Reading Room

Pirates of the Big Board
 
By: JOHN B. PAYNE, ATTORNEY
FAX 313.583.3100
1800 Grindley Park Street, Suite 6
Dearborn, Michigan 48124
www.law-business.com

President Bush and his subordinate cheerleaders can boast all day about how well the U.S. economy is doing, but facts are facts. And the facts do not support his rosy depiction of American prosperity, except as it pertains to the wealthy. Through the decade ending in 2001, the increasing concentration of wealth among affluent White Americans was striking. The mean net worth of American families was three or more times the median. Furthermore, in all age groups, non-Hispanic White median and mean net worth, both, were three to five times as high as they were for non-White and Hispanic households.1 This is not a recent phenomenon, but the continuation of economic oppression perpetrated by the wealthy on the rest of us, dating back to the Middle Ages. We cannot reach back 1,000 years to correct past wrongs, but we should try to understand contemporary economics and correct present inequities.

Modern Economic Oppression

Based on the theories of economist John Maynard Keynes, New Economics became the optimistic social creed of the post-WWII era. Keynes believed that boom and bust business cycles could be harnessed and a new pattern of continuing prosperity could be controlled through government fiscal and monetary policy. Future depressions could be avoided.2 Economic development became a panacea that the Liberals believed would solve social problems, like poverty and racial disharmony, without unpleasant conflict. One of President Lyndon Johnson’s economic advisors observed, “Far greater gains were to be made by fighting to enlarge the size of the economic pie, than by pressing proposals to increase equity and efficiency in sharing the pie.”3 However, to date the New Economics has resulted in no appreciable change in the distribution of wealth in America, and no significant increase in prosperity.4

The median household net worth fell from 1984 until 1993, then began climbing. However it did not surpass the 1984 level until 2000, when it reached $55,000. Furthermore, household net worth was closely tied to race and Hispanic origin of householders. In 2000, non- Hispanic White householders had a median net worth of $79,400; compared to Black householders, with $7,500; and Hispanic householders, with $9,750. Non-Hispanic White heads of households had significantly higher levels of median net worth, across the income spectrum, than their Black and Hispanic counterparts.5

Grand social schemes to create prosperity for all have been proposed from time to time. Utopianism, socialism, communism, and other isms have tried and abandoned. There is little point in trying to start a revolution in the U.S. Most Americans, including resident aliens, legal and illegal, have enough of a vested interest in the status quo that they would not be willing to support a violent overthrow of the social system. Furthermore, this country is too diverse for an effective rebellion. A successful insurrection requires a coherent, oppressed majority. Quite the opposite exists here. A polyglot plenitude of minorities are pursuing their own interests, but since their various interests align to create a majority consensus they work together against change. The majority is oppressing itself!

This paper is not intended to propose a major social or political realignment. However, a small change in the tax code could address an economic problem that is syphoning corporate wealth into the pockets of top managers–impoverishing stockholders, employees, and the public at large. The first part of the paper will describe the incredible despoliation of corporate funds committed by board members of public corporations and explain how they sit on many boards so that they can vote each other huge compensation and bonus packages. In the second part, the role of the tax code in facilitating this corporate desecration will be described. Finally, the paper will suggest that restricting the corporate income tax deduction for executive pay will help to curb the robber-baron mentality that is rampant in the board rooms of U.S. publicly-held corporations.

Big Bosses, Big Raises

Ivan G. Seidenberg, chief executive of Verizon Communications, received $19.4 million in salary, bonus, restricted stock and other compensation in 2005. This was 48% more than in the previous year. As his compensation nearly doubled, the stock fell 26%, bondholders lost value as the company's debt was downgraded by credit agencies, and 50,000 managers saw their pensions frozen. Verizon closed its books with 5.5% earnings.6

Two major factors enabled Mr. Seidenberg’s big heist. The incestuous nature of the boards of directors of public corporations in this country and reliance on “outside consultants” who are in the pockets of the corporate managers whose compensation packages they are reviewing. These issues will be discussed after a brief description of the top-heavy pay scales in large corporations.

Seidenberg’s obsene compensation package is no anomaly. The median compensation for chief executives at roughly 200 large companies rose to $8.4 million last year, from $8.2 million in 2004, according to Equilar Inc., a compensation analysis firm in San Mateo, Calif. The median was $7.2 million in 2003. Over just these two years, executive compensation rose at more than three times the inflation rate. Compare this to stagnant wages in the lower 99% of the workforce. The gains by these mercenary managers might be defensible if their pay were in proportion to their achievements. It is not.

A recent study by the Corporate Library, "Pay for Failure: The Compensation Committees Responsible," named 11 public corporations whose chief executives' pay had exceeded $15 million during the last two years despite five-year shareholder losses. "The disconnect between pay and performance is particularly stark" at Verizon, AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent Technologies, Merck, Pfizer, Safeway, Time Warner and Wal-Mart. Mr. Seidenberg's $75 million five-year total pay is an egregious affront to shareholders, who stood a loss of more than 26% in the period.

Verizon's board received a grade of D from the Corporate Library. One reason is that Verizon's compensation committee consists entirely of chief executives or former chief executives. Three of the four members sit on other boards with Mr. Seidenberg. On Wyeth's board, Seidenberg helped set the pay of John L. Stafford, a current member of Verizon's compensation committee. He is past chairman and chief executive of Wyeth.7

Verizon's compensation committee is led by Walter V. Shipley, former chief executive of the Chase Manhattan Corporation, and is made up of Richard L. Carrión, chief executive of Banco Popular de Puerto Rico; Robert W. Lane, chief executive of Deere & Company; and Mr. Stafford, formerly of Wyeth.

