You want strong profits? You have to pay for it.
Well, it seems corporate boards often aren’t doing well by their shareholders when it comes to hiring their chief executive officers.
“Bailed Out, Booted, Busted,” the Institute for Policy Studies’ annual report on executive excess, looks at the track record of Corporate America’s top executives. The record shows that too often the rationale for huge compensation packets is ill founded.
The corporate titans are supposed to be paid well because they bring “exceptional value” to their companies. The 49-page IPS report concludes, however, that corporations face a “chronic problem of ‘pay for poor performance.’”
Bailouts, bankruptcies, firings and fraud point to “a pay system that encourages high-risk behavior and lawbreaking—at the expense of taxpayers and investors,” the report says. Sadly, reforms adopted after the 2008 financial crisis haven’t been implemented.
The report studies the performance of the 241 chief executives who ranked among the 25 highest-paid CEOs during one or more years from 1993 to 2012, the period covered by the “Executive Excess” series of reports. Astonishingly, 38 percent of the CEOs who occupied at least one of the 500 top executive slots during the two decades led firms that collapsed or were bailed out in the 2008 financial crisis, or they were either fired or forced to pay massive fraud-related fines or settlements.
The Bailed Out: The CEOs from the firms that went bankrupt or were bailed out in the 2008 financial crisis account for 112 (22 percent) of the 500 pay leader slots.
CEO Richard Fuld of Lehman Brothers earned $466.3 million during the eight years before the global financial services firm imploded, setting off the crisis.
Pay for performance? Of the 17 bailed-out firms that continue to exist, four chose to compensate their CEOs so lavishly that they were among the top 25 high-paid CEOs in the years that followed. They include Kenneth Chenault of American Express, James Dimon of JPMorgan Chase, Vikram Pandit of Citigroup and Lloyd Blankfein of Goldman Sachs.
The Booted: Twenty-seven CEOs lost their jobs involuntarily, through termination, forced retirement or bankruptcy. These CEOs, who often appeared more than once on the yearly list of 25 most highly paid chief executives, accounted for 72 of the 500 slots (14 percent) during the two decades covered by the IPS study.
Members of this group typically received golden parachutes of $14 million. This group included Enron’s Kenneth L. Lay, fired for financial fraud, who received $60 million, and Compaq Computer’s Eckhard Pfeiffer, fired for poor performance, who departed with a $6 million severance and stock options worth $410 million.
The Busted: Nineteen of the CEOs who made the list of the most highly-paid CEOs headed companies that have paid huge sums in settlements or fines related to fraud charges. Eighteen of the companies paid more than $100 million.
These CEOs include Oracle’s Lawrence J. Ellison, who has earned $1.8 billion over the past 20 years. His compensation amounts to 2,322 times the median pay of American workers and 6,545 times what federal minimum wage workers receive, according to IPS. Five of the firms were involved in Medicaid fraud.
So, who cares? Ordinary taxpayers should.
All told, the companies on IPS’s list that were bailed out after the 2008 financial crisis received $258 billion.
What’s more, the excessive executive pay reflects the extensive economic inequality in our country that threatens our democracy. The compensation of a tiny financial elite that is part of the ruling class reaches into the stratosphere while millions of Americans struggle to get by with stagnating and falling wages. The pay gap between the chief executives of large companies and the typical American worker has increased from 195-to-1 to 354-to-1 from 1993 to 2012, the period covered by the “Executive Excess” reports.
Furthermore, many CEOs are enriching themselves at taxpayer expense:
• CEOs from 100 of the top government contractors account for 62 of the 500 slots of most highly compensated chief executive officers. The companies received $255 billion in taxpayer-funded government contracts.
• The federal tax code allows corporations to deduct the cost of executive stock options and other “performance-based” pay from their income taxes. The Economic Policy Institute estimates that the deduction for executive compensation cost the U.S. Treasury $30.4 billion from 2007 to 2010.
The U.S. Congress passed the Dodd-Frank Act three years ago to curb corporate and banking practices that led to the 2008 financial crisis. One of its mandates requires firms to reveal the pay gap between their executives and typical employees. The Security and Exchange Commission, however, has failed to implement the mandate.
“Two decades have essentially recalibrated our nation’s moral sensibilities,” the report concludes, suggesting that the public has come to accept the stratospheric compensation of CEOs. “The outrageous has become the everyday.
“This scares us. What scares us even more: the thought that unless regulators, lawmakers, or shareholders do something to stop this madness, 20 years from now today’s corporate compensation will seem as modest as the pay levels of 1993.”
Gregory N. Heires is senior associate editor at Public Employee Press, the official publication of District Council 37, which represents 120,000 municipal workers and 50,000 retirees in New York City. He blogs at The New Crossroads, where this post originally appeared..