Anyhow, the Financial Accounting Standards Board has tried twice (!) to change reporting requirements for corporations in order to require them to disclose how much exec comp comes in the form of stock options, etc. But those efforts have been killed by our Senators and Representatives each time.
Is a CEO worth 364 times an average Joe?
Here are four infuriating facts about the salaries and friendly tax rules that let executive fat cats cash in -- and what you can do about them.
9/5/2007 12:01 AM ET
By Michael Brush
In recognition of the just-completed Labor Day weekend, I'd like to offer a salute to American workers, who the United Nations just reported are second only to Norway's laborers when it comes to productivity.
And now, a bit of bad news for those same workers: You're not getting credit for that productivity. Instead, top executives at your companies are reaping the rewards in the form of increasingly fat paydays.
Here's a quick look at four ways in which workers are being shortchanged by their bosses.
No. 1: The chief executives at the biggest U.S. companies last year made as much money in a single day as the average worker made for the whole year.
Top execs at Fortune 500 companies averaged $10.8 million in total compensation in 2006. The average worker, meanwhile, made $16.76 an hour, which worked out to $29,544 for the year. Those numbers come from a report called "Executive Excess 2007: The Staggering Social Cost of U.S. Business Leadership" (.pdf file). The report was released last week by the Institute for Policy Studies and United for a Fair Economy.
And it's not clear that all of their CEOs were earning their keep. Take the top earner last year, then-Yahoo (YHOO, news, msgs) CEO Terry Semel. He got $71.7 million, chiefly in options grants. He also cashed in $19 million worth of options. That's a lot of loot. From a shareholder perspective, it's tough to argue that Semel earned it.
Yahoo's stock is lower now than it was at the start of 2004, while the Standard and Poor's 500 index ($INX)has advanced more than 30% in the same time period. Semel stepped down as CEO in June because of shareholder dissatisfaction with his company's performance.
No. 2: The managers of the 20 top hedge funds and private-equity shops made more every 10 minutes last year, on average, than the average worker made for the whole year.
The top bosses at the top 20 investment shops earned an average of $657.5 million for the year, according to data cited by the "Executive Excess 2007" report. Renaissance Technologies' James Simons led the way, earning $1.5 billion. Steven Cohen at SAC Capital and Kenneth Griffin at Citadel Investment Group ran neck and neck for second place. Each got $1.2 billion.
"We are back to the gilded age of a hundred years ago," concludes John Cavanagh, the director of the Institute for Policy Studies and a co-author of the report.
No. 3: True, many workers got a break on July 24, when the federal minimum wage was increased to $5.85 from $5.15 -- the first increase in the federal minimum wage in 10 years. But the minimum wage is still 7% below where it was 10 years ago, adjusted for inflation. Meanwhile, CEO pay has gone up 45%, adjusted for inflation, in the same period, according to the "Executive Excess 2007" report.
No. 4: U.S. CEOs enjoy supersized advantages in pensions and perks, too.
Thanks to generous contributions from their companies, CEOs at S&P 500 companies retire with an average of $10.1 million in their supplemental executive retirement plans, according to the Corporate Library. In contrast, only 36% of American households headed by someone over 65 even had a retirement account in 2004. Those accounts had an average value of $173,552, according to the Congressional Research Service.
A new study says society is paying a high price for those skyrocketing salaries.
The top U.S. CEOs enjoyed perks worth an average $438,342 in 2006, according to data cited in "Executive Excess 2007." They got money for everything from personal travel on corporate jets, to reimbursement for country club fees and taxes on bonuses.
An extreme example: Ryland Group (RYL, news, msgs) chief Chad Dreier got $6.9 million worth of perks last year for benefits that included private use of his company's jet and a $5.7 million "tax gross-up" to cover the taxes on his stock options.
Why the gap?
Apologists for highly paid CEOs argue they are merely getting the pay they deserve for their talents. Their pay is determined freely by the laws of supply and demand in the marketplace. Right?
There might be more to it than that. For one thing, U.S. execs make three times as much as their European counterparts, even though these European bosses manage companies that are 40% bigger. (The top 20 highest-paid execs at U.S. public companies made $36.4 million on average last year, while the same group in Europe got just $12.5 million on average.)
Yet, presumably, companies on both continents draw from similar talent pools in terms of education, work experience and cultural background. If that's true, it's hard to accept the notion that rich pay in the U.S. is the result of a scarcity of talent.
Next, CEO pay in the U.S. has grown to become 364 times the average worker's pay. It was just 40 times the average pay in 1980. It's hard to imagine that top leadership skills have grown so much scarcer in the past 37 years.
Many pay analysts suspect the bloated pay packages for U.S. execs are more the result of a marketplace failure than the basic laws of supply and demand from Econ 101. Exorbitant pay packages are often awarded by board compensation committees that are too cozy with CEOs, believes Paul Hodgson, an executive-compensation expert at the Corporate Library. They also fail to link pay to performance, which makes it easier for pay to spiral higher, he says.
Other critics point a finger at the consulting firms that advise companies on CEO pay. The problem is they have an incentive to recommend rich pay packages -- because they also get paid for doing other consulting jobs for the same company.
What you can do
"Executive Excess 2007" suggests supporting efforts in Washington, D.C., to reform the policies that Cavanagh and his think tank identify as contributing to overly rich pay for CEOs.
These reform efforts include:
- Proposals to close the tax loophole that lets companies deduct as much executive pay as they want, as long as the compensation is defined as a performance incentive. Rep. Barbara Lee, D-Calif., is promoting a cap on deductions at 25 times the earnings of a company's lowest-paid workers. Financier John Pierpont Morgan thought the ideal ratio was 20-to-1 a century ago, says "Executive Excess 2007."
- Proposals to tax the earnings of the top execs at private-equity shops and hedge funds as ordinary income instead of distributed capital gains. That would increase their taxes to 35% from 15%, in many cases. The loophole costs the federal government about $12.6 billion a year, says the Economic Policy Institute. Rep. Sander Levin, D-Michigan, is sponsoring legislation to make this change.
- Proposals to limit the amount of income execs can roll into their retirement plans, where the money grows tax free. Rank-and-file workers face limits, but top execs do not. Senate Finance Committee Chairman Max Baucus, D-Montana, and Sen. Charles Grassley, R-Iowa, of the same committee, are developing proposals here.
A new study says society is paying a high price for those skyrocketing salaries.
It's also important to tell your reps in Washington, D.C., that you want the Securities and Exchange Commission to take some action.
Tell them you want the SEC to loosen rules so that it's easier for shareholders to get their own slate of board members on company proxy statements circulated ahead of annual meetings, says Daniel Pedrotty, a corporate governance expert at the AFL-CIO Office of Investment.
When shareholders save on costs by having their slates distributed by the corporate proxy machine, they're more likely to propose board candidates who aren't management lap dogs on executive pay.