executive pay

The Empty Promise of 'Pay for Performance'

Sam Pizzigati — Sun, 02 Oct 2011 10:58:51 -0400

Pundits and politicians love to righteously denounce the windfall rewards that go to corporate CEOs who 'fail.' But windfalls for CEOs who 'perform,' researchers suggest, ought to worry us far more.

Leo Apotheker, the just-axed CEO at computer giant Hewlett-Packard, appears to have become the latest “poster child” for everything that’s gone haywire in America’s corporate executive suites.

Apotheker spent all of 11 months as HP’s top executive. Over the course of those 11 months, HP shares dropped over $40 billion in value. Not good. Last month the HP board gave Leo the ax. His exit package: nearly $25 million in bonus, stock, and assorted perks.

Also not good. Corporate America, critics are howling, is once again rewarding CEOs “for failure.” Corporate boards, the rant continues, have to start shaping up. They “need to choose,” one top CEO pay expert told Fortune last week, “clear performance measures and set concrete goals to align pay for performance.”

If corporations did this “pay for performance” aligning, the conventional wisdom holds, CEO compensation would cease to be an eyesore. “Pay for performance” would restore basic business common sense to corporate executive pay.

This conventional wisdom currently dominates America’s mainstream discourse over reforming executive pay. To end CEO pay outrages, the standard argument goes, corporations need to get serious about paying for “performance.”

But this conventional wisdom has a bit of a flaw. Major American corporations are already setting “concrete goals to align pay for performance.”

At Hewlett-Packard, for instance, Leo Apotheker was working under an HP “Pay-for-Results Plan” first introduced in 2005.

“The fact of the matter,” Robin Ferracone told Corporate Board Member magazine last week, “is that most executive incentive plans today are driven largely, if not entirely, by objective and quantifiable goals.”

Ferracone should know. She runs one of America’s premiere performance advisory firms and has authored a basic performance pay text, the 2010 Fair Pay, Fair Play: Aligning Executive Performance and Pay.

We seem to have somewhat of a contradiction here. How can anyone claim “pay for performance” as an antidote for our outrageous CEO compensation status quo when we already have “pay for performance” in effect?

Industry insiders like Ferracone, for their part, see no contradiction. They simply refuse to define the current CEO pay status quo as outrageous.

“Most people believe that CEOs are significantly overpaid,” as Ferracone put it to Corporate Board Member last week, “but the reality is that that the majority of CEOs are not overpaid.”

Not overpaid? CEOs last year, the latest Institute Policy Studies annual executive pay study reports, averaged $10.8 million, a take-home 27.8 percent higher than their 2009 compensation — and 325 times more than the pay of average U.S. workers. A generation ago, American CEOs averaged only 30 to 40 times more than average U.S. workers.

“Pay for performance,” given these realities, doesn’t seem to be doing much to fix our broken executive pay apparatus. And that doesn’t at all surprise two of the world's top corporate pay experts, Bruno Frey and Margit Osterloh.

Compensating by predetermined performance criteria, these two University of Zurich analysts suggested last week, is driving our corporate compensation chaos, not solving it. Their latest look at the business research on “pay for performance” crushes the widely held contention — in executive suites — that “performance-based” pay helps enterprises succeed.

In reality, the research shows, pay-for-performance plans end up encouraging employees — at whatever level — to obsess over “those areas covered by the performance criteria” and give short-shrift to everything else.

Executives with millions riding on how well they fulfill performance criteria don’t just obsess over the criteria. They devote, note Frey and Osterloh, inordinate energy and time to manipulating these criteria in their favor.

“The wage explosions observable in many sectors of the economy,” the two analysts observe, “can at least partly be attributed to such manipulations.”

But the problems with “pay for performance” run deeper than incentivizing executives to game the performance-measurement system. Pay for performance, Frey and Osterloh point out, “tends to crowd out intrinsic work motivation” — “the joy of fulfilling a particular task.”

Healthy enterprises — and societies — need to nurture this intrinsic motivation, this pleasure that comes doing from a job well, for its own sake. Intrinsic motivation, Frey and Osterloh note, “supports innovation” and encourages people to achieve tasks that go “beyond the ordinary.”

Enterprises that revolve their compensation around “pay for performance,” by contrast, end up with executives fixated on making as much as possible, as quickly as possible. These execs “exhibit no loyalty.” They jump ship to whoever might pay them more. The inevitable result? High turnover, inefficient operations.

“Pay for performance,” Frey and Osterloh freely acknowledge, certainly seems an “attractive concept.” And top corporate execs have certainly done well by it.

But the rest of us, if we truly want to end executive pay excess and promote more enterprise effectiveness, are going to have to stop genuflecting before anyone who solemnly intones we have to “pay for performance.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up at Inequality.Org to receive Too Much in your email inbox.

Executive Pay Excess: A New Battlefront

Sam Pizzigati — Sun, 17 Apr 2011 18:02:24 -0400

Taxpayers, once again this year, are subsidizing over-the-top CEO pay by the billions. But now on the table: a promising new proposal that encourages corporations to share that excess — or else.

The chief executives of America’s top 500 companies, Forbes reported last week, saw their pay rise an average 12 percent in 2010.

The week before last, the New York Times looked at 200 top companies and computed the median CEO pay hike for those 200 at 12 percent as well. The week before that, USA Today surveyed 158 big firms and calculated that CEO pay last year rose 27 percent.

In short, after a brief Great Recession interlude, corporate executive pay is cascading again — at the same time average American families, by the millions, are still facing foreclosures, frozen paychecks, and furloughs.

In fact, estimates Forbes, executive pay is now rising at least four times faster than the wages of average workers.

One major advocate for average workers, the AFSCME public employee union, last week announced plans to challenge America's latest “indefensible” executive pay surge at the April 28 annual shareholder meetings of Pfizer and Johnson & Johnson, two of world’s most celebrated corporations.

Johnson & Johnson CEO William Weldon collected almost $29 million last year, after drug recalls cost the company $900 million. Pfizer’s now-retired Jeffrey Kindler ended his career with a paycheck close to $25 million, after a stint in the CEO suite that saw his company lose $68 billion in market value.

Activists at AFSCME and other groups have, over recent years, made corporate annual meetings a prime battleground against executive pay excess, and the Dodd-Frank financial reform legislation enacted last summer has handed activists a long-sought new weapon. Under Dodd-Frank, all major publicly traded corporations must now put their executive pay plans up for a shareholder vote.

But this now-mandated vote only rates as “advisory,” and corporate boards remain free to ignore what shareholders choose to “say on pay.” And early Dodd-Frank “say on pay” voting results, corporate governance analyst Eleanor Bloxham noted last week in Fortune, haven’t been all that encouraging.

So far, Bloxham points out, shareholder majorities have voted negatively on executive pay plans at only five companies, with only one of those five a significant national corporate player.

And after the financial crisis, Bloxham's Fortune analysis points out, shareholders at big-time banks getting federal bailout dollars all had an opportunity, under the bailout legislation, to vote down executive pay plans. Not one big-bank CEO pay plan failed to gain a thumbs up.

Developments like these have other CEO pay critics looking for executive compensation reforms with a bit more bite. And the second-generation reforms these critics are advancing seem to be revolving, more and more, around federal tax dollars, both how these dollars get raised and how they get spent.

Under current law, corporations that lavish rewards on the top regularly receive billions in tax dollars via government contracts and subsidies. Corporations also regularly deduct off their taxes billions more, by declaring that the immense paychecks they stuff into executive pockets amount to “performance incentives.” The tax code lets corporations deduct all such “incentives” off their taxes.

These deductions add up. In the last fiscal year before Wall Street’s 2008 crash, corporations deducted $86 billion off their taxes for stock option incentives alone, note Harvard’s Richard Freeman and Joseph Blasi and Douglas Kruse from Rutgers in a new paper they released last month.

Average taxpayers, in effect, are subsidizing executive pay excess. So why not, analysts Freeman, Kruse, and Blasi suggest, turn the tables — and start using the tax code to discourage, not encourage, excessive executive pay?

In two narrow areas of corporate compensation, these scholars remind us, the tax code already plays this discouraging role. Ever since 1942, companies have only been able to deduct pension plan costs off their taxes if the benefits from these plans go to all company workers, not just executives at the top.

Corporate health care plans work the same way. If a company only lets high-ranking employees access a health plan’s benefits, the company can’t claim a tax deduction for the plan’s costs.

Freeman, Kruse, and Blasi want to see this basic principle extended to corporate “performance incentive pay,” to the billions in cash bonuses and stock awards that currently flow overwhelmingly, and sometimes exclusively, to top corporate executives and managers.

More specifically, the three academics are proposing that tax deductions for incentive pay only go to corporations that award “at least as much to the bottom 80 percent of their full-time workforce as they award to their top 5 percent.”

That mandate, Freeman, Kruse, and Blasi believe, would encourage corporations to share the rewards from their success — and discourage a status quo that funnels performance incentive awards to a “highly paid few.”

What if corporations don’t take the hint and continue that status quo? In that case, corporations would lose their tax deductions for incentive pay — and America’s taxpayers “would no longer be subsidizing the benefits to a small number of highly paid workers.”

The new Freeman, Kruse, and Blasi executive pay reform proposal spells out, with careful precision, just how Congress could structure the tax changes necessary to encourage “broad-based incentive compensation.”

The three, working with the Center for American Progress, have given lawmakers all they need to take a major whack at executive pay excess. Lawmakers now have the way. The rest of us now need to give them the will.

The Paycheck Data CEOs Don't Want Us to See

Sam Pizzigati — Sun, 09 Jan 2011 15:19:25 -0500

Corporate America is working feverishly behind the scenes to smother a new federal mandate, enacted last year, that just might revitalize the drive to roll back excessive executive pay.

Sometimes lobbyists — even the most perfectly coiffed — mess up. Lobbyists for Corporate America messed up big-time last summer. They let slip into law, via the 2,300-page Dodd-Frank financial reform bill, an obscure provision that could give future lawmakers a powerful lever for ratcheting down excessive CEO pay.

Now those lobbyists are pushing hard to undo their mistake — and progressives, led by AFL-CIO president Rich Trumka, are pushing back.

The winner won’t be clear until later this year when the Securities and Exchange Commission, the federal watchdog agency over Wall Street, releases the final regulations that will enforce the Dodd-Frank legislation.

That legislation includes an assortment of provisions that impact executive pay. One of these — “say on pay” — has been receiving a good bit of media attention. This “say on pay” guarantees shareholders a regular opportunity to cast “advisory” votes on the CEO pay packages that corporate boards produce.

Corporate boards don’t particularly like the idea of letting shareholders vote on CEO pay, but most have come around to understanding that, by just tweaking how they structure their CEO pay packages, they can continue conducting CEO pay business as usual even with “say on pay” on the books.

Indeed, several other nations — including Britain — already give shareholders the right to take advisory votes on executive pay. Executive pay, in these nations, has kept right on rising.

Corporate boards, in other words, can live with “say on pay.” But they seem to be choking an another Dodd-Frank executive pay provision that Senator Bob Menendez from New Jersey slipped into the legislation at the eleventh hour.

This Menendez mandate requires America’s corporations to disclose, for the first time ever, the specific gap between what they pay their CEO, on an annual basis, and what they pay their most typical workers.

Current law requires corporations to report how much their top five executives are making. Under the Menendez mandate, corporations must now also report their overall wage “median” and the ratio between this median and their top pay.

That information — from a public relations standpoint — could be explosive. CEOs who make 1,000 times more than their most typical workers would have to explain what makes them so much more valuable than competing CEOs who make just 100 times their worker pay.

But the impact of the Menendez mandate could go far beyond public relations. Future lawmakers could, for instance, deny lucrative government contracts to companies that pay their top executives over 100 times what they pay their workers — or 25 times, the CEO-worker pay ratio back in the mid 20th century.

In Britain, advocates for more reasonable executive pay levels are now making just this sort of proposal. The prospect of similar pressure here in the United States has Corporate America shuddering — and pressing the Securities and Exchange Commission to water down the Dodd-Frank Menendez mandate.

The SEC can’t, of course, kill the mandate outright. Pay ratio disclosure, after all, now stands as the law of the land. But the agency still must translate that law into enforceable specifics, and this translating will require a series of rulings, on a variety of fronts, that could mute the Menendez mandate's ultimate impact.

One example: Should corporations be required, under the mandate, to figure into their median worker pay calculations the wages that go to part-timers or workers outside the United States?

Corporate trade groups like the American Benefits Council — an outfit that represents the bulk of the Fortune 500 — want only full-time U.S. workers to be included. For obvious reasons. Including only full-time U.S. workers would let American corporations that outsource jobs — or load up on part-timers — to style themselves as noble “high-wage” employers.

Corporate lobbyists are also attacking the new Dodd-Frank pay ratio mandate as a “highly costly and burdensome” new obligation on corporations. They’re asking the SEC to let companies offer up a “single employee” as “representative” of what they pay their workers, instead of requiring corporations to calculate what their median workers actually get paid.

AFL-CIO president Rich Trumka, in an official response filed last month shortly before the holidays, dubbed these corporate charges clearly “overblown.”

Corporations, Trumka pointed out, already have to file W-2 forms that report every American worker’s total compensation. Foreign nations “have similar reporting requirements.” And firms, he added, can easily prorate their part-time worker pay “to provide a more complete picture of workforce compensation.”

The actual language of the Dodd-Frank law, the AFL-CIO leader went on to note, requires publicly traded companies to disclose “the median of the annual total compensation of all employees of the issuer,’” not just U.S. employees. Corporations could meet this requirement, Trumka suggests, simply by reporting the median pay of their U.S. and foreign workers “as two separate statistics.”

In any case, Trumka emphasizes, investors — and the public at large — need the information the Menendez mandate seeks to provide. A “meaningful disclosure of how employee compensation is allocated over their workforce” will help the public understand how corporations are approaching core operating issues.

Are these corporations, for instance, paying more than minimal wages to “attract the best qualified employees and improve employee productivity”?

Higher levels of median compensation, Trumka reminds the SEC in his statement, can “make it easier to retain workers and reduce employee turnover.” And smaller disparities between the top and bottom of the corporate pay ladder, his SEC comment adds, also strengthen enterprise “cohesion and teamwork,” as the founder of modern management science, Peter Drucker, often argued.

Average Americans, Trumka’s commentary makes clear, have still another reason to care deeply about Corporate America’s pay practices. Everyday Americans have billions of pension dollars invested in U.S. corporations.

“The retirement savings of America’s working families,” says Trumka, “depend in part on public companies having responsible compensation practices for both their CEOs and all other employees.”

Will the SEC agree — and come out with regulations that match the Menendez mandate's full-disclosure spirit? Or will the agency issue regs that let Corporate America off the hook? That answer remains months away.

In the meantime, a variety of public interest groups will be meeting this week in Washington, D.C., to kick off a new CEO pay taskforce — and help make sure SEC rulemakers hear from all America, not just the corporate lobbying set.

Banker Bonus Bingo: Every Card's a Winner

Sam Pizzigati — Mon, 19 Oct 2009 11:21:08 -0400

Can excess on Wall Street ever be ended? Maybe. Some lawmakers in France have a plan that could end it.

America’s biggest banks, amid the shakiest economic times since the 1930s, last week announced record profits — and deposited record billions into bonus pools for their top executives and traders. How did U.S. lawmakers and officialdom respond?

In Congress, a pivotal House committee gave the green light to a Wall Street regulatory reform bill that “does not do enough,” disappointed consumer advocates quickly charged, “to protect taxpayers and our economy.”

The nation's top executive pay regulator did some disappointing, too. “Pay czar” Ken Feinberg, the White House pick to oversee pay at the nation’s biggest bailed-outs, last week convinced soon-to-retire Bank of America CEO Ken Lewis to give up his $1.5 million 2009 salary. Why did Lewis agree? He gets to walk away, at year end, with a retirement package worth $69.3 million.

Welcome to post-meltdown America. One year and counting after last fall’s high-finance collapse, average Americans are reeling and Wall Street is rejoicing. The boom's back!

In fact, for Wall Street’s premiere financial giant, business is booming better than ever. Goldman Sachs last week announced $3.19 billion in third-quarter earnings, about quadruple the firm's profit a year ago. Goldman now has $16.7 billion sitting in its bonus pool.

That pool, by the end of December, will likely top off close to $23 billion, enough to pay each and every Goldman Sachs employee over $700,000 if the bonus dollars were divided equally.

The bonus dollars, past practice makes clear, won’t be equally divided. In 2007, Wall Street's previous record year, Goldman CEO Lloyd Blankfein took home $68 million. In 2008, 212 Goldman Sachs power suits stuffed their pockets with over $3 million each.

This year figures to be even more lucrative. Goldman, as one financial analyst points out, has so far in 2009 “earned three times as much as it did in all of 2008.”

That's not, to be sure, all good news for Goldman. In a record recession, record earnings create a bit of a public relations problem. To forestall any serious political blowback, Goldman's movers and shakers have opened a “charm offensive.” Message: We feel your pain. Reality: Goldman feels no pain — and doesn't intend to start any time soon.

The $200 million Goldman is now donating to charity, as the first thrust in its charm offensive, equals a mighty 6 percent of the firm’s third-quarter profit.

No other U.S. financial firm is matching Goldman’s stunning success. But you won't find other firms complaining. One new survey, released last week, estimates that 23 top U.S. banks and hedge funds will shell out $140 billion in 2009 compensation, $23 billion more than their previous all-time record high set in 2007.

“We can't go back,” a resolute White House press secretary Robert Gibbs told the nation earlier this year, “to the type of pay structure that incentivized wild speculation, like we had before this economic collapse.”

We now have gone back. But could the situation have turned out any differently? Could U.S. officials be doing more, given the complexities of our globalized economy, to prevent a return to standard executive pay operating procedure? They surely could.

At a minimum, U.S. authorities could be insisting, as British officials did last Wednesday, that every big bank in the nation either agree to the modest executive pay reforms that surfaced at last month’s global economic summit in Pittsburgh or lose the right to do business with the government.

The reforms the UK is imposing will keep bankers from immediately collecting all the bonus dollars they “earn” this year. They'll have to wait several years, a delay intended to prevent bankers and traders from cashing in on risky short-term deals that later go sour.

But these UK reforms don't speak at all to the overall size of the rewards that can go to the world’s banking and corporate elite. They should. Governments, as Institute for Policy Studies analyst Sarah Anderson noted last week on the PBS News Hour, should be leveraging “the power of the public purse to encourage more rational pay practices throughout the economy.”

Congress and the White House could do that, Anderson explained, by “limiting how much companies can deduct from their taxes” for executive pay and “using procurement policies to give preferences to companies that have more reasonable gaps between what their executives and their workers are making.”

One day after Anderson’s comments, progressive lawmakers took a daring move in just the direction she was suggesting. Progressive lawmakers in France, that is. The legislators brought before the French National Assembly the world’s boldest executive pay reform package yet.

The new French legislation, if enacted, would cap executive pay, in companies subsidized by tax dollars, at 25 times the pay of a company’s lowest-paid worker.

In all other companies, boards of directors would set the executive-worker multiple that determines the executive pay ceiling, after a process that includes worker input. Shareholders would have the final say on what that multiple would be.

Support in France for an outright income cap — a “maximum wage” — has been building since last spring when the popular French weekly, Marianne, launched a petition campaign for a “salaire maximum.” How far politically can this campaign now go?

One appraisal came last week from Jean-Philippe Huelin, the editor of the French maximum wage campaign’s online presence.

“With a little perseverance — and luck,” says Huelin, the French maximum wage drive just might become a “flagship” issue in the next French presidential election.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

Watch Out Wall Street, Here Come the Dutch!

Sam Pizzigati — Sun, 13 Sep 2009 18:59:41 -0400

All the big banks in the Netherlands, pressed on by the Dutch finance minister, have agreed on a serious plan to restrain banker bonuses. And now the Dutch want the rest of the world to sign on.

Remember that fabled Dutch boy who stuck his finger in a dike and saved family and friends from a ravaging flood? That wonderful tale turns out to be a flight of fancy from a 19th century American novelist who never ever set foot in tulip land. But now a real-life Dutchman is trying to trump that mythic Dutch boy and save the world from a menacing new flood — of banker bonus cash.

Dutch finance minister Wouter Bos last week announced a deal that will limit Dutch banker bonuses to no more than one year’s salary. Next week he’ll be taking that deal to Pittsburgh, where the leaders of the world’s 20 most important economies will be debating possible curbs on the banker pay incentives that one year ago nearly deep-sixed the entire global economy.

The Dutch won’t be the only players in Pittsburgh seeking to rein in excessive financial industry pay. The French and the Germans are talking tough, too. But all these Europeans face a determined opposition — mainly from American and British officials, who seem content, even eager, to let banker pay settle back to business as usual.

And that could prove catastrophic. Bonus business as usual could trigger the same sort of banker recklessness that so devastated the world economy in 2008.

“It's obvious we're setting ourselves up for a repeat,” Sarah Anderson of the Washington, D.C.-based Institute for Policy Studies noted last week. “If people can still make loads of money on investments that blow up a year later, where is the disincentive for doing it all over again?”

The new Dutch bank pay deal aims to avert that repeat. Banks in the Netherlands, under pressure from finance minister Bos, have agreed to “implement a meticulous, restrained and long-term” approach to compensation that takes into account both bank financial self-interest and Dutch public opinion, or “society’s acceptance,” as the new Dutch banking code puts it.

The code will go into effect this January. After that date, executives at any bank based or doing business in the Netherlands will only be able to pocket “variable” pay that adds up to no more than an executive’s annual salary. This “variable” pay encompasses all executive pay incentives, not just bonuses but options and other stock awards as well.

The new Dutch pay standard, finance minister Bos enthused last week, “goes farther than anything that has happened so far in any other country.”

