CEO Compensation in
Corporate America
E:\front.3\ceo.compensation.11dp
Dwight Eisenhower
Main Ideas:
1. CEO Compensation. The culture of corporate
Analysis:
narcissism often has its strongest influence among senior
Evaluation:
managers and boards of directors. No stronger example
exists than in the pay of senior executives. From 1980 to
1995, senior executive pay increased a whopping 1,000
percent. These were the years scarred with the largest
numbers of layoffs ever recorded, yet executives hauled in
an unprecedented share. Trying to avoid getting caught
with their hand in the compensation cookie jar, many of
these executives received a significant share of their
income through stock options and bonus plans, which are
harder to track and don't appear on the annual report. Yet
these are no crumbs, as evidenced by a Fortune magazine
report that in 1993 the average senior executive's stock
incentive plan was worth twenty-three times his or her
base salary for the year. Even more shocking is the fact
that of the Forbes 500 companies, the CEO's salary was
157 times the average worker's pay. Alan Downs, Ph.D.
clinical psychology and CEO of Michael's House,
Corporate Executions: The Ugly Truth About Layoffs—
How Corporate Greed Is Shattering Lives, Companies,
and Communities (New York: American Management
Association, 1995), 28.
What about the CEOs of 23 large U.S. companies under
investigation for accounting irregularities? They made 70
percent more - a whopping $62 million from 1999 to 2001
- according to a report released last week by United for a
Fair Economy and the Institute for Policy Studies.
Compare that with a median, household income of
$42,000 and realize that it's going to take the typical
American family about 1,475 years to net what these guys
bagged for blowing up companies. Al Lewis, Denver Post
business editor, "Labor Creates All Wealth: Labor Love
All But Lost," Denver Post, September 1, 2002, 1K.
The corporations in this study are now household names,
particularly at households with 401(k)s: Adelphia, AOL,
1
Time Warner, Bristol Myers-Squibb, CMS Energy, Duke
Energy, Dynegy, El Paso, Enron, Global Crossing,
Halliburton, Hanover Compressor, Homestore, Kmart,
Lucent Technologies, Mirant, Network Associates,
Peregrine Systems, PNC Financial Services, Reliant
Energy, Qwest, TYCO, WorldCom and Xerox. Al Lewis,
1K.
2. Bad Year/Great Pay. Collectively, the 10 best-paid
CEOs made more than half a billion dollars last year. Yet
half the members of this stratospheric club were leading
companies whose profits shrank dramatically. The AP
examination of CEO pay in 2007 mined data from the 410
companies in the S&P 500 that filed compensation
disclosures with federal regulators in the first six months
of this year. The AP's formula, based on data from the
past two years, adds up salary, perks, bonuses, abovemarket interest on pay set aside for later, and company
estimates for the value of stock options and stock awards
on the day they were granted last year. Rachel Beck and
Matthew Fordahl, Associated Press, "Despite Economy,
CEO Pay Continues to Climb," Boulder Daily Camera,
June 16, 2008, 1-6A.
But the AP analysis found that CEO pay rose and fell
regardless of the direction of a company's stock price or
profits. Take KB Home, battered by the subprime lending
crisis and the weak housing market. According to the Los
Angeles based homebuilder's proxy statement, CEO
Jeffrey Mezger is entitled to a cash bonus based on a
percentage of KB's profit. The problem was there was no
profit. KB Home lost almost $930 million in 2007 and its
stock lost 60 percent of its value. But Mezger still made
$24.4 million, as valued by the AP, including a $6 million
cash bonus. Pay packages were somewhat smaller in the
financial industry last year - banks, investment firms,
mortgage companies, insurers and other institutions, all
were roiled by the subprime lending disaster. For
companies in the financial sector that had the same CEO
two years in a row, median pay dropped 41/4 percent to
$8.7 million in 2007. But that was still a smaller decline
than the 6 percent drop in earnings and 15 percent slump
in stock prices before dividend adjustments, according to
Standard & Poor's Capital IQ data service. Rachel Beck
and Matthew Fordahl, 6A.
During the same year, Chairman Stephen M. Wolf of
UAL Corporation (parent company of United Airlines)
2
Main Ideas:
Analysis:
Evaluation:
earned $17 million in stock options while his company's
earnings dropped by two-thirds. Steven J. Ross, CEO of
Time-Warner, raked in average earnings of $16 million
per year from 1973 through 1989.139 Recently, his
company laid off 605 workers because of "hard times"
while Ross took home $78 million. This amount is two
and one-half times the wages of the laid-off workers.
Dennis D. Braun, Sociologist from Mankato State
University, The Rich Get Richer: The Rise of Income
Inequality in the United States and the World (Chicago,
Illinois: Nelson-Hall Publishers, 1997), 32.
139. Robert McCartney, "Pay Dirt: Shining a Light on the Salary
Bloat of CEOs," The Washington Post National Weekly Edition,
February 3-9, 1994 p. 22.
In fact, the pay of many senior executives seems to have
little to do with company performance. When William
Agee resigned as the chief executive of Morrison Knudsen
Corporation in early 1995, that company had recorded a
loss of $114 million over the previous two years. During
that time, Agee received $3.5 million in cash and other
unspecified benefits. On leaving the company, his
severance package was estimated to be between $1.5
million and $4.8 million by a compensation expert.
Ironically, at the time of paying Agee his generous golden
parachute, Morrison Knudsen laid off 277 workers with
no severance pay. Alan Downs, 29.
"Collectively, the CEOs at firms under investigation
pocketed $1.4 billion from 1999 to 2001," the study says.
"While these executives are cushioned by the vast wealth
they have accumulated, their shareholders and employees
are dealing with massive losses. Between January 2000
and July 2002, the value of shares at these firms plunged
by $530 billion - about 73 percent of their total value." Al
Lewis, 1K.
