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Executive Pay: Some outraged by CEO salaries(Omaha World-Herald (NE) Via Acquire Media NewsEdge) Oct. 5--One thing was clear in last week's bailout debate: Wall Street executives aren't going to win any popularity contests. When Congress voted last week to spend $700 billion to bolster the shaky financial industry, Nebraska lawmakers heard plenty from outraged constituents about the supersize paychecks reaped by top executives. People wanted to be sure that taxpayer money wouldn't be used to pay bonuses to corporate leaders who were at least partly responsible for the nation's credit crisis. Nor did taxpayers want their money to be used for "golden parachute" payouts to executives who quit or were fired. "That's what left a bad taste in the mouth of the American people," U.S. Sen. Ben Nelson of Nebraska said. "They see these people leaving with significant amounts of money." In June, for example, the Wachovia Corp. forced out its chief executive amid mounting losses -- and gave him an exit package worth as much as $42 million, according to some published reports. Wachovia, which had been the nation's fourth-largest bank, was on the brink of collapse and is being sold. Last month, the country's largest savings and loan, Washington Mutual, replaced its longtime leader. His exit package was estimated as high as $44 million. Less than three weeks later, federal regulators seized Washington Mutual and sold off most of its assets. Earlier, there was Merrill Lynch's E. Stanley O'Neal, who reportedly received a $160 million payout after he was ousted last year. His successor, John Thain, managed to keep the company out of bankruptcy until it was sold recently to Bank of America. Executive compensation hasn't been the public's only concern about the bailout. But it remains a red-hot topic that often stirs up populist sentiment or shareholder opposition -- and not just on Wall Street or in the current economic crisis. "It's a huge issue," said Beverly Kracher, a Creighton University professor who studies business ethics. "There's no doubt that economic compensation is a fairness issue, but there are different lenses through which we see fairness." Some see big paydays for executives as the free market at work, where top company officials are rewarded for their talents and expertise. Others contend that the market is rigged, with corporate leaders having too much influence over the boards that set their salaries, bonuses and the payouts they will receive if they are fired. In any case, it's clear that executive pay has soared in recent decades, prompting complaints about wage inequality between the top and bottom of the work force. In 1965, for example, the average U.S. CEO at a major company earned 24 times as much as a typical nonsupervisory production worker, according to the Economic Policy Institute, a Washington, D.C., think tank supported by labor unions. By 2007, the average CEO earned 275 times as much as a production worker. U.S. executives also are paid much more than their counterparts in Europe, Japan and elsewhere, the Economic Policy Institute said. The growing income gap between corporate titans and ordinary workers is a concern, said U.S. Sen. Chuck Hagel of Nebraska, a Republican on the Senate Banking Committee. "What it represents is a concentration of power -- too much power in the hands of too few people," he said. For the most part, Hagel said, private industry rather than Congress should address that issue. But he said when taxpayer dollars are involved, as in the bailout, it's appropriate to set limits on compensation. Last week's bailout legislation -- which both Hagel and Nelson supported -- directs the U.S. Treasury to issue new rules for executive compensation that will apply to companies that sell their troubled assets to the government. When the financial institution sells assets directly, there will be limits on pay incentives and a ban on golden parachutes. If bonuses have been paid based on inaccurate financial reports, executives will have to return the money. The repayment policy, known as a "clawback" provision, mirrors efforts already being used by companies, shareholders and the Securities and Exchange Commission to recover money from executives who engage in questionable or illegal behavior. William W. McGuire, former CEO of UnitedHealth, wound up repaying more than $600 million in cash and options to settle claims related to backdating stock options. The bailout bill also changes the current $1 million limit on how much executive pay can be deducted as a company's business expense when calculating income taxes. Firms that participate in the bailout will be limited to a $500,000 deduction. In addition, if the federal government buys more than $300 million in assets from a company through an auction process, it will levy an excise tax on the firm's golden parachute payments. Curbs on executive compensation may have been needed politically for Congress to pass bailout legislation, acknowledged Jagadeesh Gokhale, a senior fellow at the Cato Institute, a libertarian think tank. But Gokhale said populist complaints about corporate salaries, bonuses and stock options are misguided. CEOs, he said, are paid a lot because they have unique talents and management skills that can increase the value of the company. "It's rewarding high performance," he said. That isn't always true, as seen in the current financial crisis. But Gokhale said it's better to let the market punish the companies that hired the wrong leaders or overpaid them. If the bailout's pay restrictions are too onerous, he said, it could undermine the overall effort. Top executives might decide to work for companies that aren't required to limit their pay, he said, thus robbing the industry of leadership at a time when it is most needed. Or he said some companies may decide against selling troubled assets to the government in order to avoid the restrictions. Creighton's Kracher, who is executive director of the Greater Omaha Alliance for Business Ethics, said ethical business leaders would be willing to do the right thing -- that is, work to stabilize the economy -- regardless of their individual self-interest. "Freedom depends on people having a strong sense of honor, a moral sentiment, to begin with," she said. Overall, she said, executive pay is a complex ethical issue. While a libertarian may see stratospheric bonuses as fair because they were freely awarded by corporate boards, Kracher said, someone with a more egalitarian mindset might see those bonuses as unfair because they reward only a few. Inequality can be bad for a business, she said, if it erodes a sense of shared values and the common good and fosters an "us versus them" mentality. Nationally, Kracher said, inequality can fuel the public distrust and resentment that nearly derailed the bailout. Board members are supposed to make rational, unbiased decisions, she said, but in reality they may have conflicts of interest when it comes to CEO pay. "If they all know each other and they're all arranging pay for each other," she asked, "where is the independence?" Omaha's largest companies pay their top executives well, but not as much as some of the Wall Street firms, according to company reports compiled earlier this year for the New York Times. The top reported local pay for 2007 was $13.4 million for ConAgra CEO Gary M. Rodkin, including salary, bonuses and stock. Berkshire Hathaway's Warren Buffett, in contrast, received $175,000 in salary and perks. Such compensation figures do not include golden parachutes, which are binding agreements between a company and a CEO that guarantee payments if the executive is fired or if the company's ownership changes. Each deal is different, and they aren't unique to the banking or investment industries. For example, Union Pacific CEO James R. Young would collect $39 million if he lost his job as a result of a merger or takeover by another company, according to the company's SEC filing. ConAgra's Rodkin would be entitled to $15 million if he was fired for something other than a felony or "willful malfeasance." If it happened in connection with a corporate takeover, the payment would rise to $28 million. Supporters say golden parachutes serve a number of purposes, such as freeing a CEO to make decisions about mergers or other policies that may be good for a company and its shareholders without fearing the impact on his or her own interests. "Their jobs entail risk-taking," said Gokhale of the Cato Institute. If there were no golden parachutes, he said, CEOs might always choose the least risky option -- and that might not be good for economic growth. Turn that argument around, Kracher said. If CEOs are personally assured a soft landing through a golden parachute, even if the company crashes, they may gamble on too much risk. Nelson said that's what happened in the finance industry. "You've heard about people betting the farm?" the Nebraska Democrat said. "These people bet the skyscraper." Now that taxpayers have to help cover those bad bets, Nelson said, there's little public support for payments to Wall Street executives who lose their jobs. "The average person's pretty wise," he said. "They figured it out -- 'If I get fired for poor performance, I won't get rewarded on the way out the door.'" To see more of the Omaha World-Herald, or to subscribe to the newspaper, go to http://www.omaha.com. Copyright (c) 2008, Omaha World-Herald, Neb. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |