever CEO pay packages are more than 20% above the median for similar size companies. "We have found that companies that pay more than 20% above the median are consistently the ones that end up in scandal, in an investigation or in bankruptcy," says Marshall.
To help you make the calculation, see the box below for a breakdown of the median level of pay -- including base pay, bonus, restricted stock grants, options and "other" pay -- at companies based on their market capitalization, thanks to Moody's.
Median CEO pay levels at U.S. companies, by market capitalization
Company market cap
Total Compensation
Bonus
Options
$250 million to $1 billion
$1,843,000
$254,300
$717,000
$1 billion to $3 billion
$3,133,000
$550,000
$1,419,000
$3 billion to $5 billion
$5,372,000
$850,000
$2,345,000
$5 billion to $10 billion
$6,199,000
$1,030,000
$3,155,000
$10 billion +
$9,389,000
$987,000
$6,176,000
Source: Moody's Investors Services
To be fair to Cendant, the board at that company has trimmed Silverman's pay package and taken steps to better link pay to performance. But ISS still thinks the package is excessive because pay-for-performance hurdles are too low, and his pay too high. "Over the past year, Cendant underperformed both its index and its peers. Yet, the company's CEO is one of the highest paid in terms of salary and in terms of bonus," says ISS. Cendant declined comment.
Watch the perks Though they don't cost as much as lavish bonuses and pay packages, excessive perks are another red flag. Perks are typically, but not always, summarized in a footnote to "other compensation" in the proxy.
The Corporate Library, for example, chides American Express (AXP, news, msgs), Cendant and Honeywell International (HON, news, msgs) for giving their CEOs from $100,000 to $200,000 a year to subsidize personal use of corporate aircraft. At Dominion Resources (D, news, msgs), Chief Executive Thomas Capps recently got $385,510 in tax reimbursements.
Sometimes, companies slip top execs nice perks but you can't find them in the proxy statement. The Corporate Library, for example, takes Colgate Palmolive (CL, news, msgs) to task for releasing its "Above and Beyond" perk plan as part of a quarterly statement in November 2004, even though most investors expect to find such information in the proxy. The plan offers 800 executives anywhere from $2,000 to $11,500 a year to spend on personal services including housekeeping, fitness center membership dues (plus the cost of personal trainers and running shoes), tickets for entertainment events, club membership, and even pet grooming.
Chief Executive Reuben Mark said that Colgate is frugal when it comes to perks -- forgoing extravagances like corporate aircraft or subsidized housing for top brass. He says the Above and Beyond plan was part of an overhaul of company perks that reduced spending on such goodies by over 50%. The $2,000 to $11,500 annual Above and Beyond payments to 800 execs is too small to warrant a mention in the company's proxy statement, says Mark.
Other companies mentioned in this column declined to comment.
Advance detective work Corporate-governance experts also like to dig into the details of severance packages and retirement plans -- often a back door way for boards to hand CEOs sweet reimbursement packages.
For severance packages, generally anything more than three times annual compensation is out of line, says Patrick McGurn, special counsel for Institutional Shareholder Services. Institutional Shareholder Services also dings companies if they offer top brass severance packages even when they are terminated for poor performance.
Special Coverage
MSN Money exposes bloated CEO salaries and compromised corporate ethics. Read about what impact it has on your finances and join the discussion in our message board. Click here to go to our special coverage.
It's a lot harder to figure out what's going on with executive retirement packages like deferred compensation or supplemental benefit payout programs. Some details are in the proxy statements, but they are "extremely sketchy," says McGurn. "It takes someone with a lifetime of experience to estimate what the potential payouts would be. We were hoping to get some rules from the SEC to force greater clarity, but we haven't seen them yet."
McGurn would also like to see the SEC force companies to provide what he calls the "holy cow" numbers. That's a simple set of figures that would make it easy for investors to understand the sometimes stunning total pay and benefits package. "We are not seeing a lot of companies provide that on a voluntary basis," laments McGurn. "We would love to see the SEC require it."
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.
The 5 most outrageously overpaid CEOs
Here’s the pantheon of execs whose paychecks soar while their companies suffer. Also: 5 who produce stellar results for a comparative pittance.By Michael BrushAll's fair, they say, in love and war. Not much is out of bounds when it comes to executive pay, either.Consider Michael Ovitz. Although stockholders sued, the one-time Hollywood superagent gets to keep the $140 million he was paid for 14 months of work as president at Walt Disney (DIS, news, msgs). A Delaware judge ruled in mid-August that Disney's board didn't breach its responsibilities in awarding the huge severance package.While the Ovitz payout may have been legal, it's the type of corporate behavior that costs investors millions of dollars every year. And it's not just a few spendthrift companies throwing good dollars after bad leaders. We scoured corporate regulatory filings and found plenty of examples of overpaid underachievers in executive suites. Ultimately, we came up with a list of the five most overpaid bad chief executives, and another of the five most underpaid good execs.
Start investing with $100.Explore ournew ETF center.Our goal was more than uncovering a few egregious examples of corporate largess. This was an exercise in finding out which boards are working for shareholders and which have lost sight of that mission.Fat pay, thin performanceRather than focus on single-year offenders, we rounded up -- with help from Standard & Poor's -- the worst performing stocks in the S&P 1,500 over the past several years. Then we looked for the CEOs with the fattest compensation packages -- including base pay, stock grants and the value of options awarded the chiefs, as calculated using the Black-Scholes model, a common tool for valuing options.We also asked S&P to help us find the CEOs who collect the least pay in exchange for the best performance.
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The worst offendersThe upshot: Some boards award breathtakingly large pay packages to CEOs even as the executives trash their shareholders’ investments. The worst:
Top honors go to Gary Smith at Ciena (CIEN, news, msgs). His shareholders have been virtually wiped out -- losing 93% in the past four years. His compensation over that period: $41.2 million.
Jure Sola, the CEO and chairman at Sanmina-SCI (SANM, news, msgs) collected $26.4 million during the past four years while Sanmina shares fell 78%. The bulk of Sola's pay came in the form of a performance bonus of $19.9 million, paid for hitting one recent quarter's targets.
Sun Microsystems (SUNW, news, msgs) paid Scott McNealy, its CEO, chairman and founder, $13.1 million a year over the past four years, even as Sun's shareholders lost 76% of their money.
Shares of supermarket chain Albertson's (ABS, news, msgs) fell 39% over the past four years. Despite this dismal record, Albertson’s CEO and Chairman Larry Johnston collected a total of $76.2 million in that time.
Under CEO Peter Dolan’s watch at Bristol-Myers Squibb (BMY, news, msgs), shareholders have seen the stock decline by 48% over the past four years. Dolan took home $41 million.“I feel nothing but contempt,” says Don Hodges, president of the Hodges Fund (HDPMX). “They pay themselves like they are rock stars.” Particularly irksome to Paul Hodgson, an analyst at the Corporate Library, an independent research firm that provides corporate governance analysis, was the bonus paid by Sanmina-SCI. Hodgson’s complaint: Performance pay should reward long-term results. But the Sanmina-SCI board handed out a huge bonus just because of good results in one recent quarter -- even as long-term investors suffered. Hodges thinks egregious pay packages may have more to do with oversized egos than any real challenges that come with occupying the corner office. He points out that Sun Microsystems’ McNealy, for example, earns 32 times President Bush’s annual $400,000 salary. “Their pay doesn’t have anything to do with the level of responsibility. And it doesn’t seem to have anything to do with how well they run their companies, either,” says Hodges. It’s getting worse, by some measures. The ratio of CEO compensation to pay for the rank and file was roughly 200-to-1 in the early 1990s. Now it's more than 450-to-1, says David Lewin, a professor at the UCLA Anderson School of Management. Worse, many average workers are now paid partly through bonus systems and stock options, meaning their livelihoods are tied to often-volatile company stocks. Many executives have similar incentives, but at a vastly greater scale. They win almost regardless of how their stocks fare. Boards gone badDoes this really matter to investors? You bet. The Hodges fund is up 35% a year, annualized, over the past three years. Hodges chalks up his good results in part to the fact that he deliberately avoids companies where there’s little connection between CEO pay and performance. There is some logic to this. “When you have a breakdown in the executive compensation process in which CEOs are receiving undeserved pay, it is an indication that there is a power imbalance in the boardroom,” says Brandon Rees, a research analyst with the AFL-CIO Office of Investment, which keeps a close eye on executive pay. “When you have a weak board of directors, that is where you have broader corporate governance breakdowns which can include accounting fraud," says Rees."The problems at Tyco International (TYC, news, msgs), Enron and WorldCom were all preceded by excessive executive compensation packages. They were a red flag for investors.”Weak governanceNo one is suggesting the companies on our top-five overpaid execs list are committing accounting fraud. But a few companies on our list get weak to lousy grades for corporate governance. Unfortunately, all but Bristol-Myers declined to talk with us.
