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| THIS WEEK | |
Consumers took quite a hit last week. First came news that America’s top health insurers have upped this year's average family premiums an astounding 9 percent, a rate far above inflation. Then came word that Bank of America is leading a banking industry charge to jack up fees on debit cards. These new fees will offset the billions banks will be losing now that new federal regs — in effect since this past Saturday — limit how much banks can charge merchants when debit cards get swiped. Not every big bank, to be sure, is following Bank of America's lead. Citibank has no plans to start charging consumers for using debit cards. Citi is yanking away free checking instead. All these consumer-gouging games do serve a greater purpose: greater paychecks for big bank brass. Gouging prettifies the performance “metrics” — profit rates and the like — that determine the size of banker annual windfalls. The better big bank execs “perform” on these metrics, the more their bonus millions. “Pay for performance,” in short, gives top bankers a powerful, even irresistible, incentive to “perform” by any means necessary. Consumers be damned! Our economic future, too. We explain why, in this week’s Too Much. | |
| GREED AT A GLANCE | |
 Utopia, for some Warren Buffett critics, might be living in a land with no taxes at all. James Roy, the yacht design director at the naval architecture consulting firm BMT Nigel Gee, has just what these utopians need: a yacht that can double as a billionaire’s own “micro-nation.” Roy unveiled plans for this floating island at last month’s Monaco Yacht Show. His design, one reporter noted, “more closely resembles an oil rig than a typical yacht — if oil rigs had swimming pools, nightclubs, and casinos, that is.” Roy’s “Project Utopia” design calls for a mobile structure 330 feet square, with 11 residential decks. Construction, he estimates, would take five years. Roy’s utopia so far has no price tag . . .  Elsewhere in the world, activists opposed to policies that shift wealth to the wealthy are moving aggressively on another front. They're calling for a “maximum wage.” Egypt’s minister of planning has just indicated that her government will be declaring a public sector “maximum” set at 36 times Egypt’s minimum wage. Egyptian unions are demanding a private sector income cap as well. In Cairo’s Tahrir Square last month, demonstrators carried banners urging “A minimum wage for those who live in cemeteries” and “A maximum wage for those who live in palaces.” A maximum wage, adds New Economics Foundation analyst Faiza Shaheen in a just-published New Internationalist debate, “would help both business and society without damaging the well-being of the well-off.” Is the current global economic turmoil finally catching up to the world’s biggest banks? This past summer, Goldman Sachs announced a $1.2 billion cost-cutting campaign that will downsize out of existence about 1,000 jobs, and, later this month, analysts expect the bank’s top execs to report quarterly profits down by half since last year. Big banks like Goldman Sachs are clearly feeling the squeeze. But big bankers themselves seem on track to avoid any significant personal unpleasantness. Goldman, JPMorgan, Morgan Stanley, and Bank of Americadumped $65.69 billion in their bonus pools in 2011’s first half, 8 percent more than what they set aside for compensation last year. | |
| INEQUALITY BY THE NUMBERS | |
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| IN FOCUS | |
The Empty Promise of 'Pay for Performance' Pundits and politicians love to righteously denounce the windfall rewards that go to corporate CEOs who “fail.” But windfalls for CEOs who “perform,” researchers suggest, ought to worry us far more. Leo Apotheker, the just-axed CEO at computer giant Hewlett-Packard, appears to have become the latest “poster child” for everything that’s gone haywire in America’s corporate executive suites. Apotheker spent all of 11 months as HP’s top executive. Over the course of those 11 months, HP shares dropped over $40 billion in value. Not good. Last month the HP board gave Leo the ax. His exit package: nearly $25 million in bonus, stock, and assorted perks. Also not good. Corporate America, critics are howling, is once again rewarding CEOs “for failure.” Corporate boards, the rant continues, have to start shaping up. They “need to choose,” one top CEO pay expert told Fortune last week, “clear performance measures and set concrete goals to align pay for performance.” If corporations did this “pay for performance” aligning, the conventional wisdom holds, CEO compensation would cease to be an eyesore. “Pay for performance” would restore basic business common sense to corporate executive pay. This conventional wisdom currently dominates America’s mainstream discourse over reforming executive pay. To end CEO pay outrages, the standard argument goes, corporations need to get serious about paying for “performance.” But