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This Week

Make a better mousetrap, America’s business folklore tells us, and the world will beat a path to your door. But the movers and shakers of our contemporary business scene haven’t been spending all that much time on mousetraps lately — or doing much of anything else that would actually generate better or more affordable products and services.

Why should they? In early 21st century America, the really big rewards don’t go to executives who invest in R&D or work hard at building enterprise effectiveness. The big rewards go to the wheelers and dealers, the execs who spend their days plotting mergers and buyouts that multiply their revenues far faster than any new mousetrap ever could.

But this wheeling and dealing carries a bit of downside. It’s rotting out the innards of America’s corporate enterprises. Who says so? We have the surprising answer in this week’s Too Much.

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Greed at a Glance

The global luxury goods market, a top international consulting group is predicting, will contract 10 percent this year — and won’t “fully recover to 2007 levels before 2012.” The reason? Wealthy consumers, consultants at Bain & Co. believe, are feeling “luxury shame,” a hesitance to splurge at a time most people are scraping. At Chopard, a Swiss watchmaker with pieces that run up to $166,500, chairman Karl Scheufele is putting on a slightly happier face. He told Reuters earlier this month that “there is still money around and sometimes people still spend this money.” Still, counters Kepler Capital Markets analyst Jon Cox, the core problem remains: “No one wants to be showing off.”

Roman AbramovichWell, almost no one. Russian oligarch Roman Abramovich’s newest yacht, the 558-foot Eclipse, just took its first test glide out of the German shipyard that’s been busy armor-plating it. The yacht — the world’s longest private pleasure craft, by 55 feet — comes better defended than some small nations. Among the security touches in the $608-million vessel: a military-grade missile defense system, bulletproof windows, and a private submarine that “doubles as an escape pod.” Abramovich hasn’t yet revealed whether he plans to unload any of his three other yachts. The smallest of the trio stretches half the length of a football field . . .

Shareholder “say on pay” has emerged as the CEO pay reform of choice for the Obama administration. The White House wants Congress to give all shareholders the right to take advisory votes on executive pay packages. Shareholders in the UK have had this advisory “say on pay” right since 2002. How’s that working out? For CEOs, just great. Median CEO pay at Britain’s top 100 companies, BBC business editor Robert Peston reported earlier this month, rose 7 percent last year. Share prices in 2008, at those same companies, dropped 30 percent. Over the past 10 years, average British top 100 CEO pay has jumped 295 percent. Share prices, in that decade, fell 23 percent. Top British CEOs took home 47 times average British worker pay in 1998. The ratio in 2008: 128 times . . .

subplugIs the global economy finally sprouting “green shoots” that signify recovery? Some analysts are rejoicing over the substantial uptick they see on one key yardstick: the monthly number of private jet passengers that pass through the London City Airport. May’s total hit 1,430, a 44 percent boost over April’s tally. Airport officials attribute the increase “to passengers in the financial services sector starting to travel again to do deals.” The average number of high-finance passengers per private jet flight: 1.8 . . .

In Washington, meanwhile, executive high flyers are ratcheting up the lobbying pressure against White House proposals that would leave top U.S. execs with fewer reasons to go jetting around. The CEOs of Cisco, Honeywell, and American Express led one early June Capitol Hill lobbying blitz. Their target: President Obama’s proposed crackdown on U.S. companies that park profits in overseas tax havens. Also mobilizing: the movers and shakers of the hedge fund industry. The Managed Funds Association, the industry’s top trade group, has just hired a well-connected Washington lobbying firm. How well-connected? Until two years ago, the firm’s newest star lobbyist, Carmencita Whonder, served as the top financial policy adviser for Senator Chuck Schumer, the powerful New York Democrat. Whonder’s new clients are hoping she can save the loophole that lets hedge fund managers claim huge chunks of their fee income as a capital gain. Ending this bit of tax sophistry, as the White House proposes, would over double the tax due on hedge fund manager windfalls. In 2008, the top 25 hedge fund managers averaged $464 million each.



Quote of the Week

“The case for aggressive tax reform on ultra rich financiers was overwhelming last year; now, with the financial system completely dependent on taxpayer largesse, there shouldn't be anything left to debate. No one in finance can say they made their money just by working hard or being clever — their system was saved by the government.” Robert Weissman, The Good, the Bad, the Ugly: Financial Sector Regulation, Multinational Monitor, June 17, 2009


New Wisdom
on Wealth

Ed Lotterman, Is fast-rising CEO pay a sign of market failure? Idaho Statesman, June 16, 2009. An economist dissects the defense for over-the-top compensation.

Earl Gates, CEO pay seems to be for just showing up. Appleton Post-Crescent (Wisc.), June 16, 2009. Why bonuses have so little impact on “performance.”

William Cohan, The Holes in Obama's Wall Street Plan, Daily Beast, June 16, 2009. The White House proposals for reforming high finance, this veteran financier argues, fail to challenge a Wall Street pay system “that rewards taking big risks with shareholders' money in order to get big rewards for bankers and traders.”





In Focus

Rationalizing for the Rich: Cakewalk No More

In tough economic times, work for some people can suddenly become significantly more difficult. Take, for instance, the analysts and academics who have decided, for whatever reason, to devote their careers to justifying the wealth of the wealthy.

In normal times, these flacks for grand fortune can waltz through their workdays with the greatest of ease. They merely invoke the prospect of catastrophic economic collapse whenever anyone dares propose anything that might leave the wealthy even just a little less wealthier.

Without the rich getting richer, these shills will note smugly, we’ll have no one to create jobs or keep the stock market humming.

But what can apologists for the awesomely affluent threaten after an economy has already collapsed? What do they do then? Here’s what they do: They get desperate — and even more reckless than usual. They play games with stats. They torture logic. They invent ever more fanciful gloom-and-doom scenarios.

We’ve seen, over recent weeks and months, all this desperation and more.

The statistical games, of late, have revolved around the rich as “refugees.”

The wealthy, fans of fortune have long argued, will flee any jurisdiction goofy enough to raise taxes on high incomes. Over the last year, a number of jurisdictions have raised taxes on the wealthy anyway, and that seems to have upped the pressure on the apologist crowd to “prove” the exodus effect.

Editorial writers at the Wall Street Journal made just such an attempt late last month when they jumped on a news report that one-third of Maryland’s millionaires had disappeared from the state’s tax rolls.

That “substantial decline,” the Journal editorialized, demonstrates the “futility of soaking the rich.” The “fleeced taxpayers” of Maryland, the Journal asserted, had decided to “fight back.” They were leaving the state.

And what “soaking” had Maryland done? In 2008, the top state tax rate on income over $1 million had risen from 4.75 to 6.25 percent.

Could an increase this modest actually drive Maryland millionaires to pull up stakes and leave hearth and home behind? Perhaps. But so far, despite the feverish claims of the Wall Street Journal editorial page and similarly minded media outlets, no evidence is actually showing any Maryland millionaire exodus.

The number of taxable returns with over $1 million in 2008 income, the Institute on Taxation and Economic Policy notes in a detailed analysis of the Wall Street Journal’s exodus stance, has indeed dropped. But the number of returns with income just under $1 million “has risen noticeably.”

The supposed “exodus” of Maryland’s rich, in other words, likely reflects a decline in the number of Marylanders with $1 million in income. Last year, amid the Wall Street nosedive, wealthy Marylanders simply made less money.

In any case, the data the Journal cites to back up the exodus claim all come from a “preliminary” report on Maryland's 2008 tax collections. The final report won’t be out until October. Last year’s final report featured over three times more $1 million returns than the preliminary.

So much for the great Maryland millionaire exodus. Ready for some tortured logic? Last week the Harvard Business Review presented a hefty helping — from University of Chicago economist Steve Kaplan.

Kaplan’s Harvard Business Review contribution, entitled (Good) CEOs Are Underpaid, offers a provocative take on corporate executive compensation. The evidence, Kaplan contends, “indicates that CEOs typically aren't overpaid.”

What evidence? Paychecks for top CEOs, says Kaplan, aren’t rising as fast as paychecks for top hedge fund managers and other financiers. In 2007, he informs us, the hedge fund industry’s top 20 earned over $20 billion, almost triple the $7.5 billion combined income of the nation’s top 500 CEOs.

All true. Hedge fund managers are taking home rewards that dwarf the pay of even the highest-paid CEOs. But CEOs are taking home far more than average American workers, and the gap between CEO and worker pay has increased even wider and faster than the gap between CEOs and hedge fund managers.

In 1970, as Labor Institute director Les Leopold has calculated, America's top 100 CEOs made 45 times more than average American workers. In 2006, they made 1,723 times more.

Given that gargantuan gap, might a reasonable observer conclude that “(good) CEOs” have become, in the grand scheme of things, grossly overpaid? Might this same observer wonder why the University of Chicago's Kaplan compares CEOs and hedge fund managers but not CEOs and average workers?

For this choice, Kaplan offers no logical explanation. He may not have one.

Apologists for grand fortune who've been beating the drums against the federal estate tax haven’t been particularly big on logic either. They’ve taken, instead, to spinning ever more fantastic narratives on the dangers estate taxation forces upon us.

A recent report from the American Family Business Foundation, a research group bankrolled to plug away for estate tax repeal, has elevated this fantasizing to fairly surreal heights.

The estate tax currently applies only to the wealth over $3.5 million, or $7 million for couples, that the wealthy plan to pass on to their heirs. Taxing this wealth, economists Cameron Smith and Douglas Holtz-Eakin argue in their new assault on the estate tax, discourages the rich from saving and investing.

Smith and Holtz-Eakin, the top economic adviser in John McCain's 2008 campaign, go on to argue that estate taxation actually encourages the affluent to waste their money on creature comforts like round-the-world cruises. By engaging in such frivolous spending, after all, a person of means “reduces his estate and lowers his estate tax liability.”

In the process, contend Smith and Holtz-Eakin, wealthy people end up frittering away their fortunes instead of investing in businesses that create jobs.

