Heads I win, tails you lose
|January 16, 2008||Posted by Jeffery J. Smith under Progress Report, The Progress Report|
Heads I win, tails you lose
Stocks may fall, but execs’ pay doesn’t
The rewards for failure are so stratospheric, and no less so than the rewards for success, that it becomes impossible to exaggerate the numbers. Fortunately, there is a way to preclude this redistributive injustice from ever happening again. We trim and append this 2008 article from USA Today, April 10.
By Greg Farrell and Barbara Hansen
For Corporate America, the year 2007 exposed embarrassing details about business strategies and CEO compensation. Despite the economic downturn last year, CEOs as a whole fared better than investors.
For example, KB Home had an abysmal year, losing $929 million on revenue of $6.4 billion. But CEO Jeffrey Mezger, in addition to his $1 million base salary, was awarded a $6 million cash bonus for exceeding the objectives set for him.
So it goes in the topsy-turvy world of executive compensation, a land like Garrison Keillor’s Lake Wobegon, where each CEO is above average. But this shouldn’t be like the fourth-grade soccer team, where everybody gets a trophy.
For 50 of the largest companies in the Standard & Poor’s 500, the median compensation last year was $15.7 million. There are a few laws of CEO-pay-physics. The first is that it rarely goes down.
Kenneth Chenault, CEO of American Express, saw his compensation more than double, from $22.4 million in 2006 to $50.1 million last year. Alcoa CEO Alain Belda also saw a big jump. He received $10 million in 2006, but two and a half times that last year, or $25.6 million.
The fallout from the turbulence in the financial markets hit shareholders hard. How did the executives responsible for this mess fare?
- Bank of America chief Kenneth Lewis saw his compensation drop from $22.7 million in 2006 to $20.4 million in 2007. At Wachovia, CEO G. Kennedy Thompson’s pay slipped from $18.3 million to $15.7 million.
At Citigroup, CEO Charles Prince was forced out in November, but on his way out the door, the board gave him a bonus of $10 million. He was also allowed to keep $28 million worth of unvested restricted stock and options, and was granted $1.5 million in annual perks.
At Merrill Lynch, CEO E. Stanley O’Neal resigned in October. Although he didn’t receive any special bonus or severance, he walked away with a $161 million package, consisting mostly of stock and options.
At Washington Mutual, a leading mortgage provider that went from a $3.6 billion profit two years ago to a $67 million loss last year, investors saw WaMu’s stock drop from $46 in early January to below $14 at the end of the year. CEO Kerry Killinger took a 21% pay cut. He was paid $18.1 million in 2006, $14.4 million in 2007.
In February, Washington Mutual’s board changed the design of the company’s bonus plan by de-emphasizing the importance of foreclosure-related write-downs. The new plan allows the board to pay bonuses even when non-performing mortgages overwhelm the bank’s other businesses. This week, the company announced it had been forced to seek a $7 billion cash infusion from outside investors, predicted a $1.1 billion quarterly loss, and said it would have to eliminate 3,000 jobs.
JJS: All that outrageous pay that boards of directors award Chief Executive Officers — who usually are or often will become directors on other boards — is not earned. Who could earn a billion dollars a year? Nobody could work hard enough or invest smart enough to merit that much reward.
All that money is sidetracked land rent, sidetracked by mortgages, by inflated housing prices — actually location prices — by exaggerated appraisals, and fundamentally by the absence of a tax on land which would wipe out the price for land, leaving only a price for the building (and a tax for the land). If society were to recover the flow of site rents, as by having government tax location value, then lenders wont have the wherewithal to over pay CEOs. And there wouldnt be boom times to falsely tout CEO talent.
Rather than boom then bust, the real estate cycle would be a smooth one that just climbs then glides. And all that recovered ground rent, rather than sit in public treasuries or be misspent by politicians and bureaucrats, could in large part be paid as a bonus not just to CEOs but to everybody, especially since its society in general that pumps up the value of land.
Jeffery J. Smith runs the Forum on Geonomics.
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