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January 4, 2007
Your Pay vs. Your Boss's
Corporate America's scandal of the year may have been suspect timing of option grants, with more than 150 public companies under investigation by the SEC or the Justice Department, more than $5 billion in profit erased by restatements and 18 CEOs swept from office. And the chasm between executives' salaries and the pay of rank-and-file employees continues to widen.
Although the economy has been improving, according to a poll by the Society for Human Resource Management and The Wall Street Journal's CareerJournal.com (via Management-Issues.com), organizations remain somewhat cautious about increasing spending, including spending on what is perceived as the most valuable incentive for employees to stay at their place of employment: salaries.
Sibson Consulting reports that most employers "anticipate a less-than-4-percent base pay increase" for the vast majority of their workers in 2007 — about the same as in the past few years. For someone earning $40,000 a year, a pay hike of 3 percent to 4 percent works out to as little as $100 per month before taxes, which doesn't exactly justify booking the cruise.
Meanwhile, a bankruptcy judge last month capped annual bonuses for auto supplier Dana Corp.'s leader at $5.5 million. The order, according to the Toledo Blade, said that Dana can pay Chairman and CEO Mike Burns up to $5.5 million in annual bonuses during the auto supplier's bankruptcy on top of his salary of slightly more than $1 million a year if the company meets certain financial targets. Five other executives, each paid $385,000 to $440,000 a year, will be eligible for a total of up to $7.01 million in annual bonuses.
Or consider media mogul Barry Diller, who Corporate Library ranked as the highest paid CEO year before last. The corporate governance research group pegged Diller's 2005 compensation at $295 million (No, there is no missing decimal point.), most of which came from stock options.
The chasm between executives' salaries and the pay of rank-and-file employees continues to widen.
Workforce Management editor John Hollon recently proposed that the disconnect between salaries matters for two reasons: proportion and perception.
Hollon wrote:
Executive pay only becomes a hot button when it seems out of proportion to the success of the company and everyone else who works there … In other words, people will accept big paydays for top executives as long as they track along with the overall success of the company.
Perception, however, is about the widely held notion that no matter what happens, the CEO always gets a big payday. The workforce deals with layoffs, buyouts and a sense of constant job insecurity, yet the executive gets a golden parachute when he or she fails.
Just yesterday Robert Nardelli resigned as chief executive of Home Depot, after months of wrangling with investors over his heavyweight salary and the poor performance of the company's stock. Since Nardelli joined the company in December 2000, the home improvement retail giant's stock has fallen about 5.6 percent. Over that period, Nardelli managed to pull in $123.7 million in compensation. In leaving the Atlanta-based company, Nardelli will receive cash, stock, options and benefits valued at $210 million, according to Forbes. That's more than the $198 million former Pfizer Chief Executive Henry McKinnell departed with after investors expressed their anger over his company's stock price.
Moreover, Workforce Management noted Bruce Karatz, the KB Home chief executive who was let go after an investigation found he had picked stock option dates that inflated the value of stock grants he had received. His punishment was a meager $175 million in stock options, severance and pension benefits.
"Employee salary increases have barely covered cost-of-living adjustments, while CEO pay has skyrocketed," said management consultant John Challenger. "To have the highest paid executives attempt to get even more money by backdating stock options is undoubtedly and understandably being viewed with considerable ire among rank-and-file employees.
The result could be lower productivity, decreased morale, higher turnover and an inability to recruit top talent." (See: "I'm Not Paid Enough to Fully Engage In My Job. But That's Only Half the Point.")
Indeed, in addition to Hewlett-Packard's corporate spying, suspect timing of option grants has turned into corporate America's scandal of the year, with more than 150 public companies under investigation by the SEC or the Justice Department, more than $5 billion in profit erased by restatements and 18 CEOs swept out of office.
When stock options are backdated, they are issued retroactively to coincide with low points in a company's share price, fattening monetary benefit for options recipients when they sell their shares at higher market prices. Backdating options can be legal as long as the practice is disclosed properly to investors and approved by the company's board. In some cases, however, the practice can run afoul of federal accounting and tax laws.
An academic study completed by University of Michigan researchers in the fall found that corporate executives gained an average of $600,000 a year each from backdating of stock option between 2000 and 2004.
Under new federal rules, which took effect on Dec. 15, investors are getting access to clearer and more detailed information from public companies on their top executives' pay packages and perks. The rules were designed to enhance corporate accountability and address the very same aforementioned issue that has been angering company shareholders and the public: lavish compensation for executives, unrelated to their performance, even as companies stumble or tumble, lay off employees or renege on billions of dollars in pension obligations for workers' retirement.
In the SEC's 72-year history, perhaps no other issue has stirred as much interest, with more than 20,000 letters filed during the public comment period that followed the proposal being floated last January, according to agency officials.
Investors, customers and the general public seem to have grown somewhat impervious to corporate scandals of varying degrees, even tolerating apparent criminal behavior as long as it doesn't interrupt their own businesses.
One would think that when such missteps directly affect the everyday workforce's own pay, enough would be enough.
Resources
Runaway Pay
by John Hollon
Workforce Management, Dec. 11, 2006
2007 shapes up for retention crunch
by Nic Paton
Management-Issues.com, Dec. 20, 2006
How big will your raise be in 2007?
by Anne Fisher
Fortune, Dec. 20, 2006
Judge lowers CEO bonus cap
by Julie M. McKinnon
Toledo Blade, Dec. 19, 2006
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14 CommentsI have not seen a raise in 4 years! How the hell are they getting by with this?!
January 5, 2007 6:36 AMMy children ask me why someone would be worth 40 billion dollars while there are millions in poverty. How do you answer that?
January 5, 2007 10:29 AMA greed nation -- without the morality of a social harmony.
The cause of breakdown of a society.
Company Boards of Directors continue to link CEO salaries and bonuses to everything except overall company profitability. This is why we have companies going into bankruptcy, while the CEO that caused the problem skates out of town with $100 million in his pockets, and the rank-and-file employees have nothing but a pink slip for their efforts. It's the same old story of the "rich get richer and the poor get poorer."
Even in Federal Civil Service, there is some of this. I work as a civil engineer, and at my rate of pay in the old GS- system, I could be working at any of dozens of positions on base and be paid the same rate as I am now. I could manage the golf course, run the Child Care Center, or be a Contracting Administrator, all for the same money as I receive as an Engineer.
We are converting these positions to the new National Security Personnel System (NSPS), which may help a bit.
Currently, there is the same problem with CEO type of personnel getting bonuses when the rank-and-file get zip. Take the Senior Executive Service (SES). Current bonuses for SES can be up to 25% of base pay. When SES typically pays in the range of $125K or higher as base pay, this means there can be really big bonuses. Average bonus for SES is said to be about 8%.
Now, take us rank-and-filers: My past two performance evaluations have rated me firewall top ratings on 17 of 18 possible rankings with only one point off. My total bonus for this top performance combines additional time off bonuses plus cash. My total bonus for superior performance is approximately 2 percent of base pay before taxes. I typically see about 60 percent of the cash bonus in real dollars, due to taxes and other deductions.
There are workers in the maintenance shop within my own organization who get more than I do, with much lower salaries, while top dogs way up the chain can get an average of 8 percent with lower relative evaluations. It just goes to prove that even the government is not immune to CEOs getting all the breaks while the rank-and-file get the short end of the stick.
Things need to change, or the workforce will continue to slow things down and produce less. When these horrifying numbers from such corporate thievery come to public light, we should be outraged at the whole thing. It's the money WE have to pay for the products and services that go into these people's pockets that makes it harder and harder for us average folks to make ends meet. I, for one, am ready to head the line of folks who'd like to knock these robbers off their thrones and let them find out what the rest of us have to go through in the daily struggle to survive.
January 5, 2007 11:57 AMI can understand the frustration of no increase in 4 years...been there! But, what does that have to do with the compensation paid to company executives? Putting aside the violations of law concerning the backdating of options ... the execs are earning exactly what the Boards who establish policy enact.
The storm about direct compensation comes from the very stock holders who elect the board by their proxy vote. If you are a stock holder of a public corporation and there are record numbers of us currrently, did you fill out the proxy ballot sent to you as a owner and vote for the best who were available? I would bet you maybe read it, then pitched it. We are likened to the eligible voters in government elections, few vote ... ALL bitch.
In answer to the second comment, it is the perfect time to tell your children that most of us are only offered equal opportunity by law, not guaranteed equal results. The brightest often turn out to be the best because they work harder and the fruits of that labor are not OWED
to others simply because they have less, but MAY be shared by those who have been successful, should they CHOOSE.
Poverty will never be eliminated, as it is by defined as those at the bottom segment of the earning ladder. Every ladder has bottom rungs ... always will have, unless it only has one rung, and that idea didn't work well as history shows. Throwing money at the causes of poverty hasn't seemed to work well.
Recall the "War on Poverty" from LBJ? The war is over and poverty won! The person or persons with 40 billion dollars, assuming it was earned legally, have no obligation to end poverty and if they donated it all, poverty would not end. Education helps to eliminate some segments of poverty, but is is a person by person decision.
A further note, those shareholders upset by option back-dating set up the chance for the abuse when they offered compensation not based on the true viability of company developed by the hired leadership but by the value of the open market stock, read that which they owned. Their concern was not for the company and/or its employees, their concern was for their investment in the short run. Short-sighted goals reap short lived sucess.
I do not agree with the over-inflated salaries of CEOs, but their income and the income of the regular workforce have little if anything in common with regard to needed talent, the number available in the industry with the training and talent to do the job. This is a real apples and oranges comparision. When looking for someone to blame, generally we need look no further than the closest mirror.
January 5, 2007 12:17 PMThey need to get the stock out of the top bosses' hands and put it back in the real workers' hands.
January 5, 2007 12:30 PMBob: How do you propose to do that? Can or will the "real worker" buy it? Given choices to buy company stock, or any stock for that matter, from earnings, or that new, gas-guzzling SUV or pick-up a year newer than the guy next door, how will most react? If the "real worker" is given a choice of company stock or extra dollars in a paycheck, how will most choose, given the choice even exists due to the small amount of excess income available to most workers? If given stock instead of dollars in pay ... if that stock value declines due to the companies' profitability, will the "real worker" be willing to share in the blame?
It can't ALWAYS be management at fault. Better we should just give to them because of who they are ... all other stockholders bought theirs, granted they had to
work somewhere else to get the dollars. But because you work there and regard yourself as part of the reason for the company success and NEVER part of the reason for profit failure, you should get it free. Maybe they could negotiate the next union contract to include common stock
instead of wage dollars, reduce fringe benefits and reduce pension contributions.
Those of us who buy common stock essentially do that. Why are you special?
January 5, 2007 1:20 PMThey need to get CEOs from other countries that will run USA companies for less money and get traders for the stock market in our countries for less money. That would help.
January 5, 2007 5:07 PMThe major trouble with the free market system for hiring executives is that it is not truly a free market system, but rather more of a good 'ol boy system.
It's virtually impossible to work your way up to that level. Most positions are filled by friends from the old fraternity, a family member, etc. Someone might have been able to do it years ago, but today NO ONE gets there by joining at the bottom rung of the company ladder and working their way up.
I have always been conservative, but lately this exec compensation seems like it has turned into a money grab with execs then leaving the country to retire and not even spending the wealth they earned here.
I'm not sure of a solution beyond letting the whole economy fail, but maybe we could create a law that ties overall compensation for the executive positions to overall compensation of the remaining employees. It would be better than a minimum wage.
January 8, 2007 4:54 PMExecutive pay is beyond rational. I'm all for building wealth, but what can one do with $210-million? -- except gloat. Surely they can live a very comfortable life on a few million less.
$210-million might pay the health insurance premiums for 20-30,000 employees, or the salaries of 4,000 employees at $50K per year, and leave $10 million for the exec. Still a nice pay for most people. Do the math.
If there were restrictions on CEOs serving on each other's board, and board nominations more open to shareholders (i.e. owners), then maybe some of these excessive salaries, bonuses and parachutes would be less.
I agree with Bill, who thinks salaries and bonuses should be tied to profits. Stock price is a perceived value of a company and not necessarily a true indicator of wealth. We only need to look back five years to be reminded of the "dot-com" collapse to see how "value" can be eroded quickly. Enron, Tyco, Qwest, and other companies should be a wake-up call to rethink where we invest our money.
When did the focus shift from dividends to stock price? You rarely hear anyone discuss PE ratio any longer 'cause we all want a piece of that instant wealth from stock appreciation. Then we cry when the price goes the other way. Maybe we stockholders should take another look at mature companies that consistently make profits and share them with the owners through dividends.
January 24, 2007 4:48 PMI am especially concerned with the fact that the profit of these companies moves from the hands of the majority of the workforce into the hands of a few CEOs and top administrators. The economy runs not on the number of yachts or jets built or purchased, but on the number of shirts, pants, bread, eggs, cups of coffee etc. purchased each day. When the purchasing power of the country keeps shifting from 70% of the population to 30% of the population, and the 70% struggles to get by, the buying power diminishes and obviously the selling drops as well. The selling drops, and the factories close. Then to top it off, give those millionaires and billionaires tax breaks so that they don't have to struggle getting by. Oh, yes, the argument is that they use their money to start new businesses, but it seems we are closing more that starting and starting the same cycle over again doesn't make much sense.
June 26, 2008 8:22 AM