Citizens for Tax Justice earlier this month subjected this claim to a little reality check. To appreciably spend down their estates and avoid estate taxation, the CTJ researchers point out, the wealthy would have to make a great many purchases that have no lasting asset value. That’s not easy to do.

If a billionaire buys a yacht, for instance, that yacht becomes an asset and adds to the value of the billionaire’s taxable estate. Only those purchases that have no asset value can lower a wealthy person’s estate tax liability.

“Can extremely wealthy people,” asks the Citizens for Tax Justice analysis, “really spend away their millions on expensive dinners and cruises?”

To pull that off, answers the analysis, deep pockets eager to avoid estate tax would have to spend their “entire estate on caviar or cruises or cocaine,” things that “won’t be around” after they die. An unlikely outcome.

“We won’t say it’s impossible,” quips CTJ, “because we really don’t want emails from over-eating, drug-addicted trust fund babies arguing this point.”

So what, in the end, does the growing inanity of the apologetics for grand fortune tell us? Is this inanity a sign that the days of the super rich may be numbered?

Unfortunately, not necessarily. The super rich have never depended on logic or statistics or credible narratives to make the case for their dominance. They’ve depended on the political power that great wealth creates. They still have that power. They remain a formidable force — even if their flunkies do look silly.

State tax rates

In Review

Downsizing for Fun, Profit, and Chaos

Stephanie Creary and Lara Rosner, Mission Accomplished? What Every Leader Should Know about Survivor Syndrome. The Conference Board, Executive action series, No. 307, June 2009.

Corporate takeover deals that pay off big — for executives — typically follow a standard pattern. One company swallows another. The swallower grabs the swallowed company’s customers, then fires its workers. That does wonders for corporate bottom lines — and horrors for corporations as workplaces.

Employees left behind at “downsized” companies turn out to “often suffer from low morale.” They show “reduced commitment” to the enterprise. They no longer make “personal sacrifices for the good of the organization.”

Who’s making these charges? Some anti-business professor? Some angry labor organizer? Not exactly. All these observations about the chaos corporate downsizings create appear in a new report from the American business community’s oldest and most prestigious research body, the Conference Board.

This new paperMission Accomplished? What Every Leader Should Know about Survivor Syndrome — is essentially ringing an alarm. The basic message: America’s top execs have no idea how much damage their downsizing is doing.

Managements “that engage in downsizing to cut costs, increase profits, and reduce redundancies,” as the Conference Board paper notes, “prematurely proclaim ‘mission accomplished’ when these targets have been achieved without taking into account the human capital assets within the company.”

These “human capital assets” take a damaging hit whenever companies downsize. Loyal employees who've seen co-workers axed feel betrayed. They go about their jobs disengaged, “constantly waiting for ‘the next shoe to drop.’”

Meanwhile, notes the Conference Board study, too many top executtives simply dismiss this increasing organizational dysfunction. They'll mutter that employees “should be thankful to have a job and should just get back to work” or blame the discontent on “chronically underachieving employees who may derive satisfaction from gossiping and by infecting others with their dissatisfaction.”

But the walking wounded after a downsizing, the study contends, include not just malcontents, but “star” employees, too, prized people with “commitments to achievement,” veterans “seasoned and sharp.”

In fact, the study observes, downsizing can be especially devastating to mid-level managers, the corporate core. These managers have to personally drop the downsizing ax. They face “stress from the increased workload” left after downsizings and “the negative emotions that their role evokes from others.”

To counter this chaos, the Conference Board has some suggestions. Most of these boil down to touchy-feely human resource department bromides. Managements that downsize “should take a holistic approach to employee engagement.” They should ready a “crisis communication” plan. They should “offer one-to-one career counseling.”

Executive downsizers should probably not count on any of this advice actually working. The companies most “likely to limit the detrimental effects of downsizing,” as the Conference Board study acknowledges in passing, tend to be firms with “a history of fair human resources practices” that have been offering employees generous benefits like sabbaticals and on-site childcare.

In short, companies that unselfishly share rewards with workers and only downsize when hard times leave them no choice may be able to navigate around a downsizing’s devastation.

But that’s not much help to modern American CEO downsizers. They’re not downsizing because they have no choice. They’re downsizing to keep mega rewards pouring into executive pockets.

Consider Hewlett-Packard CEO Mark Hurd, the computer industry titan who wheeled and dealed his way to 31 mergers over his first 46 months as H-P’s chief exec. Hurd last year took home just under $40 million in salary and new stock incentives — and gained another $25.8 million from incentives he had collected in previous years.

In the first quarter of this year, Hewlett-Packard registered a $1.7 billion profit. H-P, in that same first quarter, announced a 6,400-worker layoff.

You might call that a holistic approach to greed.


Stat of the Week

At least eight financial firms that have collected taxpayer bailout dollars have been able to sidestep federal rules prohibiting “golden parachutes” at bailed-out enterprises, reports ProPublica, the public interest investigative journalism site. The biggest going-away package went to South Financial Group CEO Mack Whittle. He advanced his retirement date two months, to officially retire on the same day his bank applied for bailout aid. The shift hiked Whittle’s retirement package by $2 million, to $18 million.


Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: