October 9 , 2006

Which executives are more likely to hit the jackpot in Corporate America today, those who lay off workers right and left or those who pressure top-of-pay-scale employees to quit?

An interesting question for management science. We ponder the evidence — and the implications — in this week's Too Much.

Greed at a Glance: On the Diamond, Under the Table

The New York Yankees this year boasted, once again, the biggest payroll in baseball, $198.7 million for the club's 25-man roster. Think that's big league? Corporate America put on the field last year nine CEOs who each took home over $100 million. Three of these CEOs, the Corporate Library reported last week, collected over $200 million — and none of them, insiders insist, can hit a curveball. Barry Diller, the top exec at IAC/InterActive, led the CEO all-stars with $295 million, over ten times this year's $25.7 million take-home for Yankee third baseman Alex Rodriguez, baseball's highest-paid player. Last year's typical American CEO, says the Corporate Library after analyzing executive pay at 1,703 publicly traded companies, saw a 16 percent hike in total compensation over the previous year . . .

William McGuire, the CEO of the biggest health insurer in the United States, has pocketed $297.1 million in compensation over the last five years. His admirers say he’s worth every penny. Revenues at his UnitedHealth, they note, soared 22 percent just last year alone. The secrets to UnitedHealth’s success? The Wall Street Journal last month revealed one: kickbacks. The company routinely pays off the health care consultants big employers hire to help them choose health insurers. The Columbus school district paid one Ohio consultant $35,000 a year for such help. The consultant promptly advised the district to switch to UnitedHealth, a move that ended up costing Columbus schools an extra $776,000 in annual fees. The same consultant, unbeknownst to school officials, was collecting $517,138 from UnitedHealth . . .

Sir Richard Branson, the British billionaire known for his airlines and rail lines, has a deal for you. He’s renting out his private Caribbean luxury island. A “favorite with royalty, rock stars, and movie stars,” Branson’s Neckar Island can accommodate just over two dozen visitors and features “cliff-side villas,” jacuzzis, two freshwater pools, and a hefty staff that includes, naturally, a chef “always on standby for your order.” The cost: only $30,000 a night for up to 14 guests, with extra folks charged $1,250 per person per night . . .

Canada’s Vancouver rates, in travel guides, as one of the world’s finest urban centers. But the researchers who've just completed the “city’s first quality of life check-up” see danger ahead. Among the danger signs: “significant increases” in the gap between Vancouver’s rich and poor. The city’s most affluent 10 percent, notes the new Vancouver Foundation Vital Signs report, are averaging just over 10 times the income of the city’s poorest tenth. In 1990, Vancouver's richest tenth collected just six times more than the poorest tenth. Vancouver, in the midst of this growing inequality, has become Canada's “least affordable city to live.”

A mere war, the Israeli business daily Globes reports, doesn’t seem to be cooling off the sizzling Israeli luxury residential market. For the first time, lots in some choice northern Tel Aviv neighborhoods are going for over $3 million. On seaside streets, homes are fetching up to $15 million. Spurring the demand: heavy investment by foreigners, “mostly French,” says market analyst Eyal Price. Another key factor: growing inequality within Israeli society. The number of Israelis with liquid assets worth over $30 million, the Jerusalem Post noted earlier this year, jumped 20 percent last year. Between 1988 and 2004, adds the Adva Center of Tel Aviv, incomes of Israelis in the top 1 percent increased 5.6 times faster than the incomes of Israelis making two-thirds of the nation’s typical income.

Character and Compensation: A Cautionary Tale

Not everybody in the United States today can become a successful big-time CEO. That’s partly because some people have a basic character flaw. They just don’t feel comfortable firing people to make themselves rich.

Count Jeffrey Johnson as one of the flawed. Johnson, the publisher of the Los Angeles Times, was fired last week because he refused to make the massive layoffs ordered by the Tribune Company, the corporate giant that owns the Times and a host of other media properties throughout the United States.

The Times, under Johnson, had been recording profits at a robust 20 percent annual rate. But the parent Tribune Company wanted to see even higher returns and, in a move designed to make the paper more enticing to possible buyers, demanded that Johnson lay off about 100 of the paper’s 940-person editorial staff. Johnson, a 20-year “loyalist” in the Tribune empire, demurred.