Indeed, the new Dutch code — if adopted internationally — would turn current financial industry pay practices upside-down. Salary currently only represents a tiny piece of bank executive take-home. Last year, for instance, Goldman Sachs CEO Lloyd Blankfein waltzed off with $42.95 million in total compensation. Only $600,000 of that came from salary.

The Dutch code — to discourage risky short-term profiteering — also postpones financial industry bonus payouts until three years after financial transactions have taken place and lets banks “claw back” any bonus outlays discovered to rest on phony short-term “performance.”

The new code, the Association of Dutch Banks crowed last Wednesday, fixes the Netherlands at the “forefront of international discussions” on restraining banker pay. That's certainly true. But the code does sport some troublesome weaknesses.

The code’s cap on pay incentives, for one, only applies to top bank executives, not to the traders who do the highly lucrative grunt work of wheeling and dealing.

And the code carries no penalties for noncompliance. Instead, the code takes a “comply or explain” stance. Firms that don’t comply must explain why they haven't in their official shareholder filings. The code's basic assumption: Dutch shareholders, once informed, will vote out of power managements that ignore the code’s strictures.

Other critics of the new Dutch initiative point to a more fundamental flaw: The code takes aim at the structure of financial industry pay, not the overall level of pay.

The current banker pay structure, Dutch finance minister Bos believes, creates a “perverse incentive to take excessive risks.” If banker pay revolved more around fixed salaries and less around bonuses, he contends, that incentive to engage in risky behavior would ease. For Bos, in effect, the “how” of executive pay now matters more than the “how much.”

But Bos himself, in the past, has recognized that the “how much” most definitely counts for plenty.

“I believe cohesion in society,” he told a British conference just last year, “is not served by inexplicable inequalities.”

Many Netherlanders want to see bolder action than a new banking code to level down those “inexplicable inequalities.” Some are calling for the adoption of what has come to be known as the “Balkenende standard,” the notion that no one paid with tax dollars should be making more than the about $265,000 that now goes to Dutch prime minister Jan Peter Balkenende.

Last month, the Dutch Labor Party gave the Balkenende standard a major boost. No one working in a publicly subsidized enterprise who makes over the standard, the party chair announced, will any longer be able to run as a Labor Party candidate for major office.

Meanwhile, outside the Netherlands, the world’s bankers can’t seem to agree how to respond to the global anger that the “Balkenende standard” reflects.

One banker camp, led by Goldman Sachs CEO Lloyd Blankfein, wants to play nice. Last week, at a financial industry conference in Germany, Blankfein called public outrage over banker pay “understandable and appropriate” and acknowledged that “misapplied” bonuses “can also encourage excess.”

Blankfein’s “solution”: have bankers take more of their pay in stock awards instead of cash bonuses, a subtle shift that simply switches the power-suit pockets that get stuffed.

Other bankers are acknowledging nothing. Bonuses “alone have not caused the financial crisis,” a Credit Suisse exec told last week's high-finance conference in Germany. Other financial dynamics “are substantially more important than the question of compensation,” pronounced the Deutsche Bank CEO.

“We're against absolute caps on compensation levels,” added a Morgan Stanley co-president.

Morgan Stanley need not worry. “Absolute caps” will get no blessing at next week’s G-20 summit in Pittsburgh — and neither, analysts predict, will anything close. The Dutch, apparently, simply don’t have enough fingers

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

The Executive Pay Bubble: A New Progressive Appraisal

Sam Pizzigati — Wed, 02 Sep 2009 11:17:15 -0400

Top execs in high finance, says the Institute for Policy Studies, have turned hard times — for the American people — into a springboard for still another round of huge pay windfalls. Is the CEO pay bubble now beyond popping?

Researchers at the Institute for Policy Studies, a progressive think tank in Washington, D.C., have been publishing an annual report on executive pay ever since 1994. The latest edition of this Executive Excess series has just appeared. The report's verdict? On executive pay, over the last year, nothing has changed — and everything has changed.

The “nothing” surfaces first in Executive Excess 2009. Top U.S. corporate executives, the IPS study documents, are still making hundreds of times more than average U.S. workers, just as they have since the mid 1990s.

To be exact: In 2008, top execs took home 319 times the average U.S. annual worker wage. Three decades ago, before executive pay started skyrocketing, top execs seldom took home more than 30 times average worker pay.

Executive pay, in short, remains painfully excessive. That much hasn’t changed — at all. What has changed? This year, for the first time ever, most Americans now seem to understand the pain that excessive executive pay invariably produces.