Now we learn that our hyper-incentivized managers were
just grooming our companies for ill-conceived deals that
would only result in bad customer service, devastated
investors, layoffs, ungodly debt loads and bankruptcies.
Al Lewis, 1K.
3. Auto Industry. In many more cases, overall pay
ballooned. Rick Wagoner, chief executive of General
Motors Corp., announced earlier this month the company
had to close four plants that make trucks and SUVs
because of lagging demand as fuel prices soar. That
followed the posting of a $39 billion loss in 2007, a year
3
Main Ideas:
Analysis:
Evaluation:
when its stock price fell by about 19 percent, without adjusting for dividends. And Wagoner? His pay rose 64
percent, to $15.7 million. Last year was rocky for the
economy and the stock market, making it a useful test of a
concept called pay for performance - a term companies
use to sell shareholders on the idea CEOs are being paid
based on how well the company does. Rachel Beck and
Matthew Fordahl, 6A.
Lee Iacocca, whose name has become a household word
because of his frequent nice-guy, "just an average Joe"
advertising appearances as Chrysler's CEO, wrapped up
third place in the mega-million-dollar sweepstakes with a
wage of $17,656,000 in that year. In 1990, Iacocca took a
25 percent raise although earnings had fallen 17 percent at
Chrysler and workers were being asked to sacrifice.142 In
actuality, CEOs of automotive firms are the worst
offenders in this contest of greed, frequently insisting on
huge salaries despite running their companies into the
ground. Roger Smith, while CEO of General Motors
during the 1980s, engineered the collapse of market share
for GM. This led to an implosion at GM causing the loss
of $500 million per month in its North American
operation and the closing of twenty-one plants in North
America, which effectively cut in half the number of GM
workers between 1985 and 1995. For this stellar
performance, Smith was rewarded with an increase in his
pension plan when he retired in August of 1990, from
$700,000 to $1.2 million a year. Every sixteen days in his
retirement, Smith makes what an auto assembly-line
worker makes in one year on the job.143 Dennis D. Braun,
32.
143. Ralph Nader, "General Motors Careful to Protect Bloat at the
Top," Minneapolis Star Tribune, December 31, 1991, p. 13A.
4. Examples. Profit at insurer XL Capital fell more than Main Ideas:
Analysis:
80 percent last year, and its stock price slumped about 30
Evaluation:
percent. But Chief Executive Brian O'Hara made $7.5
million, a raise of 23 percent. O'Hara, who plans to retire
later this year, was also given 62,500 shares of restricted
stock and 250,000 stock options, which were not included
in the calculation of his total compensation. The company
said that was to "reflect the importance of Mr. O'Hara's
role in the CEO succession process." "The cracks in the
idea of pay for performance really start to show when
performance falters but pay still rises," said Paul Hodgson,
senior research associate at The Corporate Library, an
4
independent corporate governance research firm. "It's
always a win-win scenario for executives." Rachel Beck
and Matthew Fordahl, 6A.
A subdued Fuld opened his testimony declaring, "I take
full responsibility for the decisions that I made and for the
actions that I took," but he conceded no errors or
misjudgments in the chaotic period that led to the firm's
bankruptcy. And he said a compensation system that he
estimated paid him about $350 million between 2000 and
2007 even as the company headed for disaster was
appropriate. The panel unearthed internal documents
showing that on Sept. 11, Lehman planned to approve
"special payments" worth $18.2 million for two executives
who were terminated involuntarily, and another $5 million
for one who was leaving on his own. That was just four
days before the government let Lehman go under. Julie
Hirschfeld Davis, Associated Press, "Lehman Execs
Sought Millions," Boulder Daily Camera, October 7,
2008, 5A.
The now-bankrupt investment bank Lehman Brothers
arranged millions in bonuses for fired executives as it
pleaded for a federal lifeline, lawmakers learned Monday,
as Congress began investigating what went so wrong on
Wall Street to prompt a $700 billion government bailout.
The first in a series of congressional hearings on the roots
of the financial meltdown yielded few major revelations
about Lehman's collapse, and none about why government
officials, as they scrambled to avert economic catastrophe,
declined to rescue the flagging company while injecting
tens of billions of dollars into others. Julie Hirschfeld
Davis, 5A.
In actuality, even when executives do a poor job, they are
given "golden parachutes" and luxuriant retirement
packages to buy them off and ease them out the door.
Examples abound. J. P. Bolduc, ousted as CEO of W R.
Grace & Co., received a $20 million severance bonus,
which was $5 million more than his contract specified.
Joseph E. Antonini, when forced out as K-mart's CEO,
gained $3 million in severance despite the poor
performance of his company. Robert J. Morgado was
given $50 million to $75 million for going along with his
forced retirement. Such beneficent severance packages
are on the rise and are now routinely negotiated before
hiring is formalized. Although many are not contractual,
they are still freely given despite poor executive
performance. Dennis D. Braun, 33.
5
Main Ideas:
5. Justification. Business Week concluded, when,
Analysis:
"Thanks to (stock) options, the link between (executive)
Evaluation:
pay and performance, at least as measured by the stock
market, has never been tighter." Stock options give
chosen workers the right to buy the company's stock at a
given price at a given time. The idea is to get these
employees - especially top executives - to act like owners
and reward them with pay when they perform accordingly.
Mary Deibel, Scripps Howard News Service, "CEO Pay
Packages Examined In Study," Rocky Mountain News,
August 30, 1999, 2A.
Others - including some longtime champions of stock
options as a way to tie CEO performance to pay - argue
that options have been overdone to the point that
shareholders are seeing value siphoned off needlessly to
lackluster executives by cronies on the board who hope
the favor will be returned in kind. Mary Deibel, 2A.
