Two-thirds of Corporate America’s CEOs — and 80 percent of independent directors on corporate boards — now consider top U.S. business leaders overpaid, says a study released last week by the National Association of Corporate Directors.
So what ought we do about executive pay? Rep. Barbara Lee has just introduced legislation that points to a solution. We have more below.
But what if that legislation falters? What if America’s richest never stop getting richer? What happens then? That’s not a question any lawmaker — or economist — can answer. But a novelist can. In this week’s Too Much, we interview one fine novelist who just has.
The Pentagon is now offering veteran U.S. Army captains up to $35,000 in bonus incentives if they’ll agree to extend their service — and risk their lives — for another three years. How much incentive do former Army generals need before they’ll sign up to risk their necks on corporate boards? Quite a bit more apparently. Take Frederick Franks Jr., a retired general now serving as a director on the board of defense contractor Oshkosh Truck. This past August, Franks exercised 12,000 of the stock options he has collected from Oshkosh since 1997 — an incentive, no doubt, to brave the company’s internecine board warfare — and cleared over $638,000 in the process, over triple the $187,390 annual pay of currently active generals. Franks is clearly making his mark as an Oshkosh director. On his watch, the take-home of Oshkosh CEO Robert Bohn has only shot up 688 percent since the Iraq War build-up started . . .
Should corporations get a tax break on the multi millions they shell out for executive pay? Congresswoman Barbara Lee, a Democrat from Oakland, doesn’t think so. Her new Income 
Equity Act of 2007, introduced last Wednesday, would deny corporations tax deductions on any executive pay that runs over 25 times the pay of a company’s lowest-paid worker. A generation ago, few companies paid executives over 25 times worker pay. In 2006, top U.S. CEOs averaged 364 times more pay than the average American worker. Notes Rep. Lee about her new H.R. 3876: “It is time to reconnect the economic fortunes of the executive suite with those of the front-line employee, and that is what this bill does.”
A corporate watchdog group is urging shareholders at Oracle, the Silicon Valley software giant, to unseat the company board panel that sets Oracle's executive pay. Since 2004, the company’s top three execs have all annually averaged over $22.5 million. Windfalls like these have made Santa Clara County, the heart of Silicon Valley, home to California’s richest set of millionaires — and driven up basic living costs for everyone else. To afford a median-priced Santa Clara County house, says the California Budget Project, a family now needs a $143,454 income. The typical Santa Clara family last year made $62,000 under than figure. In Fresno County, a California locale with far fewer awesomely affluent, the gap between median family income and the income needed to afford a median-priced home runs less than $14,000 . . .
On Avon Mountain, just west of Hartford, Connecticut, the largest single-family home in New England history is nearing completion. Telecom exec Arnold Chase’s new abode will soon stretch nearly 51,000 square feet, about 20 times the size of a typical American home. The manse will feature a two-tier movie theater, a soda fountain, and 13 bathrooms. Meanwhile, Ultimate Homes magazine reports that the cheapest of the 1,000 most expensive American homes currently on sale costs $10 million. Two years ago, the cheapest home on the publication's top 1,000 list cost $7.9 million. Says Ultimate Homes publisher Rick Goodwin: “This market is still very strong. The rich are doing very well.”
Luxury hoteliers may now have a clear favorite in the 2008 U.S. Presidential race: Rudy Giuliani, the former New York mayor now vying for the GOP nomination. The latest round of campaign finance reports shows that Rudy has been spending his campaign trail evenings at some of the nation’s most celebrated inns, Giuliani has shelled out $2,010 at West Virginia’s Greenbrier, where rooms this past weekend went for $489 a night, and $5,370 at San Francisco’s Fairmont. All this time in luxury digs, notes political analyst Steve Benen, may help explain how Giuliani could spend $13 million in the latest quarterly campaign reporting period “without buying a single television ad,” normally “the biggest expense of any candidate.” Adds Benen: “I’m going to go out on a limb and suggest this might undermine Giuliani’s pitch as being a man of the people.”
Quote of the Week
“All we want is for the company to share the wealth.”
Salvador Camey, a Southern California truck driver on strike against Waste Management Inc., the national trash corporation whose CEO, David Steiner, last year made $6.54 million, a sum that a Los Angeles area truck driver earning the company's top hourly wage, $17.80, would have to labor 177 years of 40-hour weeks to match. Los Angeles Times, October 20, 2007
New Wisdom
on Wealth
Glen Ford, Numbers Tricks Mask Declining Wages and Rising Inequality, Black Agenda Report, October 17, 2007. Why “the rich take such pains to scrub the language clean of a vocabulary that could explain how they are stealing the wealth of the nation and the world.”
Michael Trotter, Higher marginal rates revisited, Daily Report, October 18, 2007. A veteran corporate attorney explains the rigged system that keeps executive pay soaring, a follow-up to his earlier appeal for higher tax rates on America's super-rich.
Stock options now typically make up, on average, around half the pay that goes to America’s big-time corporate executives.
That’s money almost totally wasted, suggests new research just published in the prestigious Academy of Management Journal.
In real corporate life, report researchers Donald Hambrick from Penn State and W. Gerard Sanders from Brigham Young, a company that lavishes options on top execs is creating incentives for risky decisions highly likely to backfire.
“It's fair to say from our data,” Sanders told Reuters last week, “that going very heavy with options is likely to have a negative effect on the health of the company.”
Stock options give executives the right to buy shares of stock at some point in the future at the share price when they're granted. These options can be incredibly lucrative. They can — and have — made billionaires out of CEOs who see their share prices soar.
And that’s why corporate boards say they grant options. Stock options, they contend, give executives the incentive to work tirelessly to get share prices higher — and keep shareholders happy.
The logic seems impeccable. A stock option grant certainly does hold out plenty of incentive. An executive granted options to buy a million shares at $10 each can score a $10 million personal profit if his company’s share price bounces up from $10 to $20.
The exec merely buys the million shares at the preset $10 option price, then turns around and immediately unloads them at the $20 going market rate. And if that market price has jumped above $20, the executive’s windfall would, of course, be even higher.
But what if the share price, between the original grant of the options and the moment the executive moves to cash out, actually drops?
That question goes to the heart of Corporate America’s option problem, conclude Hambrick and Sanders in their new paper, Swinging for the Fences: The Effects of CEO Stock Options on Company Risk-Taking and Performance.
For CEOs, the two business researchers note, stock options have no “downside.” If a company’s share price sinks, option-heavy execs haven’t lost anything, because they never had any cash of their own on the line.
Executives in that no-lose position, Hambrick and Sanders point out, will naturally gravitate toward “projects with the biggest possible upside” and pay scant attention to “the size or probabilities of downside outcomes” these projects might generate.
The chance at winning the option jackpot, in short, will leave these executives “inattuned to early signs of project failure and generally careless about risk mitigation.”
Given that dynamic, Hambrick and Sanders postulate, we can “expect that option-loaded CEOs have a relatively high likelihood of delivering big losses” — and that’s exactly what the data from their landmark analysis of 950 American corporations show to be the case.
Companies where options make up half or more of CEO pay end up over four times more likely to suffer “extreme shareholder losses” than companies where options constitute 20 percent or less.
Over a century ago, back in the original Gilded Age, Americans regularly looked to novelists for wisdom on inequality. In books like Looking Backward, a fabulously popular 1888 novel that imagined an America gone egalitarian, our forebears found the inspiration they needed to challenge robber baron fortune and power.
Looking Backward would eventually sell, after Uncle Tom’s Cabin, more copies than any secular book in the entire 19th century.
Edward Bellamy, the book's frail New England author, revolved his story around an affluent Bostonian who slips off to sleep in 1887 and awakes in the year 2000 to discover an America that had been totally transformed. No one lacks an adequate income. No grand stashes of wealth allow some to dominate over others. An equal America.
Not, in short, our actual America today. Not our America tomorrow either, suggests veteran novelist David Lozell Martin in his remarkable new book, Our American King.
No one will ever will ever confuse Martin, a former open-hearth furnace steelworker in Southern Illinois, for a frail New Englander. And no one will ever confuse the future America that Martin imagines with the equal America Edward Bellamy envisioned.
In Martin’s post-apocalyptic America, set in our near future, the super-rich play golf in fortified gated communities while, outside the walls, packs of machete-wielding adolescents in wedding gowns — “with no more than curiosity showing on their young faces” — slice off the arms of starving suburban matrons.
In other words, a nightmare America.
But with this nightmare the 61-year-old Martin may have given us a Looking Backward for our time, a novel that forces us to confront the inequality that so distorts our lives.
The defining difference: Edward Bellamy, writing in perhaps a more innocent age, painted a gloriously hopeful future to force a focus on inequality. David Lozell Martin paints a horror. We spoke to Martin earlier this month and have more on his important new work.
Stat of the Week
Three years ago, 57 percent of Fortune 100 corporations let their CEOs use the company jet for personal travel. Last year, notes MSN’s Michael Brush, 73 percent did. The typical cost of this executive perk in 2006: $121,676, well over twice the income of the median American family.
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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