Sanmina-SCI's corporate governance is worse than 93% of other companies in the S&P 500 ($INX), according to Patrick McGurn, special counsel for Institutional Shareholder Services, which advises institutional investors on proxy voting and corporate governance issues. Sanmina-SCI gets low grades for having a poison-pill anti-takeover mechanism. That protects management and the board, taking away an important shareholder tool -- the threat of an outside buyer -- for trying to fix problems like excessive pay.
Bristol-Myers’ board gets an “F” from the Corporate Library -- in part because of excessive pay that is not linked to performance, but also because groups of board members get voted on as panels in different years. Known as a “staggered board,” this makes it harder for shareholders to quickly kick out a board they don’t like. Bristol-Myers says it is taking steps to link executive pay to performance. The corporate governance watchdogs at ISS agree. But the company still has a long way to go, says Hodgson of the Corporate Library.
Ciena has lousier corporate governance policies than 95% of the companies in the S&P 500, says ISS. The company gets low grades for excessive options to top execs, a poison pill and a staggered board. Albertson's and Sun Microsystems are more friendly to shareholders, but you can’t really say they are shining examples. Each has better corporate governance than about half the companies in the S&P 500, says ISS.ISS gives Sun Microsystems credit for paying McNealy a minuscule base salary of just $100,000 from 2002 to 2004, at the low end of the scale for CEOs. It also says the board has done a commendable job of structuring McNealy’s compensation to focus on annual bonus and long-term incentives. Even so, last year McNealy took in over $7 million by exercising stock options, and the board granted him another $1.5 million in options.A better wayCan investors do more than vote with their feet? Activist shareholders sometimes fight overly generous pay. The AFL-CIO, for example recently submitted a proposal to Albertson’s shareholders asking for more performance-based pay. Another approach is to simply look for companies that have great performance and reasonably paid leaders. That’s a sign that boards and top managers feel a responsibility towards shareholders. Some examples:
Ceradyne (CRDN, news, msgs) paid CEO Joel Moskowitz an average of just $766,000 over the past three years, while Ceradyne's stock shot up 924%. The company makes ceramic components used in technology.
Whole Foods Market (WFMI, news, msgs) paid CEO John Mackey an average $645,000 a year over the past four years, while the stock gained 308%.
Jo-Ann Stores (JAS, news, msgs) paid CEO Alan Rosskamm $1.6 million a year over the past four years. The stock jumped 611%.
Hibbett Sporting Goods (HIBB, news, msgs) paid CEO Michael Newsome $969,000 a year over the past four years as Hibbett shares soared 553%.