Rewards like these began blurring the economic divisions
between top managers of major corporations and
entrepreneurial, capitalist founders or owners. Chief
executives were becoming more like owners, as their
compensation-in theory, at least-reflected corporate
success. Yet the correlations were erratic. Heads of
money-losing companies were adding only a little less
income than the stewards of high-achieving firms. Kevin
Phillips, chief political analyst for the 1968 Republican
presidential campaign and later served as assistant to the
attorney general. Since 1971 he has been the editorpublisher of The American Political Report. Since 1979
he has also edited and published the Business and Public
Affairs Fortnightly. Phillips is a contributing columnist to
the Los Angeles Times, a member of the political
strategists' panel of The Wall Street Journal, and a regular
commentator for National Public Radio and CBS Radio
Network, The Politics of Rich and Poor: Wealth and the
American Electorate in the Reagan Aftermath (New York:
Random House, 1990), 178.
Brought in after a bribery scandal to present a fresh face
of reform to German engineering firm Siemens, former
Merck executive Peter Loscher has ratcheted up
accountability and cut down on management committees .
. . To the rescue Loscher was the first outsider brought in
to lead the company in its 160-year history . . . You've put
your money where your mouth is and bought stock in
Siemens. I paid out of my own pocket 4 million euros
6
[$6.3 million], and then the next day, my whole leadership
team followed, and they bought out of their own pocket.
We have to really demonstrate to the organization the
confidence that we have in the future of the company. In
the U.S., it is nothing [special]. For a Germany-based,
European-based company, it was quite unusual. Bill
Saporito, "New Broom At Siemens. Peter Loscher Left
The Strategy Of The Scandal Ridden Firm Untouched.
His Challenge Was The Culture," Time, April 14, 2008,
Global 6 (71).
Why? According to Graef Crystal, the leading expert on
CEO compensation in the United States, it is due to guilt.
Crystal contends that directors of corporations personally
know their CEOs, have golfed with them, and had them in
their homes. It is a lot more difficult for them to fire
someone they know personally than to close a plant and
throw ten thousand people out of work that they do not
know.144 Dennis D. Braun, 33.
144. Claudia Deutsch, "Going Away for Big Pay," Minneapolis Star
Tribune, July 4, 1995, p. 1D, 4D.
Main Ideas:
6. Performance Pay. Our study of nearly 1,000
companies verifies that performance is dramatically better Analysis:
Evaluation:
at companies with high actual CEO pay (salary + bonus +
profit from stock options exercised + Long term incentive
payouts). Ira T. Kay, Ph.D. Watson Wyatt Worldwide,
Steven Van Putten, Watson Wyatt Worldwide, Myths and
Realities of Executive Pay (New York: Cambridge
University Press, 2007), 13.
Harvard economist Martin Feldstein has studied the
following two questions: Why has U.S. productivity
growth improved dramatically in the last 10 years, and
why is U.S. productivity so much higher than that [other
countries] . . . The increase in incentive compensation,
tied to individual and company performance, also caused
executives and lower-level managers to take risks, to work
harder and to engage in the unpleasant tasks that raised
productivity, Feldstein wrote in a working paper for the
National Bureau of Economic Research in 2003. Some
economists believe that the way the United States pays its
executives is a major source of competitive advantage and
that we reject it at our peril. Ira T. Kay, 14-5.
Figure 1.4. High CEO Realized Pay Correlates with High
Corporate Performance
7
Total
One-Year Three-Year Five-Year ROE*
Actual Annualized Annualized Annualized
CEO
TRS*
TRS*
TRS*
Pay**
(MMS)*
ROA* One-Year Tobin's
EPS
O*
Growth*
High $4.7 20.7% 14.4% 12.9% 14.3% 5.4% 26.6% 1.33
Low $1.0 11.8% 7.7% 6.8% 8.3% 3.1% 16.3% 1.23
All $2.1 16.8% 10.7% 10.0% 11.8% 4.1% 22.1% 1.28
**Total Actual Pay = 2004 Salary Bonus + Profit tram
stock options exercised + Long-term incentive plan payout
*Significant at 0.05 level. Note: Financial information as
of December 31, 2004; Sample size = 1,398 companies.
Source: Watson Wyatt. Ira T. Kay, 14.
In Figure 1.4. we divided our database into companies
whose CEOs received higher-than-median realized total
compensation in 2004 and those whose CEOs received
below-median compensation. Because most companies
deliver CEO pay through stock options, we conclude that
companies are directly linking executive and shareholder
interests. While it is impossible to say that the
opportunity for higher pay caused better performance, the
results indicate a causal relationship. In comparing
Figures 1.1 and 1.4, note that the median realized pay
($2.1 million) was slightly lower than the median pay
opportunity. While the numbers are riot entirely
comparable, they indicate that executives are earning what
the board intended. Ira T. Kay, 14.
The data also indicate that CEOs at companies performing
above the median had larger increases in actual pay – a 47
percent increase for firms with a median TRS of 34.3
percent (see Figure 1.5). On the other hand, CEOs at lowperforming firms, with a median TRS of 1.2 percent had
only a 10 percent increase in realized pay. In the late
1980s and early 1990s, critics argued that executives' pay
was not linked to the performance of their companies'
stock. During the expansion of the 1990s, executive pay
opportunity increased at 15 percent to 20 percent annual
compound growth rates at the typical billion-dollar
company. Most of that increase was in the form of stockbased compensation, primarily stock options. Those stock
options had value only if the stock price rose. Ira T. Kay,
14.
7. Short Term Gain. The same Fortune report found no
relationship at all between the total compensation of the
CEO and the return on investment to shareholders for the
100 companies for which data were reported.* So if
executives aren't paid for company performance, why the
8
Main Ideas:
Analysis:
Evaluation:
big paychecks? One shocking piece of data suggests at
least part of the answer. Of the companies in the report,
twenty-two announced plans to lay off large groups of
employees during 1994. When we correlate the number of
employees to be laid off with total CEO compensation, a
much stronger and statistically significant relationship
emerges (correlation = .31). Conclusion: CEOs who lay
off large numbers of employees are paid more than those
who don't (Exhibit 2). Alan Downs, 28.
*The statistical correlation is .07, indicating no detectable link
between the two factors.
Exhibit 2. Number of layoffs and CEO salary.
Number of Percentage CEO Salary
Layoffs
Return
IBM
85,000
—10.4
$15,252,000
AT&T
83,500
16.4
$4,830,000
GM
74,000
10.8
$2,444,000
Sears
50,000
16.4
$6,905,000
GTE
32,150
15.3
$2,750,000
Boeing
30,000
12.5
$4,795,000
NYNEX
22,000
10.1
$2,506,000
Eastman Kodak 20,000
9.2
$25,392,000
Martin Marietta 15,000
20.4
$4,424,000
du Pont
14,800
14.7
$1,979,000
Philip Morris
14,000
21
$5,069,000
Citicorp
13,000
11.8
$13,125,000
Procter & Gamble 13,000
25
$3,414,000
Xerox
12,500
14.4
$2,352,000
BankAmerica
12,000
25.1
$5,241,000
Aetna
11,800
11.4
$4,096,000
United
10,697
12.4
$3,052,000
Technologies
GE
10,250
22.1
$9,805,000
McDonnel
10,200
11.1
$1,184,000
Douglas
Bellsouth
10,200
13.5
$2,355,000
Ford
10,000
11
$5,501,000
TRW
10,000
14.9
$1,614,000
Pacific Telesis
10,000
17.2
$2,548,000
*five-year annual return to shareholders. Alan Downs, 29.
Mounting evidence—solid business results—suggests that
a layoff creates a downward spiral that can boost financial
results in the short term but also creates a need for
multiple, successive layoffs to maintain those results.
Like an anorexia of the organization, it begins depleting
9
the organization of its fat, then its muscle, and finally its
brain power. This process will continue until a wiser
management team intervenes and stops the addictive
cycle. Alan Downs, 7-8.
Fifteen years of continually increasing layoffs have
created a sizable bank of data and experience that show
layoffs to be a less than effective means of dealing with
the opposing forces of market competition and hungry
shareholders. What originally appeared to be a costsaving measure turns out to be a very expense prop for
earnings. Alan Downs, 1-2.
8. Long Term Gain. One of the AMA studies, a survey
of 547 companies that had downsized between 1986 and
1992, found that only a minority of these companies (43.5
percent) actually improved operating profits. These
statistics were confirmed in a separate study by Kenneth
De Meuse at the University of Wisconsin, who found that
profits actually declined faster after the layoff. Alan
Downs, 12-3.
In a 1994 AMA study, two-thirds of the companies that
laid off also reported hiring new employees in other areas.
Now when you combine this with the Wyatt and Co.
finding that most laid-off positions are refilled within two
years, a binge and-purge picture begins to emerge. With a
watchful eye to quarterly results, company management
opens and closes the hiring gate according to short-term
financials, not long-term business needs. Staff up when
things look good, in other words, and lay off when they
start to slip. Moreover, this cycle that perpetuates and
feeds itself is a very expensive process. Dow Chemical
estimates that the cost of rehiring a single technical or
managerial employee is as much as $50,000. Alan
Downs, 13.
There was a negligible correlation between increases in
CEO compensation and shareholder gains. One professor
dismissed pay-for-performance relationships as "almost
non-existent in a lot of companies."35 Kevin Phillips, 180.
35. "The Top Man Gets Richer," Industry Week, June 6, 1988, 51.
This addictive cycle has ravaged what once was one of
America's most revered companies, Eastman Kodak. The
photography giant began its foray into restructures and
layoffs back in 1985 and since then has restructured five
times. The total bill? More than $2.1 billion and 12,000
jobs. And here's what it got for all that effort: halved
10
Main Ideas:
Analysis:
Evaluation:
profit margins, a less than desirable stock price, and total
revenues that aren't much larger than before they fell into
the restructuring black hole. Alan Downs, 13.
Main Ideas:
9. Binge and Purge Corporate Strategy. As if those
Analysis:
results weren't eye-opening enough, Wyatt and Co.
Evaluation:
released a follow-up study a year later that extended these
earlier findings and prompted editorials in both The Wall
Street Journal and Money. In this study, 531 large
corporations were surveyed, and more than three-quarters
reported having cut their payrolls. Of those, 85 percent
sought higher profits from the layoff, but only 46 percent
saw any measurable increase. Fifty-eight percent of this
same group sought higher productivity, but only 34
percent reported even a slight increase. Sixty-one percent
wanted an improvement in customer service, but only 31
percent achieved it. And as in other studies, within one
year following the cuts, more than half of the companies
had refilled the laid-off positions. Alan Downs, 12.
Some of the strongest evidence condemning layoffs comes
from Wyatt and Co., one of the most respected
organizational survey firms in the country. A survey of
1,005 corporations that had recently participated in a
downsizing program found the following. • Only onethird said that profits increased as much as they had
expected after the layoff. • Fewer than half said that their
cuts had reduced expenses as much as expected over
time—an understandable result, considering that four out
of five of these same managers reported rehiring for the
positions that were laid off. • Only a small minority
reported a satisfactory increase in shareholders' return on
investment as a result of the layoff. Alan Downs, 11-2.
10. Accounting Problem. Yet like the other pseudobenefits of a layoff, any upturn in stock price is shortlived. A Mitchell & Co. study of sixteen major firms that
cut more than 10 percent of their workforce between 1982
and 1988 found that although Wall Street initially
applauded the cuts with higher stock prices, two years
later ten of the sixteen stocks were trading below the stock
market by 17 to 48 percent. Worse, twelve of these
companies were trading below comparable firms in their
industries. Alan Downs, 15.
"I created six and half billion of value," [Rock Star CEO]
Albert J. Dunlap informed a Lehrer News Hour audience.
