Politics of a Portlander

Politics of a Portlander

Personal Ideology

Corporate Executive Pay and Benefits

    Corporate executives are not just paying themselves well when they do a good job they are getting 10s of millions in "golden parachutes", which basically assure them that they will get millions even if they plunge the company they are running into bankruptcy. When American Airlines was heading into bankruptcy they paid over $40M to ensure that their executives would still get their exorbitant pensions at the same time they asked the other employees to take $1.8B in pay cuts.
     Here is a link to research and ideas for improvement from CalPERS, but I would also like to point out that these executives are the people who are giving millions to politicians so that their opinions are heard on how to handle issues, or in cases like VP Cheney they become the politicians and continue to be paid by their former employer. Here are examples of how their money influences law: Medicare and prescription drugs (no re-importation of drugs or negotiating of prices; check Republicans did it), Bankruptcy (make it harder for working people to file, whlie preserving exemptions for the wealthy; check Republicans did it), Social Security (privatize for corporate gains, Bush has spent months and millions of federal dollars to make it happen against public opinion). The list goes on and so does the corruption of business and law by corporate executives.
     Here are some examples of problems cited by CalPERS and some suggestions:

...We believe paying competitive salaries for managerial talent is an important motivational tool. But, we feel strongly that pay should be linked to long-term sustainable performance in a very significant manner.

Something has gone wrong with executive compensation in the United States. It is unconscionable to see that CEO pay has swollen to 400 times that of the average production worker. It is shocking to see example after example of top executives insulating themselves from any risk in their own compensation, and ensuring their own financial security at the same time employees are being asked to shoulder the burden of cuts, and shareholders are losing value.

At American Airlines shareholders and employees were shocked to find out that the company made a $41 million dollar payment to a fund designed to protect the pensions of executives if the company filed bankruptcy. This fact was not disclosed during negotiations to secure $1.8 billion in wage concessions despite the fact that the payment was made months before.

If I had to identify one issue that is at the heart of the problem with compensation in the United States, I would point to accountability. More appropriately perhaps to a lack of accountability. This is an area where we can make reform with the support of Congress.

As public markets investors we rely upon boards of directors to represent us. In the case of compensation, the Compensation Committee is charged with representing shareholders. It is clear to me that a major contributing factor to the problem with executive compensation is that Compensation Committees are not accountable to shareholders. They obviously do not feel that approving abusive compensation packages will cost them their job. Rather, it appears that not approving what the CEO wants is what they feel will cost them their job. This represents the central conflict of interest inherent in the problem of executive compensation today. Until this fundamental issue is solved, we will continue to have widespread abuse in compensation practices.

In the last five years alone, CEO compensation has doubled according to compensation consultants Pearl Meyer & Partners. In 1996, the average CEO at the largest 200 companies made about $5.8 million. By 2001, that figure jumped to $11.7 million.

However, while the absolute levels of pay are a concern, perhaps the most troubling element of executive compensation is the heads I win, tails you lose attitude of corporate executives. CalPERS is deeply concerned over what appears to be an attitude of entitlement in the executive suite of corporate America. This attitude manifests itself in many forms.

Perhaps some of the more offensive entitlements are the so called forms of "stealth compensation." Lavish severance packages complete with perks for life that are fit for a king, guaranteed pension benefits far outstripping the value of benefits provided to employees, enormous loans to executives that are eventually forgiven, and provisions providing that the company shall pay all the taxes due (including gross-up provisions) should the executive incur a tax liability all send a clear message to shareowners. The message is that we do not respect you as owners, and we do not feel accountable to you as owners.

In other examples demonstrating a lack of respect for shareholder's capital:

Delta Airlines, Leo Mullin will be credited with 22 years of service toward his pension upon termination, plus two additional years in a Supplemental Retirement Benefit. The company also put $25.5 million in a protected pension trust for him according to press accounts.

Home Depot has an employment contract that includes a $10 million loan with predetermined criteria for forgiveness in addition to base salary, 2,500,000 stock options (plus annual increments of no less than 450,000 more options), a target bonus of between $3,000,000 and $4,000,000, deferred stock units (750,000 in 2002), pension benefits and change in control provisions that include (if the executive leaves for good reason or for any reason within 12 months) $20,000,000, immediate vesting of options, and immediate forgiveness of any outstanding loans and payment of the gross-up for taxes.

CalPERS amended its U.S. Corporate Governance Core Principles and Guidelines recently to call on companies to formulate executive compensation policies and seek shareholder approval for those policies. Currently, Compensation Committees issue a statement in the proxy to briefly describe the company's compensation philosophy. Shareholders role in this process is relegated to a distant back seat. In discussions with companies about this issue, they often state emphatically that only the board has the right and the expertise to manage the affairs of the company and particularly the issue of compensation. Companies state that the Compensation Committee must have the flexibility to attract and retain executives and that shareholders should essentially trust them to do the right thing. Yet the behavior of corporate America in regards to executive compensation indicates otherwise.

We believe it is a completely appropriate role for owners of a corporation to approve broad policies in relation to executive compensation. Perhaps most importantly, it would force Compensation Committees to face shareholders with a plan on how they will use compensation of all forms in managing the corporation. This will help to shift the accountability back to where it belongs, to the owners.