Credit that understanding to the global economic meltdown that erupted last September. Super-sized rewards for executives, the new IPS report notes, created the incentives for the executive “recklessness that brought the United States — and the world — to the brink of economic cataclysm.” And most Americans know it, from the President on down.

Unfortunately, the report shows, this new awareness hasn’t translated into any significant action to limit the rewards at America’s economic summit.

“The denizens of our nation’s executive suites,” as the study’s lead author, Sarah Anderson, puts it, “are still going about their business with the same visions of compensation sugarplums that danced in their heads before last September.”

In fact, Anderson goes on to add, America’s financial industry kingpins have essentially turned last year’s high finance meltdown into a springboard to more windfalls.

The IPS report spells out the incredible numbers: The 20 financial industry giants that have received the most bailout dollars from taxpayers have together laid off 160,000 workers since the beginning of last year. In 2008, the top 100 executives at these 20 firms together collected $795.5 million in compensation.

And the gravy train continues. Early in 2009, with financial industry share prices near record lows, Wall Street’s biggest banks began stuffing the pockets of their power suits with millions of stock options. These options give executives the right to buy company shares, a few years down the road, at the early 2009 bargain-basement price.

Financial industry share prices, thanks to the bailout generosity of U.S. taxpayers, have already started rising. These share prices mean that dozens of top financial industry executives have already this year seen their personal portfolios jump by multiple millions — and that's without counting any salary or bonuses.

This past January, for instance, American Express CEO Ken Chenault pocketed a new option grant that gives him the right to buy nearly 1.2 million shares at just $16.71 per share. American Express shares ended August trading near $34, around half the credit card giant’s highest share price in 2007 before the meltdown began. Chenault stands to make, from his 2009 options alone, over $20 million.

At other firms, a similar story. At JPMorgan Chase, for instance, four top executives have seen their 2009 options jump a combined $21.6 million. At PNC, five executives are looking at $18.5 million in gains on their 2009 options.

In all these companies, meanwhile, ordinary shareholders who hold the same shares they held back in 2007 are still sitting deeply in the red. At PNC, the shares these ordinary shareholders hold are trading 35.7 percent off their 2007 high.

In effect, notes the new IPS report, America’s top banks have invented “a perpetual upward-motion machine for executive compensation.”

If share prices should sink, no problem for executives. Boards of directors simply shell out to them new batches of stock options, all exercisable at the current low share price. And if share prices should sink even lower the next year, explains Executive Excess 2009, boards merely hand out still more option “incentives,” all exercisable at an even lower price.

“Boards,” the IPS study sums up, “will just keep lowering the ‘performance’ bar until they find a height executives can jump over.”

The bottom line in all this?

“America’s executive pay bubble,” says IPS analyst Sarah Anderson, “remains un-popped.”

Congress and the White House could do the popping, note Anderson and her report co-authors, John Cavanagh, Chuck Collins, and this reporter.

But both Congress and the White House have swallowed Wall Street’s “basic operating assumptions” — “that ‘performance’ justifies whatever windfalls may come an executive’s way, that the ‘incentives’ for misbehavior these windfalls create need not be regulated, that executives need never share the rewards that marketplace ‘success’ creates.”

Lawmakers and the Obama administration, having swallowed these assumptions, remain almost single-mindedly fixated on reforms that help shareholders deny windfalls to executives who pocket mammoth rewards while share prices plummet. But the CEO pay problem we face today goes far beyond the windfalls that funnel to poor performers.

“Our problem has become those mammoth rewards, in and of themselves,” notes IPS study co-author Chuck Collins. “Outrageously high rewards give executives an incentive to behave outrageously. They downsize. They outsource. They cook their corporate books. Left to their own devices, they eventually crash the global economy.”

In the process, these executives cost millions of Americans their jobs, their homes, and their retirements.

A few bills now buried in Congress, the IPS Executive Excess 2009 study notes, do offer some tantalizing hints of what real executive pay reform could look like.

One bill, sponsored by Rep. Jan Schakowsky of Illinois, would extend tax breaks and federal contracting preferences to companies that meet benchmarks for good corporate behavior. Among the benchmarks: executive pay that does not exceed worker pay by more than 100 times.

This legislation’s basic message to Corporate America: If you overpay your CEO, you’re not going to get taxpayer dollars.

Nothing that has happened within the U.S. — or global — economy over recent years, the IPS study sums up, justifies the enormous current pay gap between executives and their workers.

“High-ranking executives,” the study observes, “have neither become ‘smarter’ than their workers over the last generation or more ‘productive.’ They have, on the other hand, become more powerful.”

The time has come for lawmakers and the White House to challenge that power.

“Until they do,” the new IPS study concludes, “reckless executive behavior will continue to threaten the economic security — and decency — that Americans hold dear.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

Making Wall Street Safe Again for Windfalls

Sam Pizzigati — Sun, 14 Jun 2009 11:38:37 -0400

Remember that $500,000 pay cap for bailed-out banking execs the White House announced in February? Under Treasury Secretary Geithner’s new rules for bailout pay, that max has become a minimum.

Early this past February, amid escalating public fury over $165 million in bonuses at bailed-out insurance giant AIG, President Obama announced a $500,000 cap on executive cash compensation at bailed-out firms getting “exceptional assistance.”

Congress, feeling that same fury, would soon toughen limits on executive pay even more. Lawmakers banned executives — at any firm in TARP, the showcase bailout initiative — from taking in bonus dollars that equaled more than a third of their total compensation.

And then executive pay proceeded to drop off the political radar screen — until last week when Treasury Secretary Timothy Geithner unveiled the long-awaited new rules meant to clarify just how much executives can make when tax dollars are keeping their companies afloat.

Secretary Geithner’s answer: They can make plenty.

“We are not capping pay,” the secretary told reporters Wednesday.

Geithner’s new directives essentially erase the executive pay cap President Obama announced in February. Geithner's new rules, in effect, turn that $500,000 maximum into a minimum.

Under these rules, a new federal pay czar will “automatically approve” any pay package the nation’s most troubled enterprises dish out that doesn’t top half a million.

How high above this half million can these pay packages now go? The original White House $500,000 cap on cash compensation did allow execs to collect additional stock awards, on an unlimited basis, so long as they didn’t cash those awards out until their firms had paid back their bailouts.

But the bonus restriction that Congress then passed — limiting bonuses to one-third of total pay — effectively placed a lid on these additional awards at $250,000, a figure that would translate into one-third of total pay if cash compensation were limited to $500,000.

The new regs Geithner released last week knock this lid off. They turn full responsibility for executive pay at firms now getting “exceptional assistance” — a group that now includes AIG, Citigroup, Bank of America, Chrysler, GM, GMAC, and Chrysler Financial — over to a new pay czar, Washington superlawyer Kenneth Feinberg.

Feinberg, for his part, spent last week reassuring Wall Street how reasonable his pay judgments will be. He even urged reporters not to call him a “czar.”

“It makes it sound as if my goal is to impose certain restrictions on the private marketplace,” Feinberg explained, “whereas I am much more interested in working with these companies.”

And those companies seem eager to work with him. Top corporate execs, the Washington Post , “breathed a sigh of relief” Thursday after going over the details in the Geithner pay package. They found little reason, as one top New York executive compensation consultant told a Bloomberg reporter, “to be prepared for less pay.”

The new Geithner executive comp package has something for everyone.

The biggest bailout basket cases now have no pay cap and more wiggle room. The pay czar will be reviewing and approving their proposed executive pay levels under “principles” that allow the basket cases to argue that they need to pay princely sums to remain competitive.

Beyond the basket cases, in the much larger universe of TARP recipients, the Treasury Department has thoughtfully excluded a variety of revenue streams from regulation. Investment managers who get to pocket a percentage of the assets they manage, for instance, don’t have to worry about any bonus limits kicking in, no matter how grand the assets grow.

TARP recipients do face some new rules that prohibit some commonplace executive pocket-stuffing practices. One example: Firms can no longer reimburse their executives for the taxes the execs owe on their perks like free country club memberships, a practice known as “grossing up.”

But TARP recipients can increase regular executive cash compensation to offset the shortfalls these new prohibitions create, and the higher this cash compensation goes, the more firms can shell out in bonuses and still meet the bonus-as-one-third-of-total-pay limit that Congress set.

And the big banks that have paid off their TARP dollars? These kingpins — the likes of Goldman Sachs, JPMorgan Chase, and Morgan Stanley — get the best deal at all. They face no compensation limits whatsoever.

Yet these financial giants are still receiving government aid, most notably via FDIC loan guarantees. These guarantees have enabled the ten banks that exited TARP last week to borrow $57.8 billion at lower-than-market interest rates. These interest rate savings, in turn, are pumping up the banks’ bottom lines — and the “performance” bonuses due their heaviest of hitters.

“Our financial system,” Secretary Geithner noted last week, “is built on trust and confidence.”

The superstars of that system, now more than ever, have every reason to confidently trust in Secretary Geithner.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.