“Newspapers can’t cut their way into the future,” he argued. “We have to carefully balance economic realities with serving our readers.”

That sort of balancing seldom takes place in America’s executives suites. Layoffs, as new research documents, have become irresistibly lucrative for the top execs who make them.

The new research, to be published shortly in the Financial Review, examined 229 corporate layoffs that took place in the 1990s and compared the resulting compensation for the CEOs at these layoff-happy companies with CEO pay at companies that had taken no layoff action.

The investigators behind the new study — Jeffrey Brookman and Saeyoung Chang of the University of Nevada, Las Vegas and Craig Rennie of the Sam M. Walton College of Business at the University of Arkansas — found that total pay for layoff company CEOs ran 9.3 percent higher, in the layoff year, than the pay for CEOs in non-layoff companies.

But the real gains for layoff company CEOs came in succeeding years. The year after slicing their workforces, layoff company CEOs took home 22.8 percent more pay than their full-employment counterparts. Two years after the layoffs, total CEO pay in layoff companies stood 22.5 percent higher than CEO pay in non-layoff companies — and 41.3 percent higher in the years after that.

The compensation upside for CEO downsizers, the researchers conclude, appears to be “permanent.”

Wal-Mart and the Maximum Wage

Wal-Mart, news reports last week revealed, seems to be implementing what amounts to a “maximum wage” — for its workers. The giant retailer is essentially capping weekly wages, mostly by shifting full-time job slots to part-time and making work so uncomfortable for “expensive” veteran employees that they quit.

How uncomfortable? At some Florida stores, “managers are barring older employees with back and leg problems from using stools they had sat on for years.”

Wal-Mart’s new maximum wage offensive, predictably enough, does not apply to CEO H. Lee Scott (2005 takehome: $15.7 million) or anyone else at the top of the company’s global empire. Quite the contrary. The new wage cap push will, if successful, increase wealth at the top, by hiking company profits enough to jumpstart the company’s anemic share price, now down 10 percent over the past three years.

The heirs of Wal-Mart founder Sam Walton still own Wal-Mart's biggest individual chunks of stock. Taken together, widow Helen Walton, sons Jim and Robson, daughter Alice, and daughter-in-law Christy own a reported 38 percent of the company. Four of the five heirs rank in the top 10 of America’s richest 400. One ranks 11th.

Full-time Wal-Mart workers, meanwhile, average $10.11 an hour, according to the company. At that rate, an average Wal-Mart worker would have to labor over 37,000 years to make what Robson Walton could make in a single year if he parked his $15.6 billion net worth in a CD paying 5 percent annual interest.

Disparities like these have some analysts convinced that modern economies need not a cap on what workers can make but a cap on the incomes of those who profit from their labor. This "maximum wage" sentiment has become most visible in Britain, the second-most unequal nation in the developed world, after the United States.

Five years ago, economists with the UK New Economics Foundation offered a variety of approaches for introducing limits on pay differentials within corporate enterprises.

Last December, in the international academic journal Contemporary Politics, University of Leeds political scientist Maureen Ramsay went much deeper into the rationale for income caps in a fascinating paper entitled, A modest proposal: the case for a maximum wage. Her piece is now available online, as a free sample on request for readers who register at the Contemporary Politics site.

More recently, an engaging new book by British journalist Stewart Lansley, Rich Britain: The rise and rise of the new super-wealthy, challenges the “Reagan-Thatcher-Bush-Bush-Blair doctrine” — the notion that grand concentrations of private wealth pose no threat to social decency — and explores the need for a “ceiling at the top.” We have a review.

The United States also has a maximum wage tradition, as chronicled in Greed and Good: Understanding and Overcoming the Inequality That Limits Our Lives, a book by Too Much editor Sam Pizzigati. The complete Greed and Good text now appears online. To access, just click the upper right button on the book’s homepage.

Stat of the Week: Banking's Personal Touch

The “global fee pool” banks can expect to collect from “catering to the needs of millionaires and billionaires,” says new research conducted by the New York-based asset manager Bear Stearns, “could top $200 billion by 2010” — over three times the income available from investment banking.

Quote of the Week: A Plea for New Priorities

“Washington should stop taking care of millionaires and start taking care of the middle class.”
Claire McCaskill, Democratic Party candidate for the U.S. Senate in Missouri,
Wall Street Journal, October 2, 2006

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