March 12, 2007
Last Thursday morning on Capitol Hill, just outside the committee room where lawmakers were about to hold a congressional hearing on executive pay, an earnest, well-dressed young man stood by the door, politely handing out a leaflet to everyone hurrying inside.
The young man's leaflet — from FreedomWorks, a right-wing activist group led by former House Republican majority leader Dick Armey — blasted the legislation the hearing would shortly be considering. That legislation, FreedomWorks charged, threatens “executives running companies that are the lifeblood of our economy.”
FreedomWorks need not worry. The paychecks of America’s corporate elite face no real threat from the CEO pay legislation now pending in Congress. We explain why in this week’s Too Much.
Also this week: the latest Forbes list of the world’s most wealthy.
A former economist for Shell oil, now the deputy leader of the British Liberal Democratic Party, is urging UK lawmakers to enact a 1 percent annual tax on all homes worth over £1 million, the equivalent of about $2 million in the United States. Economist Vince Cable says this tax on “obscenely large” properties would hit the “super-rich who get away with paying very little” in taxes. These wealthy, says Cable, are increasingly parking their taxable assets offshore. But “their desire to live in large homes,” he notes, makes a wealth tax on the British property of the super-rich an ideal antidote to their chronic tax avoidance . . .
Wall Street investment bankers, suggests a new study, apparently share the same predilection “to live in large houses” as British deep-pockets. Bankers who took home at least $2 million in bonus dollars last year, says the survey released last month by Prince & Associates, devoted more of their bonuses to new homes and home improvements — 26 percent in all — than any other expenditure. The richer the bonus, the survey also found, the more spent on jewelry and watches. Bankers with bonuses over $5 million spent an average 16 percent of their good fortune on bling. Those with bonuses in the $2-$5 million range devoted only 7 percent of their bonus dollars to $31,000 Patek Philippe watches and other fine baubles . . .
How much individual wealth just might quality as too much? University of Chicago economist Austan Goolsbee recently explored that question via the fortune of Oracle software CEO Larry Ellison. Goolsbee took Ellison’s net worth, $16 billion last year, and assumed a 10 percent annual rate of return. Ellison must spend, Goolsbee calculates, over “$30 million a week — $183,000 an hour — on things that can’t be resold, like parties or meals, just to avoid increasing his wealth.”
Would you like to watch Larry Ellison try to spend $30 million a week? The media wunderkinds at WealthTV are betting you would. Their fledgling TV network, now carried by 50 TV distributors across the United States, delivers “informative shows that provide invaluable insights on what every American dreams of — from travel secrets to fast cars.” The network’s signature series, The Best of Everything, takes viewers “to luxurious and exotic destinations around the globe.” Last week, in its Wealth on Wheels series, WealthTV featured the Palm Springs Auto Show. In high def, of course . . .
IBM last week proudly announced what may be the largest retirement planning program in U.S. corporate history. Over the next five years, the company will spend $50 million on seminars and Web sites designed to help employees scope out their financial futures. So why aren't IBM employees cheering? A decade ago, IBM’s “defined-benefit” pension plan guaranteed long-time employees a comfortable retirement. But the company’s last CEO, Lou Gerstner, replaced that plan with a 401(k) that shifts all retirement responsibility — and risk — onto employees. Big Lou took home $127 million in 2001, the year before he retired with a $1.1 million annual pension. His CEO successor, Samuel Palmisano, won’t need to attend the new IBM seminars either. He’s set to exit, notes the Boston Globe, with an annual pension worth $4 million.
Quote of the Week
“There is now good evidence, some of it published in the BMJ [British Medical Journal], that the healthiest and happiest societies are those with the most equal distribution of income.”
Fiona Godlee,
editor,
BMJ, Editorial: Our Unequal Society, March 3, 2007
New Wisdom
on Wealth
Joseph Gyourko, Todd Sinai, and Christopher Mayer, Why Do House Prices Rise Faster in Some Cities? National Bureau of Economic Research March 2007 Digest. Increasing concentrations of income in affluent households, this study shows, raise housing prices for everyone.
Justin Fox, Thanks, Rich People! Time, March 9, 2007. How America's top-heavy distribution of income is helping George W. Bush “balance” the federal budget.
The Democrats who now control Congress took aim — and fired — at CEO pay abuse last week. Unfortunately, they missed.
The miss came at a House Financial Services Committee hearing chaired by Massachusetts Rep. Barney Frank, who, just the week before, had unveiled a new version of the CEO pay legislation he originally introduced a year and a half ago.
The new version, in an apparent attempt to minimize opposition from corporate leaders, waters down that original legislation. Frank's first bill, grandly entitled the Protection Against Executive Compensation Abuse Act, would have helped “claw back” from executives any incentive pay awarded on the basis of cooked corporate books.
The new legislation, less ambitiously titled the Shareholder Vote on Executive Compensation Act, only gives shareholders the right to take a “nonbinding” vote on CEO pay plans.
But this watering down doesn’t seem to have helped. At Thursday’s hearing, Business Roundtable president John Castellani flatly rejected the new Frank effort. Requiring even just an advisory vote, Castellani testified, “would seriously erode” corporate board responsibilities.
At the same time, as other testimony at Thursday’s hearing made plain, the new Frank bill — even if enacted — would do little to actually reduce outsized CEO paychecks. Some of that testimony, remarkably, came from the bill’s supporters.
These supporters devoted major chunks of their presentations to the shareholder vote mandate now in place in the UK. The day’s star witness, the Yale management school’s Stephen Davis, even gave a sneak preview of research on the British system due out this spring.
The final report on this research, Davis told lawmakers, will pronounce shareholder voting on executive pay as “rational, timely, road-tested and practical for use in the United States.”
But advisory shareholder voting in the UK, Davis acknowledged, hasn’t acted as much of a brake on CEO pay. British executive pay, he noted, “continues to exceed inflation and average workforce wage increases.”
In other words, the gap between British executives and workers is continuing to widen, despite the new advisory shareholder voting.
Indeed, another witness added, UK CEO pay is rising at an even faster rate than CEO pay in the United States. University of Chicago business prof Steven Kaplan, an opponent of the Frank bill, made that point citing data reported last month in the Wall Street Journal.
So what has the British “say on pay” actually accomplished? “Say on pay,” enthused Yale’s Davis, has nurtured a “constructive and regular annual dialogue” between corporations and investors. Rather than risk a negative shareholder vote, corporate boards are sitting down with investors and discussing how they compensate their top execs.
British investors clearly feel they've become part of the pay-setting process. They love the new system, as do executives themselves, reports Yale’s Davis, who just last month finished directing a series of on-site interviews with leading lights on the British corporate scene.
British executives should be pleased. They now have both rising paychecks and an investor community willing to go along with the rises. UK “say on pay” has essentially served to legitimize the British executive pay status quo, the most unequal in Europe.
Meanwhile, the problems this status quo creates remain in place. Interestingly, the most sober recitation of those problems at last week’s hearing came not from Democrats on Financial Services, but from the panel’s ranking Republican, Alabama Rep. Spencer Bachus.
Corporations “doing well,” Bachus noted, are not sharing rewards with average employees. What impact, Bachus wondered, is this inequity having on workplace morale? And how, he asked, are outsized CEO paychecks affecting the competitive posture of U.S. companies? Dollars that could be going into job training and R&D, Bachus observed, are instead pouring into executive pockets.
At this point, Bachus retreated into Republican orthodoxy. He stressed his “abundance of caution” about government’s ability to correct the executive pay problem.
“There may not be,” he resignedly summed up, “a solution.”
Democrats on the House Financial Services Committee, by advancing no reform beyond advisory shareholder voting, certainly gave Bachus no reason to change his mind.
What could Congress be doing? The Institute for Policy Studies and the Center for Corporate Policy, two think tanks more interested in ending CEO pay abuse than raising shareholder self-esteem, are currently circulating an analysis that explores more potent approaches.
In today’s global-warming world, about the only thing climbing faster than the mercury in our thermometers may be the personal net worths of our super-rich.
At least 946 billionaires, Forbes magazine noted last week in its annual tally of the world's wealthiest, now walk the Earth, 21 percent more than last year.
These fortunate few, adds Forbes, now sport fortunes worth a combined $3.5 trillion, over 35 percent more wealth than the world’s billionaires held last year — and nearly double the $1.9 trillion in net worth the world’s billionaires held in 2004.
The 946 world billionaires, together, make up less than one-millionth of 1 percent of the world’s adult population. Yet they own nearly 3 percent of the world’s household wealth, as calculated this past December by the United Nations University.
In effect, the billionaires in the new Forbes count — average wealth, $3.6 billion — hold over 100,000 times more wealth than they would if the world’s wealth were divided equally among every adult on Earth.
The new Forbes wealth figures carry some geographical surprises. The United States still leads the world in billionaires, with 44 percent of the global total. But China, India, and Russia are swooping up fast.
India now boasts 36 billionaires, a dozen more than Japan. Germany still hosts more billion-dollar fortunes than Russia. But Russia’s 53 billionaires have accumulated $37 billion more in wealth than Germany’s 55.
Of the Americans on the Forbes list, eight owe their nest-eggs to the Wal-Mart retail empire. On the overall list, nine billionaires have built their fortunes selling luxury goods to other rich people.
No one in the world grew richer faster last year, says Forbes magazine, than Mexican mega billionaire Carlos Slim. The telecom mogul saw his personal net worth jump by $19 billion in just 12 months. His wallet, notes analyst David Usborne, “grew by roughly $2.2 million an hour.”
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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E-mail: editor@toomuchonline.org.
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