When the gods dance...

Monday, May 28, 2012

An End to CEO Option Windfalls?



Earlier this month, outside a Philadelphia Inquirer printing plant, a 43-year-old railroad engineer went to open a boxcar door. The contents of that boxcar — giant rolls of newsprint — had apparently shifted over the course of the trip to the plant. One roll tumbled out when the door opened — and killed the engineer.

Millions of Americans have jobs that place them, on a daily basis, “at risk.” Some don’t make it. In 2010, notes the American Society of Safety Engineers, 4,547 of us died from on-the-job injuries and illnesses.

Not many high-powered corporate chief executives ever die from an on-the-job injury or illness. Yet these same execs rake in millions of dollar a year. They deserve those millions, their flacks assure us, because they confront “risk.” What are CEOs risking? Their compensation. They have to “perform” to score big.

So holds the conventional corporate wisdom. Critics have been puncturing this “wisdom” for years. Last week brought perhaps the deepest puncture yet — from a most unlikely source. We have that story, and more, in this week’s Too Much.


The CEO merry-go-round keeps spinning at Yahoo. But the Internet giant's exiting execs always seem to grab the brass ring. The latest to exit: Scott Thompson. He lasted four months, long enough to pocket $7 million. His predecessor, Carol Bartz, left last September, after 20 months. She came in with a contract worth$42.7 million and left with an exit deal valued at $10.4 million. Her predecessor, billionaire Yahoo founder Jerry Yang, had returned for a 18-month stint after his hand-picked successor, Terry Semel, lasted six lucrative years. Semel cleared$230 million in option profits in 2004. He currently has his Malibu mansion up for sale. The asking price: $50 million. Yahoo workers are riding their own merry-go-round. Yahoo last month announced plans to lay off 2,000 staff, the company’s sixth round of mass layoffs since 2008 . . .

How much has speculative trading cost JPMorgan Chase, America’s biggest bank, in this spring’s biggest financial scandal? The estimates now run up to $7 billion. How much has the scandal cost Ina Drew, the JPMorgan Chase exec who ran the errant trading office — and is now taking the fall for JPMorgan CEO Jamie Dimon? Analysts are putting the ultimate value of Drew's total severance package at somewhere near $32 million. JPMorgan insiders are now claiming that the bank’s trading troubles started when Drew caught Lyme disease and had to miss long months of work. Fortunately for Drew, JPMorgan has one whale of a sick leave policy. Despite her long absences from work, Drewpulled in compensation worth $15.5 million last year . . .

How high can prices for fine art rise? At Sotheby’s and Christie’s, the world’s top two fine art auction houses, appraisers have a rough rule of thumb: No collectors will pay more than 1 percent of their net worth for a single piece of art. That puts the total number of global deep pockets able to spend over $100 million for a painting, calculates Philip Hook of Sotheby’s, at somewhere between 30 and 40. Just three have so far taken that plunge. Most mega-million art pieces, the London Evening Standard noted last week, sit in vaults in Zurich and Geneva. One art dealer, the paper reports, recalls entering one of these vaults to view a painting, “then turning abruptly around and tripping over a pile of gold bars.”

Quote of the Week

“We must not repeat the pattern of the last decade when a few gathered enormous wealth, while the vast majority of New York families were left behind or saw very modest gains.” 
John Liu
, New York City comptroller, on new dataplacing the top 1 percent share of local income at 32.5 percent, Times Ledger, May 24, 2012


Florida’s Palm Beach Post has just published its annual listing of the local area’s top-paid execs. Ranking third, at $13.3 million, Digital Domain Media Group CEO John Textor. Not a bad take-home for a CEO whose company reported only $99 million in 2011 revenue — and $141 million in losses. Given all that, Digital Domain’s former CEO told thePost, Textor’s pay seems “extraordinarily high.” Textor’s retort? He claimed that questions about his pay amount to “class warfare.” Textor would apparently rather engage in “classroom” warfare. News reports last month revealed that Textor — who will ring the bell to open tomorrow's New York Stock Exchange session — intends to make students pay to intern at his company.

Stat of the Week

CEOs in the health care sector saw their pay jump 7.8 percent last year, theWall Street Journalreported last week. The sector’s overall profits jumped 1.1 percent. Health care execs gained more in 2011 than execs in any other sector.


Take Action
on Inequality

Help make a film out ofThe Spirit Level, the best-seller that details how more equal societies make for far better lives.

Urge the SEC to require firms to disclose their CEO-to-worker pay ratios.

Join the interfaith online drive to make Wal-Mart's 50th anniversary a biblical Jubilee of redistribution.

Watch a two-minute 
video about organizing a local Resilience Circle.


The Most Surprising 'Nay on Pay' Yet

A perfectly respectable business panel is urging corporate boards to ditch the ridiculous rationalizations for CEO pay excess and narrow the gargantuan corporate pay gap. Step one: end CEO stock options.

In Corporate America, the emperors have no clothes.

The entire edifice of mega-million CEO pay, suggests an unexpectedly bold newpolicy statement from a prestigious Canadian business study panel, rests on assumptions so implausibly inane that only the seriously deluded could ever hold them dear.

