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COFES Blog
Nov
4
Written by:
Russ Henke
11/4/2008 11:09 AM
One of the most irritating issues for most Americans in recent years, has been the unprecedented rise of corporate executive salaries, especially those of CEO’s, compared to the incomes of average US workers. In frequent cases, this ratio has reached 400:1. This disparity has become especially galling since 1999, because average workers’ income in the US has not even kept up with inflation, while CEO pay has ballooned.
Such irritation reaches still another level when CEO’s who head poorly performing companies are finally ousted, but having still collected exorbitant pay and lucrative golden parachutes.
(See for example the blog entry in this space from September 18, 2008, entitled, “Poster Child”, which discussed Nicholas Kristof’s Op-Ed piece published in the September 18, 2008 New York Times, “Need a Job? $17,000 an Hour. No Success Required." Kristof’s article was about one Richard Fuld, the longtime chief of Lehman Brothers. He took home nearly half-a-billion dollars in total compensation between 1993 and 2007. Last year, Fuld “earned” about $45 million, according to the calculations of Equilar, an executive pay research company. That amounts to roughly $17,000 an hour to obliterate a firm. And despite his insistence otherwise, Fuld is said to have collected another $22 million in severance.).
Unfortunately, there are dozens of examples of failed execs who, in addition to huge salaries on the job, also collected great severance packages. Recall for example the case of Carly Fiorina, who was CEO of HP till 2005. Under Fiorina’s watch, HP shares lost more than 50% in value and the company implemented huge numbers of layoffs. She received $21 million in severance pay after being fired, and an additional $21 million in stock options and other benefits, bringing her total payout to about $42 million. As a result, company shareholders filed suit against HP and Fiorina personally.
Then there is Angelo Mozilo of Countrywide, who was all set to receive a $37.5 million severance package when Countrywide was recently acquired by Bank of America. He didn’t take the severance after bowing to public pressure, but he did cash in stock options, walking away with a tidy $129 million.
Just recently, Kerry Killinger took away $44 million when he exited Washington Mutual. Alan Fishman took over for him and was on the job less than three weeks before the US economic breakdown; he too may collect some $20 million, for less than a month’s worth of work.
Wachovia’s Ken Thompson received $5 million in severance when he was ousted this year; he also had taken in nearly $30 million in stock and options during the prior two years. His current replacement is said to have a $12 million severance package if he leaves Wells Fargo, which may occur soon.
Just when you think you’ve seen it all, we come to the corporate entities now begging for and receiving taxpayer funds from the $700 billion bailout package jammed through Congress in early October. While the law explicitly prohibits golden parachutes, most of the prospective recipients of taxpayer largess are scrambling to preserve as much pay and bonus money as they can squeeze out of us taxpayers.
Here’s one example of many: On October 13, 2008, the chief executives of nine large American banks were called to a meeting at the Treasury Department and offered $125 billion from the federal government in exchange for shares of preferred stock. The chief executives accepted these terms, but they asked for the agreement to allow the banks to continue paying dividends to shareholders. If that happens, some $25 billion of the $125 billion (of US taxpayer money) would go directly to bank shareholders instead of into loans to grease the moribund US economy. Moreover, given their own equity stakes, the officers and directors of the nine banks will be among the leading beneficiaries of the dividend payout, some $250 million in the first year alone. Despite public and congressional outrage, this loophole remains open.
Compensation experts say that these attempted agreement provisions, though politically prudent to temporarily appease public anger, will probably have little real impact on how financial executives are paid in coming years. They predict banks will simply pay higher taxes and will find other creative ways of paying their executives as they see fit. Some say there could even be a sudden surge in compensation if and when the government program ends. “Congress’s record of regulating executive pay has been unblemished by success,” said Kevin J. Murphy, a finance professor at the University of Southern California. This was especially true from 1994 to 2006 (when the GOP controlled both houses of Congress).
There are many more egregious examples. Perhaps blog readers can chime in with the stories of which they are aware?
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