"I received less than 2 percent of the value I created."28
11
Main Ideas:
Analysis:
Evaluation:
Dunlap's clever counters would all be baloney. The 65
percent of Scott Paper employees who survived his
chainsaw, for instance, enjoyed no job security. Just one
day after the merger, Kimberly-Clark announced plans to
eliminate eight thousand more jobs.29 Sam Pizzigati,
Greed and Good: Understanding and Overcoming the
Inequality That Limits Our Lives (New York: Apex Press,
2004), 54.
28 “Bridging the Gap,” PBS Lehrer News Hour, March 20, 1996.
29 The total combined workforce was sixty thousand. John A. Byrne,
“The Shredder: Did CEO Dunlap Save Scott Paper - or just Pretty It
Up?” Business Week, January 15, 1996.
"What galls many former executives, employees, and
union leaders," Business Week would report, "is their
belief that Dunlap and his team took credit for
improvements that had been in the works for months, if
not years."30 Dunlap, in the end, added no real value to
Scott Paper. He merely, as the Wharton business school's
Peter Cappelli would explain, "redistributed income from
the employees and the community to the shareholders."31
The company's shares did soar - but not because Dunlap
had made the company more effective. Wall Street bid up
Scott Paper because investors figured Dunlap would do
what he always did: "cut jobs, divest assets, and then ditch
the company at a tidy profit."32 Sam Pizzigati, 54.
30 John A. Byrne, “The Shredder: Did CEO Dunlap Save Scott Paper
- or just Pretty It Up?” Business Week, January 15, 1996. The move
Dunlap dubbed "the linchpin of my strategy' - the $1.6 billion sale of a
Scott papermaker subsidiary - had first been scoped out a year before
Dunlap arrived on the scene, The high-tech tissue mill in Kentucky
that Dunlap "opened with great fanfare" in 1995 had been initiated in
1990. Several product initiatives Dunlap credited to his management
team were actually “the result of years of effort by ousted staffers."
Added Business Week "Even many of the employee layoffs had
already been approved by Scott before Dunlap came on board."
31 Ibid.
32 John A. Byrne and Gail DeGeorge, “Commentary: Dear Al
Dunlap: Put Away the Chainsaw,” Business Week, August 5, 1996.
Some business and industry leaders have begun to
acknowledge the hand of Wall Street in initiating layoffs.
Robert Reich, U.S. secretary of labor, has chided bankers
and financial analysis for their wholehearted support of
layoffs. He noted, "The typical upturn in stock prices
immediately upon announcement of a layoff is based more
on a collective anticipation by investors that other
investors will respond positively to the same news, than it
is on any change in the fundamentals." Alan Downs, 14.
12
Exhibit 1. Gain in stock price after a layoff for selected
U.S. companies.
Company
Number of Date
Rise in
Employees Layoff Was
Stock
Laid Off Announced
Price by
December
27, 1993
Boeing
21,000
February 18, 31%
1993
IBM
60,000
July 27, 1993 30%
Procter and
13,000
July 15, 1993 13%
Gamble
Sears Roebuck 50,000
January 25,
3%
1993
United
10,500
January 26,
30%
Technologies
1993
Alan Downs, 14.
The aggressive use of stock options allows companies and
boards to do this and reward senior executives without
much penalty because current Financial Accounting
Standards Board rules basically allow companies to offer
lavish option packages without cost to their bottom lines.
John A. Byrne, Senior Writer, Business Week, "Why
Executive Compensation Continues to Increase,"
Conference Board, Compensation: Present Practices And
Future Concerns (New York: The Conference Board,
1995), 19.
11. Alternatives. The company could cut labor costs and
drop profits by an equal amount. Or it could leave the
payroll intact and force shareholders to bear the brunt of
the downturn. What have most American companies been
doing? Maintaining profits by cutting jobs. When an
American company's output falls by $1, the income of
workers tends to decline 48 cents. But there is another
way: allowing the company's profits to fluctuate
realistically with a decline in output, so there is less need
to lay off workers. Passing losses as well as gains on to
shareholders is healthier in the long run for the company
and the economy. Alan Downs, 4.
A company that endures a layoff mercilessly bleeds
critical personnel. It staggers from the loss of talent,
knowledge, and morale for months, even years, after a
layoff. The loss of productivity after a layoff is profound.
Not only does the company lose needed employees; it
loses customers. Layoffs destroy consumer confidence,
13
Main Ideas:
Analysis:
Evaluation:
and that causes the economy to stagnate. History shows
that a reduction in shareholder dividends does not have the
same effect. Most investors dependent on dividend
income are high-income individuals and institutions that
own assets. When dividends decrease, they can—and
apparently do—liquidate those assets in order to maintain
their previous spending level. Alan Downs, 4-5.
Mon Valley Works in Pittsburgh . . . APEX activities in
the early years at Gary involved a team of veteran hourly
employees that visited automotive customer plants to
assist in problem solving involving our steel. This quality
team ultimately submitted its own application to the USA
Today Quality Competition in 1992 and became the first
winner of that prestigious award. Thomas J. Usher,
"Restoring Broadly Shared Prosperity: A Business
Perspective," Ray Marshall, editor, Back to Shared
Prosperity: The Growing Inequality of Wealth and Income
in America (New York: M.E. Sharpe, 2000), 354.
This is a . . . locally initiated empowerment understanding
that quickly moved to other locations throughout US Steel
system . . . APEX came to stand for . . . a total quality
system that includes all product lines and employee
disciplines. Thomas J. Usher, 354.
US Steel . . . in 1901--the world's first billion dollar
corporation, with 149 facilities, 168,000 employees, and a
capacity of about 9 million tones a year. Today, ninetysix years later, we have four steel mills, 20,000
employees, and produce 20 percent more steel. That is
quite a testimony to employee and equipment
productivity, and quite a challenge to labor-management
relations. Thomas J. Usher, 353.
US Steel today is the lowest-cost steel in the world, and
yet we still need to import 20 percent of our needs. We
should be building more capacity today. Thomas J.
Usher, 355.
12. Exporting Jobs. One well-rewarded strategy was to
cut costs by moving operations and production to foreign
locales with cheaper labor and less regulation. Overall
profits of the largest 500 corporations climbed as the
percentage derived from overseas facilities rose from 3.4
percent in 1950 to 6.1 percent in 1960, 9.9 percent in
1970, 19.3 percent in 1980, and 19.7 percent in 1990.
Wages dropped from 66 percent of corporate revenues in
1992 to 62 percent in 2000. Kevin Phillips, 148.
In this milieu, pressure to maximize profits and stock
14
Main Ideas:
Analysis:
Evaluation:
prices by cutting employees came from both top
management and from Wall Street and institutional
investors, the latter responding to yardsticks that a single
layoff added $60,000 to future-year bottom-line earnings.
If layoffs and downsizings continued even as profits set
records in the nineties, that was because the layoffs and
downsizings-13,000 employees here, 9.2 percent of the
work-force there-were often the reason for the profits.
Kevin Phillips, 150.
Chart 3.21 Declining Employment at the Top 500 U.S.
Industrial Corporations. Number of Jobs at the Top 500
Corporations.
Year
1980
1985
1990
1993
Millions of 15.9
14.1
12.4
11.5
jobs
Source: U.S. Department of Commerce, Bureau of the
Census, U.S. Statistical Abstract, various years, and "The
Fortune 500. The largest U.S. Industrial Corporations,"
Fortune, April 18, 1994. Kevin Phillips, 151.
Technology . . . has altered the organization of production,
especially by facilitating globalization, which enabled
companies to shift work to low wage places, hastened the
integration of financial markets, and accelerated the
growth of both portfolio and direct foreign investment.
Ray Marshall, 16.
Main Ideas:
13. International Comparisons. Our industrial
Analysis:
competitors did a much better job in the last decade than
Evaluation:
American business executives in building up their
companies, earning increased market share, and enhancing
their profits. This happened despite the fact that they do
not pay their corporate executives nearly as much.
Corporations in Europe and Japan pay their CEOs at a
more sensible rate. In 1990, the average CEO of an
American manufacturing company with an annual revenue
of $250 million was paid $633,000 in salary and other
compensation.152 This was two-thirds more than the
second place average, which went to CEOs of comparable
German companies and over twice as high as what typical
Japanese executives earn ($308,000). Dennis Braun, 35.
152. John Burgess, "The Latest American Export: Higher Executive
Salaries are Showing Up Abroad," The Washington Post National
Weekly Edition, October 28–November 3, 1991, p. 25.
Chuck Collins, study co-author, founder of United for a
Fair Economy and an heir to the Oscar Mayer meat
empire, notes that Fortune 500 CEOs earned $625,000 on
15
average in 1980, or about 45 times what their workers
made. Today a big-company CEO makes 419 times $10.6 million on average - what U.S. workers make and
even heads of mid-sized U.S. companies, with an average
1.07 million a year in pay, draw more than twice what
CEOs bank in Canada, Germany or Japan. The study uses
Business Week's 49-year-old annual survey of CEO pay as
its benchmark. Business Week's latest tally ranks Eisner
first for 1998 with $5.76 million in salary and another
$569.8 million in stock options for a total of $575.6
million. Mary Deibel, 2A.
A European corporation's chief executive officer typically
receives pay six to eight times that of an entry-level
professional employee.154 Put simply, most European and
Japanese managers believe that an organization suffers
when the CEO receives an astronomical multiple of the
average employee's pay. Dennis Braun, 35.
154. Marjorie Kelly, "Mushrooming Executive Pay Prompts
Resentment, Problems," Minneapolis Star Tribune, October 9, 1995,
p. 3D.
[International Executive Compensation Comparisons, with
money and benefits measured in standard units].
Canadian Manufacturing
70
Companies
British Manufacturing
337
Companies
US Companies
730
Charles Peck, Henry M. Silvert and Kay Worrell, Top
Executive Compensation: Canada, France, the United
Kingdom and the United States (New York: The
Conference Board, 1999), 8.
Main Ideas:
14. Toyota. The two countries where the workers' share
of productivity fluctuations is lowest, Japan and Italy, also Analysis:
Evaluation:
have the most stable economies. Countries experiencing
the deepest recessions since 1988—Britain, Canada, and
the United States—are also the countries most likely to lay
off workers in a downturn. Layoffs, it seems, have
become the bane of American corporations and the
economy. Alan Downs, 5.
The Japanese auto giant forecast its first operating loss in
70 years on Monday, more fallout from the severe slump
in vehicle sales that has nearly claimed two Detroit
automakers and raised questions over when the U.S.
market, Toyota's largest, will hit bottom. Despite the
setback, the automaker is still poised to pull ahead of its
16
main U.S. rival, General Motors Corp., to become the No.
1 world carmaker in 2008, industry watchers said. Toyota
reported it sold 7.05 million cars worldwide during the
first nine months of the year, compared with 6.66 million
for GM for the same period. "'They're going to grow and
outstrip General Motors, there's no way around that," said
George Magliano, analyst with IHS Global Insight.
Toyota Motor Corp., which is committed to zero layoffs,
will continue cutting production to weather the downturn.
The automaker also lowered its global vehicle sales
forecast for the second time this year and said it was
putting ambitious expansion plans on hold, in large part
because of a precipitous drop in demand in the U.S. Yuri
Kageyama and Dan Strumpf, AP Business Writers,
"Toyota Projects First Loss In 70 Years," Boulder Daily
Camera, December 23, 2008, 7A.
Sona IIiffe-Moon, a spokeswoman for the automaker's
U.S. arm., said the company has not had any layoffs since
the 1950s. "As a result of that experience, it became a
part of our culture to ensure employment and stability for
employees," Iliffe-Moon said. Toyota had reported strong
growth in recent years, boosted by heavy demand. for its
fuel-efficient models like the Camry sedan and Prius gaselectric hybrid. But Toyota Motor Co. President Katsuaki
Watanabe said a severe drop in demand, especially in
North America, which accounts for one-third of vehicle
sales, and profit erosion from a surging yen were too
much for Japan's No. 1 automaker. Overall U.S. auto sales
fell to their lowest level in 26 years last month. "The
change that has hit the world economy is of a critical scale
that comes once in 100 years," Watanabe said. Yuri
Kageyama and Dan Strumpf, 7A.
15. Looting Pensions. Another group that had no
pension worries would turn out to be the biggest winners
under the bill. Congress wrote the law so broadly that
moneymen could dip into pension funds and remove cash
set aside for workers' retirement. During the 1980s, that's
exactly what a cast of corporate raiders, speculators, Wall
Street buyout firms and company executives did with a
vengeance. Throughout the decade, they walked away
with an estimated $21 billion earmarked for workers'
retirement pay. The raiders insisted that they took only
excess assets that weren't needed. Among the pension
buccaneers: Meshulam Rildis, a once flamboyant Beverly
Hills, Calif., takeover artist who skimmed millions from
17
Main Ideas:
Analysis:
Evaluation:
several companies, including the McCrory Corp., the
onetime retail fixture of Middle America that is now gone;
and the late Victor Posner, the Miami Beach corporate
raider who siphoned millions of dollars from more than
half a dozen different companies, including Fischbach
Corp., a New York electrical contractor that he drove to
the edge of extinction. Those two raiders alone raked off
about $100 million in workers' retirement dollars-all
perfectly legal, thanks to Congress. By the time all the
billions of dollars were gone and the public outcry had
grown too loud to ignore, Congress in 1990 belatedly
rewrote the rules and imposed an excise tax on money
removed from pension funds. The raids slowed to a
trickle. Donald L. Barlett and James B. Steele, "The
Broken Promise," Time magazine (October 31, 2005), 42.
During the 1980s and early 1990s, nearly 2,000
corporations dipped into pension funds for at least $1
million each, bringing the total take from the funds set
aside for the retirement of older workers to just over $21
billion. And where did all this money go? The biggest
chunk went to finance leveraged buyouts and corporate
mergers. The rest went directly into the company's cash
account and eventually ended up in the pockets of aggressive corporate raiders who are often the primary
shareholders. One corporate raider, Victor Posner, has
drained the pension funds of eight companies he acquired
over the past ten years to the tune of $65.2 million. Alan
Downs, 136-7.
The list of companies with underfunded pensions is
staggering. Among the top fifty companies according to
the Pension Benefit Guaranty Corporation (the quasigovernment organization that insures pension funds) are
Chrysler Corporation with a $2.6 billion deficit and Boise
Cascade at $32 million in the red. The list of those
companies with underfunded pensions grows longer each
year, prompting James B. Lockhart III, executive director
of Pension Benefit Guaranty Corporation, to warn that
there is "at least $40 billion of unfunded liabilities in the
defined pensions system." Alan Downs, 137.
16. Temps. Much of the work that wasn't outsourced
would go to "temps" or part-time workers. In 1982, only
5 million Americans worked in a temporary or part-time
capacity. That total increased more than fivefold over the
next fourteen years, to nearly 28 million in 1996.59 Sam
Pizzigati, 105.
18
Main Ideas:
Analysis:
Evaluation:
59 Cheryl Fields, “The Temp, Route: Tryouts That Work Both
Ways,” Washington Post, May 26, 1997.
Temps averaged, near the end of 1996, $8.79 an hour.
Full-time workers, at the same time, averaged $11.44.60
Corporations, naturally, seized this savings opportunity.
By 1999, according to American Management Association
research, 70 percent of America’s businesses had replaced
regular full-time employees with temporary workers.61
Sam Pizzigati, 105.
60 Aaron Bernstein, “Bigger Paychecks, Yes. Better Pay, No,”
Business Week, November 18, 1996.
61 David Moberg, “Temp Slave Revolt,” In These Times, July 10,
2000.
Part-timers, like temps, also hardly ever qualified for any
benefits. Simply by splitting full-time work into part-time
halves, companies could virtually eliminate, not just halve,
their benefit outlays.63 Sam Pizzigati, 105.
63 Many Americans, to be sure, wanted to work only part-time, even
if that meant forgoing benefits. But plenty of Americans - 7 million in
1997, for instance, about a third of the part-time universe - found
themselves working part-time only because they couldn’t find regular
full-time jobs. "According to Chris Tillys fine book, 'Half a Job,'
involuntary part-timers typically have family incomes fully $17,000
below those who are working part-time out of choice." Robert
Kuttner, “UPS: Off the Low Road,” Washington Post, August 8,
1997.
Discussion.
Franklin D. Roosevelt
1. Do you think that these allegedly outrageous CEO
compensation packages benefit the companies as a whole?
If not, then why do corporations and their shareholders
allow them?
2. What support do you find for the argument that these
CEO compensation packages actually hurt production?
19
3. What mechanisms does the free market system have to
checking these types of abuses?
4. What do you think should be done to try and stop these
types of abuses?
5. Shipping jobs overseas is in some senses good for the
company because it lowers labor costs and boosts their
production, and it is arguably good for the consumer to the
extent that they benefit from lower prices. How is this
phenomena bad for our country?
6. Evaluate Charles Erwin Wilson's famous quote: What
is good for the country is good for General Motors, and
what's good for General Motors is good for the country.
Charles Erwin Wilson, To the Senate Armed Forces
Committee (1952).
7. Why hasn't worker compensation kept up with rising
efficiency?
8. Evaluate the objectivity of this discussion packet.
9. Compare the "Robber Barons" with Today's "Rock Star" CEOs in terms of the
following categories:
Category
"Robber Barons"
Themselves
Long Term Corporate Gains
Their Nation
Society
Lecture
20
Today's "Rock Star" CEOs
1. Multiplier Effect Exercise.
a)
GNP: Gross National Product.
Speed at which dollars change hands
b)
Pass dollar
(Play money)
Speed changes
Speed = economic growth
Pass around class: Front to Back.
15 seconds
c)
Left hand
Earn money
Right hand
Purchase goods, and services
Multiplier effect
4 bills reconfigure for economic growth
d)
Trade Deficit.
By 1992 Americans were buying $2 worth of imports for every $3 worth of
goods made here. At the end of World War II, the ratio was less than $1 of
imports for every $10 of American-made goods.17 Translating such data into
more immediate terms, this has meant great losses in jobs. Plant closings went
up in the United States as foreign competition for America's purchasing dollar
rose. Decline ensued in one industry after another. While imported steel was
only 2 percent of the American market in the 1950s, it is 20 percent today. In
1960, America made three-fourths of all the world's cars. Today we account
for only one-fourth of global automobile production. During the mid-1980s,
the high-tech semiconductor industry lost $2 billion while twenty-five thousand
employees were laid off in the computer industry as competition with foreign
firms sharpened.18 Dennis Braun, Sociologist from Mankato State University,
The Rich Get Richer: The Rise of Income Inequality in the United States and
the World (Chicago, Illinois: Nelson-Hall Publishers, 1997), 189.
17. Bennett Harrison and Barry Bluestone, The Great U-Turn: Corporate Restructuring and
the Polarizing of America (New York: Basic Books, 1988), 8-9.
18. John Agnew, The United States and the World Economy: A Regional Geography (New
York: Cambridge University Press, 1987), 142-5.
21
Export
Import.
Sales abroad
Purchase foreign goods
1945
$10 American
goods
$1
Healthy Trade
Surplus
1992
$2 American
Goods
$3 foreign purchases.
Disastrous Trade
Deficit
3. Accounting Problem.
Accounting. Meaning
Common business sense.
Debit.
That which is owing. An entry on
the left-handed side of an account
ledger.
Debt
Credit.
To give credit in a bank account. To Asset
enter on the credit side of the amount
paid.
a)
When a CEO, corporate raider of liquidating merger and/or acquisition
specialist: exports jobs, lays off workers, sells corporate assets, and/or
out-sources work, they show a short term paper profit. Let us say that
they sold the human capital side of Hewlett Packard for $2 million (aka
Agilant Technologies).
b)
They show a short-term profit of $2 million on the corporate books.
What they have done, as a practical matter is sold off valuable corporate
assets. Labor and human capital is what produces the products,
services and innovations, which HP will sell next year. Instead of
making the company money; they have killed the geese that will lay
next year's golden eggs.
c)
Unfortunately, our antiquated accounting practices have not kept up
with CEO greed. What should happen in the real world is to enter a
balancing entry on the debit side of the ledger, which accounts for the
sale of corporate assets.
Given my proposed accounting reform, HP would show a $2 million
short term credit, and an accompanying $18 million dollar loss, for a net
22
operating loss of $16 million dollars. This assumes that over the next
ten years, Agilant would have earned let us say $8 million per year,
amortized at present value.
The bottom line is that this greedy CEO created a paper profit of $2
million in the short term, by liquidating, jeopardizing and selling off
corporate assets, which were worth much more in the long term.
4. Way to Earn Profit
Old Fashioned Way
We Earn It
New Fangled Way
Short Term Stock Manipulation
Economies of
Scale
Mass Production
Interlocking
Directorates
Assembly Lines
Labor Saving
Devices
Mechanization
Automation
Robots
Quality Control
Improve
Efficiency
Announce a layoff, export jobs, or sell off
corporate assets.
Invent Better
Widgets
Improve Worker
productivity
Management:
Improve Morale
Grass Roots
Cooperative
Management
Total Quality
Control
Reduce waste
Reduce, Reuse
and Recycle
Improve Customer Sales, Advertising
Service
and Marketing
Customer
Word of Mouth
23
Goodwill
Advertising
5. Special Interest Conflict.
a.
National interest vs.
CEO interest
b.
Mercantilism.
Globalization.
Mercantilism used taxes and customs duties to
protect domestic industry.
Economists, politicians and
businessmen, who believe in
globalization believe two
things.
This has happened. As Ross Perot said, That
"giant sucking noise," caused by NAFTA, is the
sound of millions of jobs being exported to
Canada and Mexico.
First, jobs and exports will
migrate to those countries,
which can produce goods and
services most efficiently.
This empirically has not happened. How many
millions of jobs must the US export per year
before we realize that globalization is harming
the American economy. Those millions of
jobs, dollars and capital that we export per year,
ain't never coming back!
Second, somehow this
increased economic
efficiency will rebound and
benefit American workers
and businesses.
Tariffs / Customs Duties.
Free Trade.
They taxes foreign imports, thus raising their
prices. This leveled the playing field for
domestic manufacturers.
Eliminate trade barriers to
boost trade.
c.
By contrast, an immediate 25-50% tax on all
imported goods and services would level the
playing field, make Chinese good much more
expensive, and stop the export of jobs cold. In
addition, import duties and customs taxes,
which are by comparison easy to collect, can be
used to invest in infrastructure, green industries
and domestic jobs.
24
d.
Protect American Workers.
Export Jobs
e.
Domestic Multiplier.
Chinese Multiplier.
f.
United States
China / India.
a. Did Europe and Japan jump on the Globalization Band wagon?
Did they export Dollars, and ship their jobs overseas in order to take advantage of low
wage rates?
25