this conventional wisdom has a bit of a flaw. Major American corporations are already setting “concrete goals to align pay for performance.” At Hewlett-Packard, for instance, Leo Apotheker was working under an HP “Pay-for-Results Plan” first introduced in 2005. “The fact of the matter,” Robin Ferracone told Corporate Board Member magazine last week, “is that most executive incentive plans today are driven largely, if not entirely, by objective and quantifiable goals.” Ferracone should know. She runs one of America’s premiere performance advisory firms and has authored a basic performance pay text, the 2010 Fair Pay, Fair Play: Aligning Executive Performance and Pay. We seem to have somewhat of a contradiction here. How can anyone claim “pay for performance” as an antidote for our outrageous CEO compensation status quo when we already have “pay for performance” in effect? Industry insiders like Ferracone, for their part, see no contradiction. They simply refuse to define the current CEO pay status quo as outrageous. “Most people believe that CEOs are significantly overpaid,” as Ferracone put it toCorporate Board Member last week, “but the reality is that that the majority of CEOs are not overpaid.” Not overpaid? CEOs last year, the latest Institute Policy Studies annual executive pay study reports, averaged $10.8 million, a take-home 27.8 percent higher than their 2009 compensation — and 325 times more than the pay of average U.S. workers. A generation ago, American CEOs averaged only 30 to 40 times more than average U.S. workers. “Pay for performance,” given these realities, doesn’t seem to be doing much to fix our broken executive pay apparatus. And that doesn’t at all surprise two of the world's top corporate pay experts, Bruno Frey and Margit Osterloh. Compensating by predetermined performance criteria, these two University of Zurich analysts suggested last week, is driving our corporate compensation chaos, not solving it. Their latest look at the business research on “pay for performance” crushes the widely held contention — in executive suites — that “performance-based” pay helps enterprises succeed. In reality, the research shows, pay-for-performance plans end up encouraging employees — at whatever level — to obsess over “those areas covered by the performance criteria” and give short-shrift to everything else. Executives with millions riding on how well they fulfill performance criteria don’t just obsess over the criteria. They devote, note Frey and Osterloh, inordinate energy and time to manipulating these criteria in their favor. “The wage explosions observable in many sectors of the economy,” the two analysts observe, “can at least partly be attributed to such manipulations.” But the problems with “pay for performance” run deeper than incentivizing executives to game the performance-measurement system. Pay for performance, Frey and Osterloh point out, “tends to crowd out intrinsic work motivation” — “the joy of fulfilling a particular task.” Healthy enterprises — and societies — need to nurture this intrinsic motivation, this pleasure that comes doing from a job well, for its own sake. Intrinsic motivation, Frey and Osterloh note, “supports innovation” and encourages people to achieve tasks that go “beyond the ordinary.” Enterprises that revolve their compensation around “pay for performance,” by contrast, end up with executives fixated on making as much as possible, as quickly as possible. These execs “exhibit no loyalty.” They jump ship to whoever might pay them more. The inevitable result? High turnover, inefficient operations. “Pay for performance,” Frey and Osterloh freely acknowledge, certainly seems an “attractive concept.” And top corporate execs have certainly done well by it. But the rest of us, if we truly want to end executive pay excess and promote more enterprise effectiveness, are going to have to stop genuflecting before anyone who solemnly intones we have to “pay for performance.” | |
| IN REVIEW | |
Are Corporate Boards Wising Up on Perks? 2011 CEO Benefits & Perquisites Report: An Analysis of Key Benefits and Perquisites at Fortune 100 Companies. Equilar, September 2011. Can requiring corporations to disclose exactly how and how much they compensate their top executives change corporate behavior? Will corporate boards of directors be less likely to lavish over-the-top compensation on execs if they sense the public is watching? Equilar, the California-based executive compensation analysis company, has just jumped into the ongoing national debate over disclosure with a new report on the perks that go to America’s top 100 CEOs. Before 2006, a report as thorough as this new Equilar effort simply would not have been possible. Corporations a half-dozen years ago only had to disclose an individual exec’s perks — everything from cash for country club dues to free jet rides for personal business — if the goodies totaled over $50,000 a year. The Securities and Exchange Commission's current disclosure rule, in effect since 2006, lowers the perk disclosure threshold to $10,000. That drop has increased the volume of executive perk data now available and, at the same time, seems to have somewhat diminished the cascade of perks pouring into executive pockets. The average annual CEO intake of “other compensation” — the pay category that includes perks — has slipped, Equilar reports, from $338,815 in 2005 to $228,929 in 2010. In other words, the typical top 100 CEO took home in 2005 about 11 times more in perks than average U.S. workers made in total wages. In 2010 top 100 CEOs took home only about seven times more. To what do we owe this “progress”? Corporate boards of directors appear to be listening to their public relations consultants. They’re cutting back on those perks — tax reimbursements, for instance — most likely to inflame how the public feels about executive compensation. The IRS currently requires corporate execs to pay personal income tax on the value of the perks they receive. Corporate boards, to ease this terrible injustice, have been reimbursing execs for the taxes on perks they have to pay — and then reimbursing execs some more for the taxes on this initial reimbursing. The math here can get complicated. But the message these tax reimbursements send to the general public couldn’t be simpler: Only the little people, Corporate America shouts out with tax reimbursements, ought to have to pay all their taxes. With joblessness at double digits, some corporate boards have apparently realized that this particular message might not resonate too well outside their boardrooms. Last year, the number of Fortune 100 corporations offering their CEOs “gross-ups” — the insider label for tax reimbursements — fell by half. And gross-ups averaged just $13,911 last year, down from $26,936 in 2009. Other perks — like free corporate jet travel and financial planning services — show similar downward trajectories. The only CEO perk that’s increasing appreciably in value: home security. Corporate boards must be fearing, as the Great Recession lingers, the growing rage of America’s great unwashed. But these same corporate boards keep giving Americans, washed and unwashed alike, reason to rage. In 2010, the typical top 100 CEO perk package did drop — by a little over $20,000 — from the year before. Total CEO pay for top 500 CEOs, on the other hand, increased over $2 million from the year before. We certainly do need more disclosure on CEO compensation. But we need, these latest CEO pay totals show ever so plainly, much more than disclosure. | |
Quote of the Week
“This is a leaderless movement without a central ideology. We are bound only by the understanding that we are part of the 99 percent of Americans getting shafted by the top 1 percent.”
Mark Provost, Occupy Boston: Day One (and Other OccupyWallStreet Updates), October 3, 2011
Stat of the Week
Average U.S. workers who lose their jobs receive no more than one or two weeks of severance pay for each year of service to their employer. So far in 2011, the departed CEOs who’ve received the year’s five highest chief exec severance packages have averaged724 weeks of severance pay for each year of service.
Take Action
on Inequality
New Wisdom
on Wealth
Georgia Levenson Keohane,Inequality in America: Pox and Progress, New Deal 2.0, September 28, 2011. On the growing consensus, among thoughtful economists, that inequality subverts economic vitality.
Josh Bivens, Are hedge-fund managers making my health insurance premiums expensive?Working Economics, September 28, 2911. How rising inequality drives up health care costs.
U.S. Income Equality Trails Iran, Mongolia, and Lithuania, PBS NewsHour, September 29, 2011. A useful — and interactive — online infographic.
Philippe Douste-Blazy, To Ease the Crisis, Tax Financial Transactions,New York Times, September 29, 2011. A former French foreign minister makes the case for a 0.05 percent levy on each stock, bond, or currency transaction as a step toward narrowing the gap between the world’s richest and poorest.
Ryan Witt, Why ‘Occupy Wall Street’ is growing, and may explode in the future, Examiner, September 30, 2011. Income inequality is once again driving Americans onto the streets.
Howell Raines, Obama, don’t run from class warfare, CNN, September 30, 2011. Top Democrats, charges this veteran editor, have unwisely accepted the “pejorative definition of economic class warfare as an un-American evil.” In fact, struggles over income distribution have been “a major stabilizing force in American democracy.”
Robert Reich, Tax hikes on rich is next big DC battleground, San Francisco Chronicle Sunday Insight, October 2, 2011. A former U.S. labor secretary explains why “anyone who says the American economy suffers when the rich pay more in taxes doesn't know history.”
Barbara Ehrenreich, Rich people are being ‘demonized’ for flaunting their wealth. Poor dears!Washington Post, October 2, 2011. On attempts to give the rich "victim” status.
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