The new statement — from Canada’s Institute for Governance of Private and Public Organizations — calls on corporate boards to eliminate from CEO pay packages the stock options that have ballooned executive paychecks in both Canada and the United States.

But the new policy paper doesn’t just recommend overhauling how today’s corporate executives get paid. The paper takes direct aim at how muchPay for Value: Cutting the Gordian Knot of Executive Compensation urges “a fair and productive relationship” between executive and worker pay.

What makes these urgings so striking? They come from eminently respectable representatives of Canada’s corporate director and investor communities, all deliberating under the auspices of an equally respectable academic center, Montreal’s John Molson School of Business.

What makes this new policy statement even more striking: The respectables who’ve endorsed it haven't swallowed the conventional media and political wisdom on CEO pay reform. They don't celebrate those institutional investors — pension funds and the like — that reduce reforming CEO pay to a matter of making sure that corporate boards only “pay for performance.”

These institutional investors, Pay for Value argues, have become part of the problem. They buy into the same bogus assumptions about rewards and markets that have jumped executive pay levels nine-fold over recent decades.

Most alarmingly, these institutional investors continue to insist that executive compensation, short- and long-term alike, must be linked to a “performance” that changes in share price value can somehow accurately measure.

Institutional investors consider stock options — and other rewards linked to share values — “at-risk compensation.” With this “at-risk compensation,” the assumption goes, executives only realize ample rewards if they create real marketplace value for shareholders.

But this faith in the “efficiency” of markets, this trust in share trading values as a marker that can sort out good from bad executive “performance,” cannot withstand even the most casual of reality checks.

“Numerous factors beyond the control of management,” as Pay for Value points out, drive share prices. Stock market booms lift all boats, and those fortunate enough to occupy a boom-time captain’s chair “become very rich.”

And if a market boom should stumble, enterprising CEOs can always game share prices on individual stocks “through accounting gimmickry” or kindle the “infatuations” and “mass hysteria” that can send a share price soaring.

The Canadians behind Pay for Value spend most of their paper discussing executive pay in the United States. They trace CEO pay's evolution from the “managerial capitalism” of the mid 20th century to a late-century “financial capitalism” totally devoted to maximizing “shareholder value.”

Under “managerial capitalism,” shareholders typically held on to their shares six to eight years, share price fluctuations had next to no impact on the annual cash salary and bonus that made up the bulk of CEO pay, and compensation for top executives averaged no more than 30 times worker pay.

Under “financial capitalism,” the average holding period for shares of stock dropped to under a year, and share price fluctuations came to determine the bulk of executive compensation. Top execs now take home hundreds of times the paychecks that go to their workers.

This new corporate pay pattern has now become “standardized.” Virtually all major companies,” notes Pay for Value, sport the same executive pay line-up of salaries, bonus, stock awards, and exceedingly generous pension benefits.

These generous pension — and related severance — benefits effectively insulate CEOs from any iota of real “risk.” Whatever happens, they’ll still pocket mega millions at the end of the day. That “high risk-high reward” justification for our North American executive pay status quo, notes Pay for Value, “rings hollow.”

And this ringing, in all its tones, has a toxic impact on enterprise life.

“Social trust, reciprocity, loyalty, sharing of goals, and pride in the organization,” observes Pay for Value, “will dissipate slowly but surely where compensation schemes are viewed by employees as unfair and dramatically skewed in favor of the few.”

Adds the analysis: “Without the cementing property of these values, without the surplus meaning that they bestow on work in organizations, a business firm soon becomes a marketplace for mercenaries, unmanageable and fragile.”

But the authors of Pay for Value, after this eloquent denunciation of top-heavy corporate reward systems, shrink back in horror from the one already legislated CEO pay reform that could advance their pay reform agenda. They refuse to endorse the pay ratio disclosure mandate enacted in the 2010 Dodd-Frank bill.

This Dodd-Frank mandate requires that all publicly traded corporations annually reveal the ratio between their CEO and median worker pay. What better way to encourage corporate boards to adopt, as Pay for Value advises, a pay ratio between execs and workers that will seem “fair” in the “social, cultural and industrial circumstances within which the company operates.”

Pay for Value inexplicably gags on this disclosure notion. Such disclosure, the paper argues, might provide “fodder for sensationalistic reporting.” Corporations should only “have to declare in official filings that their board of directors has adopted policies on fair and equitable compensation.”

A truly bizarre position. Canada’s Institute for Governance of Private and Public Organizations is arguing, in effect, that we should trust corporate boards, in the absence of the public oversight that ratio disclosure would enable, to voluntarily set reasonable pay ratios between top and bottom within their enterprises.

Corporate groups will no doubt seize on this Pay for Value opposition to Dodd-Frank’s pay ratio disclosure mandate. They’ll use this opposition to advance their ongoing — and so far successful — lobbying campaign to stall the new mandate’s enforcement.

The rest of us can honor the spirit of the Pay for Value’s overall analysis by urging regulators at the Securities and Exchange Commission, the federal watchdog over Wall Street, to stop dragging their feet and start issuing the regulations needed to put the Dodd-Frank disclosure mandate into play.

A campaign to press the SEC on pay ratio disclosure is already underway. This campaign needs to succeed.

“Fundamental changes in compensation practices,” as the authors of Pay for Valuethemselves put it, “will happen only if and when management’s performance is measured more by the way the company meets its broader obligations and less by growth in earnings per share and by meeting the quarterly earnings expectations of analysts.”

New Wisdom
on Wealth

Paul Buchheit, How the Ultra-Rich Betray AmericaCommon Dreams, May 21, 2012. From tax evasion to high-frequency trading.

Rick Ayers, Anarchists, Cops, the Super Rich — It's New York 100 Years AgoHuntington Post, May 22, 2012. A new history looks at America's original plutocratic heyday.

Jen Sorensen, The Nine Zeros ClubDaily Kos, May 23, 2012. A clever cartoon commentary on Facebook’s newly minted billionaires.

Paul Krugman, Egos and Immorality, New York Times, May 25, 2012. America's super rich don't just want public policies that serve their interests. They want immunity from criticism.

Seth Borenstein, Top CEO pay equals 3,489 years for typical worker, AP, May 25, 2012. And a minimum wage worker would have to labor for three years to make what our top CEO makes in an hour.

Michael Wood, The time Britain slid into chaos, BBC News, May 25, 2012. The fall of Rome in Britain serves to remind us that complex societies can, and do, break down — when wealth concentrates at the economic summit.


Can an Unequal Economy Self-Correct?

Lars Osberg, Instability Implications of Increasing Inequality: What can be learned from North America? Canadian Centre for Policy Alternatives. May 2012.

Economist Lars Osberg has been writing about income distribution since the 1970s. Back all those years ago, few other scholars shared his preoccupation.

Income distribution, as a field of study, had turned rather boring. America's incomes had been trending more equal ever since the New Deal, and that trend seemed all but certain to continue. Income distribution struck most researchers, Osberg remembers, as “about as interesting as watching grass grow.”

But things have changed. Income distribution, in our Great Recession and Occupy movement world, has suddenly become hot.

That equalizing trend that seemed so boringly eternal back in the 1970s? Totally reversed. The United States and Canada, the two nations Osberg knows best, have been growing ever more unequal — and now this trend to ever more inequality seems to have become our distributional default.

That prospect doesn’t, of course, at all bother cheerleaders for grand fortune. They have no doubt that greater wealth for the wealthy, once we get past our Great Recession unpleasantness, will usher in a steadily richer and better world.

But increasing income inequality, Lars Osberg helps us understand in this new Canadian Centre for Policy Alternatives analysis of inequality in North America, cannot give us a “steady” anything. Inequality in our economy can no more grow “without limit” than can carbon dioxide in our atmosphere.

In both cases, our political system either has to intervene or we’ll have a real disaster on our hands. And that disaster will surely come economically, Osberg argues, because our U.S. and Canadian economies, left to their own devices, have nothing going on within them that could increase our lowest incomes.

In Mexico, by contrast, the economic bedrock is shifting. Mexico has had until recent decades a high proportion of its population engaged in agriculture and relatively few women in the paid labor force. But these and other structural realities of the Mexican economy are evolving, and these evolutions are placing an upward pressure on household incomes at Mexico’s base.

But structural changes alone, Osberg adds, don’t explain why income distribution in Mexico has turned more equal the last dozen years. Mexico has also witnessed a powerful — and equalizing — political intervention, via a massive income redistribution program that provides poor families cash transfers linked to regular school attendance and health clinic visits.

Mexico’s movers and shakers had this 1997 intervention — initially known as the Progresa, now the Oportunidades program — essentially forced upon them.

In 1994, the onset of the NAFTA trade agreement had begun ushering Mexico into economic crisis, and that same year, Osberg notes, the Zapatista insurrection in Chiapas province had “forcefully reminded” Mexico’s elite “of the country’s deep and recent history of violent revolution and civil conflict.”

Continued growth in inequality, Mexico's elite understood, might “push the populace towards social unrest, with unpredictable consequences.”

Osberg sees no comparable political pressure in the United States and Canada, only a “dominant political feedback loop” that translates more income for the top 1 percent into more political influence for that same elite few.

The political consequence of this increasing 1 percent power: a gridlock that prevents any move to reforms — like steeply graduated progressive income taxes — that could temper income inequality. The economic consequence: serial financial crises that leave “deeper and longer busts in the real economy.”

At some point, amid the resulting higher levels of inequality, something has to give. But give way to what? The state of affairs that will come next, Osbergobserves, has not yet become clear.

History does offer hints. In the 1920s and 1930s, the developed world saw the same sort of financial volatility and bust that plague us today. Something did give. Democracy and decency. In Italy, Germany, and Spain, Osberg relates, the world witnessed a “catastrophically dysfunctional” fascist response.

But the world also witnessed the New Deal in the United States and the massive programs of reform and renewal that created what Osberg calls the “enduring success stories” of the Scandinavian social democracies.

“Political forces and decisions made the difference then,” sums up Osberg, “and they will make the difference this time around as well.”

Inequality Links


Common Security Clubs/Resilience Circles 

99% Power

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