April 16, 2007
In 2006, the Wall Street Journal reported last week, the typical big-time CEO took home $8.2 million, 765 times more than someone working full-time at the minimum wage. The typical CEO, the New York Times concluded from a somewhat smaller chief executive sample, last year took home 942 times minimum wage worker pay.
How much more than a minimum-wage worker should a typical CEO make? In this week’s Too Much, we have a surprising answer from an American CEO who’s anything but typical.
Also this week: The inequality nightmare that's keeping British generals and admirals up at night.
Looking to score on the stock market? Finance profs David Yermack of NYU and Crocker Liu of Arizona State have some advice: If you run into a CEO with a new home that totals over 10,000 square feet — quadruple the size of an average American home — run the other way. The two analysts found “a significantly negative stock performance” by companies with top execs who had just bought a mega-home. Such CEOs, Yermack and Liu speculate in a new paper, may be looking for an excuse to dump the company stock they own “before their stock goes south.” By selling stock for an ostensibly legitimate reason — to raise cash for a new home — these execs can insulate themselves from charges of insider trading. Yermack and Liu tracked down home ownership data for 488 CEOs in the S&P 500 Index. The typical home of an American CEO, they found, sports 12 rooms, sits on 5.37 acres, and carries a $3.1 million price-tag . . .
Swiss watchmakers are feeling particularly proud and prosperous these days. Why all the smiles? Explains Jacques Duchene, a top global watch industry observer: “Swiss brands have never been in such a healthy state, especially the big luxury brands.” Luxury 
watches now total “80 percent of Swiss watch sales by value.” Swiss watch companies, news reports last week noted, are “crafting ever more expensive precious metals like gold or platinum, sometimes bejeweled with gems like diamonds.” One new Swiss model features “oxidized steel from the sunken wreck of the Titanic.” Not everyone in the Swiss watch industry is high-fiving the rush to watch luxury. Francois Thiebaud, an exec at Tissot watches, is complaining that too many watches that sell for over 100,000 Swiss francs, or $82,192, offer no “intrinsic value.”
Big-time college presidents, the American Association of University Professors reported last week, are doing a remarkably effective job impersonating big-time corporate CEOs. Pay for college presidents, over the past decade, has jumped seven times faster than pay for college faculty. In 1996, only one college president took home over $500,000. In 2006, 112 college presidents hit the half-million mark. Meanwhile, after inflation, compensation for college professors has increased just 5 percent since 1996. College presidents, notes AAUP pay expert Saranna Thornton, “should lead by example and neither seek nor accept annual salary increases in excess of those awarded to other employees.”
The British military establishment's most prestigious think tank sees a new threat to social stability on the strategic horizon. The rich, suggests a new report from the UK Defense Ministry's Development, Concepts and Doctrine Centre, may be getting too rich. By 2035, the new report warns, the "middle classes could become a revolutionary class." What's going to have the middle classes so upset? The report's research team, led by Rear Admiral Chris Parry, offers an inequality-driven reason why middle class folks figure to be fuming: "The growing gap between themselves and a small number of highly visible super-rich individuals might fuel disillusion with meritocracy."
Bankers in South Korea, the Korea Times reports, are going the extra mile to keep their nation's wealthiest from taking their banking abroad. The nation's major banks have all set up exclusive "private banks" open only to the deepest of pockets. Hana Bank, for instance, offers a Gold Club limited to customers worth at least 5 billion won, about $5.4 million. At the loftiest levels of Korean private banking, customers get a good bit more than portfolio management. Shinhan Bank has a pro golfer on its private banking staff — to give free lessons. The Industrial Bank of Korea serves up a feng shui expert who specializes in selecting factory sites. The most eager Korean private bankers, journalist Yoon Ja-young observes, are providing even more of a personal touch. They're actually arranging marriages for their clients' children.
Quote of the Week
“When CEO compensation exceeds the entire profit of the airline, we know there's a problem."
Greg Davidowitch, president, United Airlines Association of Flight Attendants, Lawmakers Set a Minimum Wage and Should Set a Maximum Wage,
April 12, 2007
New Wisdom
on Wealth
Institute for Policy Studies and Center for Corporate Policy, Selfish Interest: How Much Business Roundtable CEOs Stand to Lose from Real Reform of Runaway Executive Pay,
April 10, 2007
Abby Scher, Who Would Jesus Tax? National Radio Project, April 11, 2007. Explores how traditional conservatives “wooed the Christian Right to support tax cuts for the wealthy.”
Robert Nelb, Race for the top is wearing society down, April 12, 2007, Yale Daily News. Understanding the link between growing inequality and the rock-bottom ranking of the United States in global life-expectancy rankings.
Robert Frank, In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up, New York Times, April 12, 2007.
The New York Times and the Wall Street Journal, the two biggest media outlets now conducting annual CEO pay surveys, both unveiled their executive compensation numbers for 2006 last week.
The new numbers tell a story that, until this year, went largely untold. CEO pay researchers have been able to detail, for years now, how much money top execs took home the previous year.
This year, for the first time ever, CEO pay researchers have the data — thanks to new federal disclosure regulations — to see how much today’s CEOs will take home in the future.
The new fed regs, in effect since December, require companies to place a dollar value on just how much their current CEOs have coming to them, in severance, pension, and “deferred” pay, when they exit. Some wags have dubbed this new dollar figure the “Nardelli number,” in a tribute to Bob Nardelli, the CEO who departed Home Depot early this year with an exit package worth $210 million.
The New York Times has calculated “Nardelli numbers” for 150 CEOs at companies that filed pay data for fiscal 2006 after the new federal disclosure rules went into effect.
Most of these CEOs, 125 of the 150, have dollars sitting tax-free in lush deferred pay accounts. Twelve of these accounts total between $10 million and $20 million. Another 22 add up to over $20 million.
The Times also found 25 CEOs sitting on lump-sum pension benefits worth between $10 million and $20 million and another 22 sitting on pension bonanzas worth over $20 million.
One typical exec in the Times sample: IBM CEO Sam Palmisano. This high-tech king took home $18.8 million in 2006 and “can expect an additional $34.9 million in deferred pay and $33.1 million in retirement benefits” when he leaves IBM’s generous employ.
Executives at companies that change hands in a corporate takeover can expect considerably more. Merrill Lynch CEO E. Stanley O’Neal, for instance, “could walk away with $251.4 million if a merger sets off a change-in-control payout.”
Top execs, apologists for the CEO pay status quo argue, merit all this moolah. They could, after all, be fired at any time. True enough. Corporate boards do show CEOs the door more often today. But these involuntary exits seldom leave CEOs in much of a lurch.
The average CEO shoved out the door last year, notes Times analyst Eric Dash, pulled in “$9 million in severance, the equivalent of about 170 weeks of salary for each year at the helm.”
Michael Kesner, an executive pay expert with Deloitte Consulting, calls such huge severance rewards for already wealthy corporate officers “completely unnecessary.” Corporate America, he said last week, shouldn’t be in the business of providing an “executive’s great-great-grandchildren with a payday.”
Those great-great-grandchildren, if our contemporary corporate culture doesn’t change, will undoubtedly wonder why not.
No top executive in the United States spent 2006 sitting on a bigger deferred-pay stash than Occidental Petroleum CEO Ray Irani. The interest income alone on the $124 million that ended the year in Irani’s deferred-pay account totaled $679,396, or over 14 times the annual take-home of an oil industry worker.
But this immense deferred-pay nest-egg — the largest that’s so far surfaced in this year’s CEO pay surveys — only begins to suggest how much the good folks at Occidental appreciate Ray Irani.
The 72-year-old Irani last year took home $52.1 million in salary, bonus, perks, and new incentives. He also cleared over $270 million cashing out stock options that Occidental had bestowed upon him in previous years.
Add to that $270 million another $93.3 million, the amount Irani last year withdrew from his deferred pay account. The Los Angeles Times, after factoring in assorted other sundries, estimates Irani's total payoff for 2006 at $460 million.
Ray Irani is certainly doing his part to raise the going rate for CEO labor. Meanwhile, at the other end of the executive pay spectrum, Robert Carr continues to risk dirty looks from his CEO peers.
The 61-year-old Carr, the co-founder and CEO at Heartland Payment Systems Inc., first started raising eyebrows in America’s executive suites seven years ago when he gave away a third of his credit-card processing company to his managers and workers. Now he’s endeavoring to narrow the base pay gap between his own annual CEO pay and the pay of Heartland’s lowest-paid employees.
Carr currently draws 14 times more pay than a Heartland hourly worker just starting out. That gap, Carr noted last week, will likely drop down “to 12 by the end of this year.”
What makes Carr so intent on narrowing pay gaps in his 2,026-employee company?
“It is my sense of fair play,” he explains. “The CEO is not more than 12 times more important than an unskilled worker.”Stat of the Week
California’s poorest families pay more of their incomes in state and local taxes, over 64 percent more, than the state's richest families. The state's most affluent 1 percent of families, says the California Budget Project, spend 7.1 percent of their incomes on in-state income, sales, property, and excise taxes. The tax rate on the incomes of California's poorest fifth: 11.7 percent. Families in California's statistical middle class — the middle fifth of the state's families — see 9.5 percent of their incomes go to pay their state and local tax bills.
Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954.
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