Digi International (DGII, news, msgs) paid CEO Joseph T. Dunsmore $744,000 a year over the past three years while the stock advanced 320%.One sign of these companies' investor-friendly nature: Ceradyne, Whole Foods and Jo-Ann Stores use performance-based options and stock grants, says Hodgson. Jo-Ann Stores, he says, "is an example of a company that has so much faith in its executives, the board is willing to tie their long-term compensation even closer to performance.” Many of these companies are much smaller than the five on our worst-paid CEO list. So you might expect CEO salaries to be lower. But from an investor’s point of view, does that really matter when you are making 500% on a stock in four years instead of losing 93%?
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.
Start investing with $100.Explore ournew ETF center.Our goal was more than uncovering a few egregious examples of corporate largess. This was an exercise in finding out which boards are working for shareholders and which have lost sight of that mission.Fat pay, thin performanceRather than focus on single-year offenders, we rounded up -- with help from Standard & Poor's -- the worst performing stocks in the S&P 1,500 over the past several years. Then we looked for the CEOs with the fattest compensation packages -- including base pay, stock grants and the value of options awarded the chiefs, as calculated using the Black-Scholes model, a common tool for valuing options.We also asked S&P to help us find the CEOs who collect the least pay in exchange for the best performance.
Related news and commentary on MSN Money
•
Extravagant CEO pay is back
•
While pensions fall short, CEOs fly high
•
Disney's new magic makes stock a bargain
•
Dear CEOs: Stop fudging your numbers
•
18 stocks for the bull market's last gasp
•
Jubak's 50 best stocks in the world
The worst offendersThe upshot: Some boards award breathtakingly large pay packages to CEOs even as the executives trash their shareholders’ investments. The worst:
Top honors go to Gary Smith at Ciena (CIEN, news, msgs). His shareholders have been virtually wiped out -- losing 93% in the past four years. His compensation over that period: $41.2 million.
Jure Sola, the CEO and chairman at Sanmina-SCI (SANM, news, msgs) collected $26.4 million during the past four years while Sanmina shares fell 78%. The bulk of Sola's pay came in the form of a performance bonus of $19.9 million, paid for hitting one recent quarter's targets.
Sun Microsystems (SUNW, news, msgs) paid Scott McNealy, its CEO, chairman and founder, $13.1 million a year over the past four years, even as Sun's shareholders lost 76% of their money.
Shares of supermarket chain Albertson's (ABS, news, msgs) fell 39% over the past four years. Despite this dismal record, Albertson’s CEO and Chairman Larry Johnston collected a total of $76.2 million in that time.
Under CEO Peter Dolan’s watch at Bristol-Myers Squibb (BMY, news, msgs), shareholders have seen the stock decline by 48% over the past four years. Dolan took home $41 million.“I feel nothing but contempt,” says Don Hodges, president of the Hodges Fund (HDPMX). “They pay themselves like they are rock stars.” Particularly irksome to Paul Hodgson, an analyst at the Corporate Library, an independent research firm that provides corporate governance analysis, was the bonus paid by Sanmina-SCI. Hodgson’s complaint: Performance pay should reward long-term results. But the Sanmina-SCI board handed out a huge bonus just because of good results in one recent quarter -- even as long-term investors suffered. Hodges thinks egregious pay packages may have more to do with oversized egos than any real challenges that come with occupying the corner office. He points out that Sun Microsystems’ McNealy, for example, earns 32 times President Bush’s annual $400,000 salary. “Their pay doesn’t have anything to do with the level of responsibility. And it doesn’t seem to have anything to do with how well they run their companies, either,” says Hodges. It’s getting worse, by some measures. The ratio of CEO compensation to pay for the rank and file was roughly 200-to-1 in the early 1990s. Now it's more than 450-to-1, says David Lewin, a professor at the UCLA Anderson School of Management. Worse, many average workers are now paid partly through bonus systems and stock options, meaning their livelihoods are tied to often-volatile company stocks. Many executives have similar incentives, but at a vastly greater scale. They win almost regardless of how their stocks fare. Boards gone badDoes this really matter to investors? You bet. The Hodges fund is up 35% a year, annualized, over the past three years. Hodges chalks up his good results in part to the fact that he deliberately avoids companies where there’s little connection between CEO pay and performance. There is some logic to this. “When you have a breakdown in the executive compensation process in which CEOs are receiving undeserved pay, it is an indication that there is a power imbalance in the boardroom,” says Brandon Rees, a research analyst with the AFL-CIO Office of Investment, which keeps a close eye on executive pay. “When you have a weak board of directors, that is where you have broader corporate governance breakdowns which can include accounting fraud," says Rees."The problems at Tyco International (TYC, news, msgs), Enron and WorldCom were all preceded by excessive executive compensation packages. They were a red flag for investors.”Weak governanceNo one is suggesting the companies on our top-five overpaid execs list are committing accounting fraud. But a few companies on our list get weak to lousy grades for corporate governance. Unfortunately, all but Bristol-Myers declined to talk with us.
Sanmina-SCI's corporate governance is worse than 93% of other companies in the S&P 500 ($INX), according to Patrick McGurn, special counsel for Institutional Shareholder Services, which advises institutional investors on proxy voting and corporate governance issues. Sanmina-SCI gets low grades for having a poison-pill anti-takeover mechanism. That protects management and the board, taking away an important shareholder tool -- the threat of an outside buyer -- for trying to fix problems like excessive pay.
Bristol-Myers’ board gets an “F” from the Corporate Library -- in part because of excessive pay that is not linked to performance, but also because groups of board members get voted on as panels in different years. Known as a “staggered board,” this makes it harder for shareholders to quickly kick out a board they don’t like. Bristol-Myers says it is taking steps to link executive pay to performance. The corporate governance watchdogs at ISS agree. But the company still has a long way to go, says Hodgson of the Corporate Library.
Ciena has lousier corporate governance policies than 95% of the companies in the S&P 500, says ISS. The company gets low grades for excessive options to top execs, a poison pill and a staggered board. Albertson's and Sun Microsystems are more friendly to shareholders, but you can’t really say they are shining examples. Each has better corporate governance than about half the companies in the S&P 500, says ISS.ISS gives Sun Microsystems credit for paying McNealy a minuscule base salary of just $100,000 from 2002 to 2004, at the low end of the scale for CEOs. It also says the board has done a commendable job of structuring McNealy’s compensation to focus on annual bonus and long-term incentives. Even so, last year McNealy took in over $7 million by exercising stock options, and the board granted him another $1.5 million in options.A better wayCan investors do more than vote with their feet? Activist shareholders sometimes fight overly generous pay. The AFL-CIO, for example recently submitted a proposal to Albertson’s shareholders asking for more performance-based pay. Another approach is to simply look for companies that have great performance and reasonably paid leaders. That’s a sign that boards and top managers feel a responsibility towards shareholders. Some examples:
Ceradyne (CRDN, news, msgs) paid CEO Joel Moskowitz an average of just $766,000 over the past three years, while Ceradyne's stock shot up 924%. The company makes ceramic components used in technology.
Whole Foods Market (WFMI, news, msgs) paid CEO John Mackey an average $645,000 a year over the past four years, while the stock gained 308%.
Jo-Ann Stores (JAS, news, msgs) paid CEO Alan Rosskamm $1.6 million a year over the past four years. The stock jumped 611%.
Hibbett Sporting Goods (HIBB, news, msgs) paid CEO Michael Newsome $969,000 a year over the past four years as Hibbett shares soared 553%.
Digi International (DGII, news, msgs) paid CEO Joseph T. Dunsmore $744,000 a year over the past three years while the stock advanced 320%.One sign of these companies' investor-friendly nature: Ceradyne, Whole Foods and Jo-Ann Stores use performance-based options and stock grants, says Hodgson. Jo-Ann Stores, he says, "is an example of a company that has so much faith in its executives, the board is willing to tie their long-term compensation even closer to performance.” Many of these companies are much smaller than the five on our worst-paid CEO list. So you might expect CEO salaries to be lower. But from an investor’s point of view, does that really matter when you are making 500% on a stock in four years instead of losing 93%?
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.
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