Here's a tip for chief executives who want a raise: Fire people. CEOs of the 50 U.S. companies that have laid off the greatest number of employees since the start of the Great Recession made an average of nearly $12 million in 2009, according to a new report on executive compensation (click on chart at right to expand). That's 42 percent higher than what corporate leaders were paid on average for all S&P 500 firms.
But surely those top-earning CEOs were at struggling companies that had no choice but to cut costs in coping with the economic downturn, right? Wrong. Roughly 72 percent off the firms that made the most layoffs were profitable, found the Institute for Policy Studies, a Washington think-tank.
[A]fter adjusting for inflation, CEO pay in 2009 more than doubled the CEO pay average for the decade of the 1990s, more than quadrupled the CEO pay average for the 1980s and ran approximately eight times the CEO average for all the decades of the mid-20th century. American workers, by contrast, are taking home less in real weekly wages than they took home in the 1970s.Sarah Anderson, a director at IPS and lead author of the report, said spiraling CEO pay is not only bad for corporate morale, but also bad for business. Widening income disparity between top execs and rank-and-file workers hurts team spirit and undermines productivity. Other costs can include expenses related to rehiring employees when business conditions improve and a hit to the organization in terms of expertise and knowledge.
Meanwhile, it's not clear that mass layoffs boost performance. The report cites a University of Colorado survey of S&P 500 companies from 1982 to 2000 that found no evidence that downsizing improves a company's returns on assets.
"You can look at this from both a moral perspective -- how in the midst of the worst crisis in 80 years can CEOs continue to line their own pockets, and how that's just plain unfair," Anderson told me. "But you can also look at it straight from a 'what's good for the bottom line' perspective and agree that there are big changes that need to be made in executive pay."
A minor, but delicious, aside: Verizon (VZ) chief Ivan Seidenberg, No. 10 on the list with total comp of $17.4 million, is the guy who recently accused President Obama of implementing policies that hindered job creation. The telecom, which made a (pro forma) profit of nearly $36 billion in 2009, laid of more than 21,000 people between November 2008 and April 2010.
The report has other details underscoring the dysfunction in CEO pay, not to mention tax policy. For instance, Occidental Petroleum (OXY) CEO Ray Irani made $31.4 million in 2009 -- nearly twice as much as the $16 million the oil giant paid in federal corporate income tax. More broadly, there are no limits on how much a company may deduct from its taxes in accounting for executive comp.
Big financial firms have, of course, been at the center of controversy over executive pay. But while CEOs at some big banks have accepted a reduction in comp, they've continued to shovel huge amounts of money to other top executives within their organizations. Although Citigroup (C) Vikram Pandit may have taken home a symbolic $1 in annual salary in 2009, for instance, others within the troubled company did considerably better. States the report:
In 2009, five other executives listed in the firm's proxy statement each took in multi-million stock and option awards. The highest paid among them: John Havens, the chief executive at Citi's Clients Group. He took home $12.1 million in total compensation.What's the solution? The Institute endorses several broad principles for reining in executive comp:
- Encourage narrower CEO-worker pay gaps. Extreme pay gaps, with top executives earning hundreds of times more than their employees, run counter to basic principles of fairness. They also endanger enterprise effectiveness. Management guru Peter Drucker, echoing the view of financier J.P. Morgan, believed that the ratio of pay between worker and executive can run no higher than 20:1 without damaging company morale and productivity.
- Eliminate taxpayer subsidies for excessive executive pay. Ordinary taxpayers should not have to foot the bill for excessive executive compensation. And yet a variety of tax and accounting loopholes that encourage excessive pay add up to a cost of more than $20 billion per year in foregone revenue. No meaningful regulations, for instance, currently limit how much companies can deduct from their taxes for the expense of executive compensation.
- Encourage reasonable limits on total compensation. The greater the annual reward an executive may receive, the greater the temptation to make reckless executive decisions that generate short-term earnings at the expense of long-term corporate health. Outsized CEO paychecks have also become a major drain on corporate revenues, amounting, in one recent period, to nearly 10 percent of total corporate earnings.
- Accountability to shareholders. On paper, the corporate boards that determine executive pay levels must answer to shareholders. In practice, shareholders have had virtually no say on corporate executive pay decisions. Accountability must begin with procedures that force corporate boards to disclose and defend before shareholders the rewards they extend to corporate officials.
- Accountability to broader stakeholders. Executive pay practices, we have learned from the run-up to the Great Recession, impact far more than shareholders. Effective pay reforms need to encourage management decisions that take into account the interests of all corporate stakeholders, not just shareholders but consumers and employees and the communities where corporations operate.
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