Many of the Verizon directors who are on its compensation committee have also met Mr. Seidenberg at board meetings of other public companies. At Wyeth meetings, Mr. Seidenberg encounters Mr. Shipley, who is the chairman of Verizon's compensation committee and who is a member of Wyeth's committee, sitting with Mr. Carrión, at least until 2006.

Mr. Seidenberg sees Mr. Stafford when the board of Honeywell International meets. Mr. Stafford is chairman of Honeywell's compensation committee, which includes Mr. Seidenberg. A tally of the 29 directors of Exxon and Verizon who sit on multiple public corporation boards shows that the two boards are very tightly interlocked. Ten of the 29 are Exxon board members and 12 sit on the Verizon board, with three sitting on both boards. However, another interesting connection crops up–11 of these same board members sit on the board of Wyeth. Three are Verizon/Wyeth directors and two are Exxon/Wyeth directors. One director, Walter V. Shipley, sits on all three boards. This concentration of board seats ensures that these 29 directors who hold down 92 public corporation board seats control all three companies.

The other factor that helped Seidenberg fatten his pay check was that Verizon’s executive team had its “outside consultant,” Hewitt Associates of Lincolnshire, Ill, firmly in its pocket. Hewitt, a provider of employee benefits management and consulting services with $2.8 billion in annual revenue, did much more for Verizon than advise it on compensation matters last year. Verizon is one of Hewitt's biggest customers in the far more profitable businesses of running the company's employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management.8 Hewitt has received more than a half-billion dollars in revenue from Verizon and its predecessor companies since 1997, according to the Mortenson article. Hewitt is all over Verizon, operating its employee benefits Web sites and acting as actuary for three of Verizon's pension plans. Hewitt also performed extensive work for Verizon’s predessor companies.

Although the compensation committee of the corporate board of directors employs the consultant to provide independent evaluation and make an objective recommendation of the chief executive’s compensation package, that objectivity is compromised when the consultant depends on its relationship with the executive for a large portion of its revenue. Furthermore, the consultant often is cozy with the human resources executive, the company's chief executive and the chief financial officer. The chief executive may even be present at meetings where the compensation consultant and the human resources executive hash out the terms of a package.9

By packing their boards of directors with cronies and ensuring that their “independent” consultants will provide the advice they desire, many corporate CEOs have persuaded their boards to award them immense wealth. Ivan Seidenberg is not unique. He is just one among many corporate looters. Lee Raymond is another.

Lee Laughs His Way to the Bank

Lee R. Raymond led Exxon for 13 years as chairman and chief executive. Under Raymond, the market value of Exxon Mobil increased fourfold to $375 billion, overtaking BP as the largest oil company. The price of Exxon's shares rose an average of 13 percent a year. The company, now known as Exxon Mobil, paid $67 billion in total dividends.

Raymond, who retired in December, was paid more than $686 million from 1993 to 2005, according to a New York Times article by Brian Foley, an independent compensation consultant. This translates into $144,573 for each day he spent in Exxon's "God pod," the executive suite at the company's headquarters in Irving, Tex.10

In 2005, Raymond received $19.9 million in salary, bonus and other incentives. He made $21.2 million on options exercised last yeard, and was awarded 550,000 restricted shares, bringing the total he owns to 3.26 million, with a value of $199 million. He owns more options that hold a value of $69.6 million and on retirement received a pension buyout of $98 million.

Was he a corporate magician who earned his amazing compensation? Not according to Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He says that Raymond just happened to be in the right place to benefit from high oil prices. He said, "Exxon's performance has more to do with commodity prices than any strategy vis-à-vis its competitors. . . . Everyone had a good year in the oil business."11

Other oil executives also benefitted from the doubling of oil prices over the last two years. Ray R. Irani, the chief executive of Occidental Petroleum, received about $63 million in total compensation last year, half again as much as in 2004. Irani’s three-year compensation was more than $135 million, including options and restricted stock. David J. O'Reilly, Chevron’s chief executive, received nearly $37 million in salary, bonus, stock and stock options last year.12

We Foot the Bill

The story of corporate gluttony would be an amusement piece, like “Lifestyles of the Rich and Greedy,” but for the fact that these bloated compensation packages are being subsidized by lower and middle class investors and taxpayers. Look at the chart at the beginning of this paper. The average net worth of U.S. households is more than three times as high as the median. Average is calculated by adding up the net worth and dividing by the number of households, but the median is the point at which there as many households with higher net worth as with lower. That the average is so much higher than the median means that there is a tremendous concentration of wealth among a very small number of households. It also means that these rich CEOs are sucking wealth from the rest of us.

We also subsidize these rapacious managers with a tax deduction. The corporate income tax rate is 35%. Therefore, for every million dollars the board votes to give the CEO, it only costs the corporation $650,000. The other $350,000 is paid by the government–that is the American taxpayer.

Stem the Hemorrhage

It is time to put these robber barons in the “time-out chair.” Send a message to the pirates of the big board that it is time to curb this fiscal abuse. One way would be to limit the corporate deduction for executive compensation to one hundred times the minimum wage. If the minimum wage goes to $7.00, that would be $14,560 per year for full time employment. The corporation could deduct up to $1,456,000 per year in executive compensation. Executive pay could be more than that, but it would not be deductible.

This modest change in the tax code may have little effect on executive pay, but it would at least trim the public subsidy. However, cutting the deduction may have a profound effect. It is a government guideline as to the maximum reasonable paycheck for one person, no matter how prideful and self-important. CEOs who are used to receiving whatever outrageous compensation package they have the gall to demand will be given the message that they are committing the second deadly sin.







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