Sunday, August 3, 2014

CEO pay - a massive scam?

There might be several reasons for this. We've long known, for example, that people tasked with interviewing and hiring applicants for a job - any job, not just a CEO position - generally have a greatly inflated sense of their ability to choose good people.

Research shows that they don't add much, if anything, to a company's chances of getting a good employee, but they think they do. I suppose this applies as much to the CEO as any other position. (And if the CEO is expensive, he must be good, huh?)

But mostly, it's because everyone involved has an incentive to keep CEO pay as high as possible. The directors of corporations are often paid very, very well for doing almost nothing at all. (Indeed, they frequently just rubber-stamp what the CEO is doing.)

They have no incentive to rock the boat and risk their lucrative position. Many are CEOs themselves, or at least want to be, someday. But they're all in that class of people who think that executives are important and lesser employees just interchangeable parts.

I suppose it's prestigious, too, when you have the most expensive CEO. You must be doing something right if you've paid that much for someone to lead the company, right? And that expectation of high pay tends to translate into higher pay for other top executives and for the board of directors, too (but certainly not for the rank-and-file employee).

So the people making these decisions are the people who benefit themselves, in one way or another, from the culture of exorbitantly high CEO pay. Is it any wonder that CEO compensation has skyrocketed (for no benefit to the company, as that devastating graph shows so clearly)?

But CEO pay is even a bigger scam than that. Often, there are "golden parachutes" - or other severance packages - in a CEO contract, which mean that the CEO makes out like a bandit even if he does so poorly he gets fired by the corporation.

Obviously, a CEO would prefer to do well, if only for the prestige. And no one wants to lose his job. But that's the whole point. This makes it less likely that the CEO will be fired, just because the corporation will have to pay him millions of dollars anyway. (Not that the directors necessarily care about that, but this would make them look bad, too.)

Frequently, these are set up to protect a CEO from losing his job in the event of a merger. (Of course, no one would even think of such protections for other employees. In fact, part of the expected benefit of mergers is that they'll be able to fire so many employees afterward.)

But then, kickbacks - excuse me, "retention bonuses" - are also common in mergers. You either bribe a CEO so he doesn't kick up a fuss, or you promise him a position in the merged company (basically, another form of bribery).

Again, only the people in charge of a corporation have anything to say about this, and that's certainly not the rank-and-file employees. Thus, the effect of a merger on rank-and-file employees is ignored (if it's not, as I noted, a positive benefit that many of them will lose their jobs).

But the reason why this is a scam is because none of this tends to benefit the shareholders - you know, the people who are actually supposed to own the company. In corporate America, there's a huge difference between ownership and control. It's the people who control the company who call the shots, and they may or may not own very much of it at all.

These days, with so many of us owning shares of mutual funds in our retirement plans, our "ownership" ends up filtered through multiple organizations. You probably don't even know what companies you, technically, "own" shares of, nor do you have any idea how your mutual fund is voting "your" shares.

It's bad enough for a small shareholder who owns stock directly, but it's even worse if you own stock mutual funds. You have zero control over what you, technically, "own." And the people who do control it tend to have very different interests. Their priority is to keep their own high-paying jobs - and to get as much out of them as possible.

Naturally, it's usually beneficial if the corporation's stock does well, too. But that's seldom the most important thing to the people running it. And even when it is, it's invariably the short-term results that matter. What happens in the long-term, as a result of your actions, makes no difference at all if your pay is based on short-term results (or if you won't be at the company long enough for the long-term results to matter).

Yeah, this is sort of like politicians not looking past the next election, huh? But I won't get into that right now.

This is the article Cenk Uygur is talking about:
Indeed, even when companies boast that they tie executive compensation to company performance, the country’s largest companies routinely game those systems to ensure they get their bonuses and payouts, such as setting targets so low as to be meaningless or fluffing up their reported profits. In one example, Walmart US CEO William Simon was only supposed to get a $1.5 million bonus last year if net sales grew by 2 percent, but he got it anyway when sales only grew by 1.8 percent because the company calculated “adjusted” sales at the necessary rate. Worse, out of the highest-paid CEOs over the past 20 years, nearly four in ten were fired, caught committing fraud, or oversaw a company bailout. Incompetence doesn’t stand in the way of a big payday.

There’s even evidence that paying chief executives lavishly can backfire. Shareholders at the companies that pay their CEOs the most get the worst results, with an average shareholder loss of $1.4 billion. That’s because exorbitant pay breeds overconfidence, leading to bad decisions about weak performance.

None of these findings have kept CEO pay in check. Median chief executive pay jumped above eight figures for the first time last year, hitting $10.5 million. The average pay package was $15.2 million, a 21.7 percent increase since 2010. Workers’ compensation, on the other hand, actually fell during that period, and the ratio of CEO pay to worker pay was 295.9-to-1 last year. Over the last 30 years, chief executive pay has risen 127 times faster than worker pay despite the fact that workers’ productivity has kept increasing.

Uygur was wrong about one thing, though. At the very end of this video, he talks about taxpayers "bailing out" the shareholders. Sorry, but that's a common misconception. Our government "bailed out" corporations, keeping them afloat so our overall economy wouldn't crash and burn, but the shareholders didn't benefit any more than the rest of us.

Again, this is the difference between control and ownership, although all - or almost all - of the employees of these companies benefited, because they kept their jobs. Other companies which did business with those corporations also benefited. And local governments certainly benefited by keeping those people employed and tax money coming in.

But the shareholders lost bigtime. Of course, they were going to lose in any case. If the company had dissolved into bankruptcy, their shares wouldn't have been worth anything then, either. But that "bail out" term is misleading - even to many shareholders.

I have a distant relative - a Republican, of course - who remains angry that his General Motors stock was worthless after the government "bail out." Um, no. Sorry. The executives of General Motors - most of them - got to keep their jobs, as did the other employees, and the company remains in operation. But you don't own the company anymore.

Frankly, if you don't understand that, you shouldn't be investing in stocks in the first place. In a bankruptcy - which was inevitable here - the owners of common stock almost always lose everything. (Creditors can't come after you for anything else, though, which is why the corporate structure is so attractive to investors.)

Bond holders lose, too, to a greater or lesser extent. Of course, in a bankruptcy, all this would be settled by the court,... eventually. But with our economy crashing down around us, we simply couldn't afford to let our banking industry and our automobile industry stop functioning entirely. You think the Great Depression was bad?

The so-called "bail out" kept these corporations running. It kept the employees from losing their jobs - even the executives, in most cases. So, yes, many of the people who caused the problem benefited from government action. That's a shame. But I've never been a big fan of cutting off my nose to spite my face.

Stock market investors in general benefited greatly, too. Shortly after Barack Obama took office (in early March, 2009, to be precise), Wall Street stopped panicking and stock prices turned around. We've been in a booming market ever since.

The people who owned shares of the "bailed out" corporations lost money, but that money was lost, anyway. And as long as they owned other stock, too, they benefited hugely by the rebound. Well, as long as they hadn't sold their shares in a panic (perhaps because they listened to wrong-headed right-wing pundits?).

The other thing to remember is that the people who owned shares of these banks when they were committing fraud on the America people are not necessarily those who owned shares during the crash.

Shares are bought and sold all the time, and if share prices collapse, you'll often see a big swing in ownership, as some people sell at a loss - worried about losing even more if they don't - while vulture investors, or other people making a bet that things will turn around, buy at what they think is a cheap price.

After all, for every buyer, there's a seller, and vice versa. Half of those people are going to be wrong. If we only knew which half, huh? :)

No comments: