In Medieval Europe, many noblemen made their living by either robbing
those who crossed their vast estates or keeping them in their dungeons until
ransom was paid. During the latter half of the 19th century many
American tycoons built their wealth by building monopolies and ruthlessly
exploiting labor and natural resources.The
American HeritageDictionary defines robber baron as:
1.A feudal lord who robbed travelers passing through his domain.
2.One of the American industrial or financial magnates of the latter 19th
century who became wealthy by unethical means; such as questionable stock-market
operations, or exploitation of labor or political connections.
Today a landowner can do little
more than have an intruder charged with trespassing-- indeed if the landowner
were to take further action he could find himself facing criminal charges.These days, laws covering anti-trust provisions, environmental
protections and labor fairness restrict would-be monopolists.Surely with all our laws and heightened social consciousness, these
unscrupulous men could no longer exploit our economy and society.
Unfortunately, this has not been the case.Almost daily we are bombarded with news reports concerning mass layoffs.Real wages for the rank and file have remained almost
stagnant or even dropped in some cases (Wolff).Workers looking forward to retirement after many years of service to the
same company suddenly find themselves unemployed and possibly unemployable.Yet throughout all this turmoil, at least one group has prospered.The total compensation for top executives at our corporations has
experienced unprecedented growth.In
many cases, chief executive officers are receiving packages that amount to a
nine-digit annual income (Colvin 64).This
exorbitant executive compensation in the midst of corporate downsizing is
unconscionable.Modern American
corporations have several stakeholders that they directly impact: shareholders,
employees, communities, and the society in which they function.Disregarding the interests of the many stakeholders, the new robber
barons accelerate their plunder.
For the past three decades we have heard so many reports of enormous
corporate downsizing that we have almost become accustomed to the phenomenon.The layoff used to be a temporary gap in employment that only occurred
during downturns in the economy. Workers--mostly blue-collar--were called back
to work as soon as the economic situation improved.More recently, a layoff has come to mean a permanent termination of
employment and for the remainder of this paper we will use this definition.Lately, layoffs have occurred during periods of economic growth.We have been so inundated with tidings of mass firings that we have come
to accept them as status quo--for everyone but ourselves.Our work ethic leads us to believe that if we work hard we will never be
laid off (Downs 18-19).We prefer the sentiment that the victims have done something
to cause their own plight.Nothing
could be further from the truth.There
are thousands of sad stories about those who dedicated most of their lives to a
company only to be unceremoniously dismissed.
It is more than laid off workers who pay. Society as a whole is adversely
affected by large-scale layoffs.Communities
lose major portions of their tax base right as their expenses begin to rise
(Downs 19).Consider Bartlesville,
Oklahoma after corporate raiders set their sights on Philips Petroleum.The resulting mass layoffs created a ripple effect throughout the entire
community that ravaged banks, schools, real estate, and the city's entire
economy.The effect can be so
profound that even the threat of a layoff can cause communities to grant
crippling tax breaks, as was the case in Shreveport, Louisiana when AT&T
threatened to close its distribution center there.The town of Joliet, Illinois was so devastated by mass layoffs from it
largest employer, Caterpillar, it resorted to becoming a municipality almost
entirely dependent on riverboat gambling--a shaky proposition at best(Downs 55-62).
Doesn't a company have a right to hire and fire anyway it sees fit?Isn't this one of the basic assumptions of employment?Harry J. Van Buren III, doctoral student at the University of Pittsburgh
School of Business, suggests there are implied psychological and social
contracts between employers and employees: "...the fact that many society (and
for that matter, personal) expectations of employers are neither codified into
law nor included in a formalized contract is not necessarily fatal to their use
in a theory of corporate responsibility.." (Van Buren 207).In fact, most relationships within a society are governed by unwritten
contracts.Merely adhering to the
letter of the law does not make one a responsible member of the
community. "Because corporations
are members of the societies in which they operate, they are subject to local
social contracts.Respect for local
values and mores is to be expected for the corporation to be considered a good
citizen" (Van Buren 209).David
Packard, legendary co-founder of Hewlett Packard, proposed the corporate
triangle model, the three points representing shareholders, management, and
employees.He believed every
corporate decision should be based on the interests of all three. A lopsided
triangle has recently emerged.Stockholders
scream for higher stock prices and dividends while management demands ever
increasing compensation.Employees
pay the price for this imbalance through layoffs and oppressive workloads (Downs
22-25).
How did we get from the days when people retired from the company where
they had spent their whole careers to the present day slash and burn corporate
mentality?The answer lies in the contemporary corporate executive's
obsession with quarterly results and his own compensation package. Good
management practices, such as process improvements or total quality, may take
time to produce results.Reducing
payroll lowers expenses immediately.For
those who fixate on the short term, quarterly results, the quick payback from a
layoff is attractive (Downs 16).When The Institute for Policy Studies and United for a Fair
Economy released their annual pay survey for 2000, "It found that chief
executives of the 52 major companies that announced layoffs of at least 1,000
employees in the first half of 2000 earned about 80 percent more on average than
CEOs at 365 big corporations surveyed by Business Week magazine.It said the top job-cutters got an average increase in salary and bonus of
nearly 20 percent last year, compared with average raises for U.S. wage earners
of around 3 percent ..." (Gordon)
Aren't these job-cutting executives just controlling expenses and
looking out for the interests of the shareholders?Alan Downs, consultant, management
psychologist, and former human resources executive, states in Corporate
Executions:
The argument that the reduction mentality accounted for the swift
growth in the 1980s just doesn't hold up according to the latest Census Bureau
analysis.The study, based on
detailed nonpublic corporate disclosures in the economic census, which is taken
every five years, found that labor productivity fell in more that one-third of
the companies that laid of workers between 1977 and 1987.The survey also found there were just as many successful 'upsizers'
as there were downsizers during that period, suggesting that downsizing may be
limiting productivity growth rather than improving it (191).
The truth of the matter is, corporate executives don't have to be as
concerned about the shareholders as they once were.Due to regulations, the proxy fight--formerly the ultimate
weapon in the shareholder's arsenal--has become very expensive.Coupled with the limited success rate, the proxy fight has become too
costly to undertake for most shareholders.Between 1962 and 1978 there were only 96 proxy contests involving New
York Stock Exchange and American Stock Exchange firms and dissident stockholders
won in only 25 percent of those contests (Dodd 60).One way that management shows its disregard for stockholders is the
increasing use of stock options in executive pay packages.Giving out options cost the company's shareholders in two ways: by
diluting their stake in the company when the company issues new shares to cover
the options and by forcing the company to repurchase shares in order to keep
options from affecting earnings per share. One study found a very strong
statistical link between options use and share buybacks.The problem for shareholders arises because executives try to exercise
options when the share price is at its highest.This means, in order not to dilute the stock, the company must repurchase
shares of its own stock at a premium price (Fox 87-88).
A section buried within the Revenue Act of 1950 amended the tax code to
make it legal and practical for companies to pay employees with a form of
currency called the stock option.From
this humble beginning, the executive pay madness began (Colvin 64). Stock
options are simply the option to buy company stock at a specified price
regardless of the stock's market price at the time they are exercised.Company financial statements treat stock option grants as though they
don't cost the company anything¾of
course this is just accounting hocus-pocus.As a pre-retirement gift, GE gave Jack Welch, their outgoing CEO, 3
million stock options.Similar
options sold on the American Stock Exchange were $6.90 each, making the initial
worth approximately $20 million.But,
Jack's options are actually worth even more than the ones the public can buy.The options sold on Amex expire in three years.Mr. Welch's options last ten years.If GE shares repeat the performance of the past ten years, the profit on
these options would be in the neighborhood of $1 billion.This is money the company--and its shareholders--would be giving up by
selling at discount to Welch instead of full price on the NYSE (Fox 86).Although stock options have been around since 1950, it wasn't until
stocks experienced a long coma in 1964 that we began to see the stirrings of
today's opulent reward system.The
market was going nowhere so traditional stock options weren't paying off and large raises seemed
hard to justify.This is when
compensation consultants entered the picture.These consultants began their continuing job of devising pay-enhancing gimmicks.They are the pay machine's expert mechanics in the conflicted role of
being paid by management to advise management on how management should be paid
(Colvin 66).
The efforts to align the CEO's interest with the shareholders' by
using options worked better on paper than in actual practice.The options were granted on top of an already generous salary; so if the
stock did poorly, the CEO simply wouldn't exercise the options (Colvin 67).Louis J. Brinidisi, Jr. of American Compensation Systems, Inc. writes:
A large number of today's executive pay packages insulate the CEOs
from the consequences of weak performance and low market valuations of their
stock, while positioning them to benefit from any positive results that occur...
(Brindisi 331)
Geoffrey Colvin, editor and columnist for Fortune magazine goes
further:
The No. 1 earners in each of the past five years got packages valued
cumulatively at nearly $1.4 billion, or $274 million on average. Yet far from
delivering the superb results investors might have expected from the world's
highest-priced management, four of the five companies have been marginal to
horrible performers.They are Walt
Disney, Cendant, Computer Associates, and Apple Computer (Colvin 65).
The bulk of stock options end up in the hands of the five or six
executives whose compensation is detailed in the company proxy statement (Fox
90).The most optioned stock of Fortune 500 companies was Merrill
Lynch with options representing 23.1% of outstanding shares.The impact of
options on Compaq's earnings per share was ?67%.At Siebel Systems, a NASDAQ stock, options represented 41.6% of
outstanding shares with top executives holding over a third of those options
(Fox 91-92).These can hardly be
beneficial situations for shareholders.
How do the outrageous pay packages keep accelerating despite mixed
performance results?When a
company fires its CEO, it must pay a huge signing bonus to the replacement to
compensate him for the options lost by leaving the current employer to accept
the new position.The ousted CEO
was probably earning a lot for doing a lousy job, so the replacement can argue
that he is worth much more.If the
replacement is eventually let go, the cycle begins anew (Colvin 67).?An awful lot of executives should honor Curt Flood,? says Michael
Halloran of SCA Consulting.Flood's
challenge of the reserve clause in baseball players' contracts, though
unsuccessful at the time, led to the days of free agency beginning in the 1970s.CEOs could now argue that they were surely worth more than a 20-year-old
shortstop. "The counterargument--that athletes? pay, unlike CEOs,
was determined in a brutally competitive open market--didn't get much airtime
in the boardroom" Colvin 66).The
executives have taken this springboard to launch compensation to ludicrous
heights.In a study showing
comparisons of compensation in 1990 to 2000 by market sector, the largest
increase for a CEO in the same position was shown to be 12,444%.Most CEO pay increases in this same period were 500% or more.In contrast, the pay for the average major league baseball player
increased 217% in the same period, the average NYC teacher's pay increased
20%, the minimum wage rose 36%, and the consumer price index rose 32% Loomis 83-84).Steve
Ross' salary of $75 million and options package of $215 million as CEO of Time Warner in 1990 pales in comparison to Apple's Steven
Jobs? $381 million pay and $872 million in options grants in 2000 (Colvin 70).
For those who may believe that the boards of directors determine
executive pay by fair market value and in the interest of the company, Carol
Loomis? Fortune magazine article, "This Stuff is Wrong," reveals
some disturbing information.In
order to get board insiders to speak openly, Loomis had to promise anonymity to
those he interviewed. One speaker, a corporate executive with wide experience on
boards, states:
When it comes to relating executive pay to performance, compensation
committees are really in the pockets of CEOs.There are all kinds of cozy relationships involved.And when a CEO wants the rules changed as to how people are paid, the
rules simply get changed (74).
Another board insider, a well-paid CEO who has served on several
boards is quoted:
They now use performance formulas--based, say, on return on
equity--that determine the size of the bonus pool.Most of the formulas are b.s.When
you've got a formula, you've got to have goals--and it's the people who
are the recipients of the money who are setting these.It's in their interests to keep the goals low so they will succeed in
meeting them.You've got the fox
in the chicken coop (73).
Yet another interviewee, the CEO of a very successful Fortune 500
company, says:
The way I see it, stockholders are going to continue to get screwed.
Baseball players will get paid according to their batting averages, entertainers
will get paid according to the size of their audience, and CEOs will get paid
according to a system that scorns objectivity and market forces (76).
The big guys make out like bandits even if they leave the job. This is accomplished
via change of control triggers for severance pay, more commonly known as
"golden parachutes."
When William Agee resigned as the chief executive of Morrison Knudsen
Corporation in early 1975, that company had recorded a loss of $114 million over
the previous two years.During that
time, Agee received $3.5 million in cash and other unspecified benefits.On leaving the company, his severance package was estimated to be between
$1.5 million and $4.8 million by a compensation expert.Ironically, at time of paying Agee his generous golden parachute,
Morrison Knudsen laid off 277 workers with no severance pay (Downs 29).
John Riley of Cooper Industries has his options and restricted shares
become vested immediately should he quit for "good reason" following an
outsider purchase of 15% of the stock.Donald
Graber of Huffy Corp. would get $4.5 million if he quit for any reason after two
people not nominated by the company join the board. Several key Sprint
executives decided to quit after the company was forced to vest $1.7 billion in
options when shareholders approved sale to WorldCom--the payout was not
affected when federal regulators squashed the deal.Three executives at US Airways shared $45 million in severance pay even
though the sale to United Airlines was aborted (Condon).
Even a national tragedy cannot seem to slow down the plunder by the new
robber barons.The recent airline
financial rescue package, following the events of September 11,did little to force top executives to give up their lavish remuneration.
To make matters worse, the biggest airlines balked at providing standard
severance packages and other assistance to laid-off employees¾layoffs
in travel-related industries could reach 500,000.Contrary to some early misconceptions, the airline relief bill does not
limit current airline executive pay.It
limits those who made at least $300K to no increase in salary, bonus and
benefits for the next two years (Asker).Clearly there is a disturbing trend in this country's corporations.Chief executives continue to receive ever-increasing
compensation while employees face increasing economic uncertainty.If we do not wish to become a nation of haves and have-nots,
like some third-world plutocracy, we must do something to stem the tide.The new robber barons must be deposed soon.
Perhaps the first step toward dethroning the new robber barons is
exposing the magnitude of their spoils. As recently as 1992, 72% of the
respondent to a USA Today poll said $1 million was too much to pay a top
executive no matter how well a company performed (Osborn).Yet, other surveys suggest that most people were unaware that more than
half of the top executives at the 500 largest corporations made over $1 million
in salary and bonus in 1992.One of
the problems is the complex pay packages executives receive. The combinations of salary, bonus, stock options, and perks
that compensation committees hand out are too complicated for anyone other than
an accountant to comprehend.At
least two organizations are working to correct the public awareness situation:
AFL-CIO?s Executive PayWatch www.paywatch.org
and United for a Fair Economy www.faireconomy.org.The PayWatch website offers specific information about the totalcompensation of the top executives at nearly all American corporations
and both sites provide instructions to help the average citizen become more
actively involved in the war on wage disparity.
Any attempt to make corporations become more responsible toward their
communities and workers must be national in scope.As evidenced by the numerous companies that are incorporated in Delaware,
despite not being headquartered or having substantial operations there,
corporations use differences in state and local laws to their advantage.Even the most ardent supporter of states rights can't argue that the
overwhelming majority of corporations don't engage in interstate commerce.I certainly wouldn't propose that states and municipalities don't
have the right to set their own tax policies.I would, however, propose that federal regulations be enacted that
require any corporation granted a state or local tax abatement not to reduce the
local workforce for the period of that abatement.This would address situations such as the aforementioned dealings of
AT&T in Shreveport.This would
also hinder some of the aggressive deal shopping between corporations and local
governments.Corporations and
localities may be more prudent in their negotiations if both parties know they
will have to live with the results for some time.
The shareholder proposal
exclusions in SEC 14a-8 are purported to prevent frivolous proposals from
wasting the company's time and resources.Raising the minimum investment requirement to $10,000 should prevent a rash of frivolous proposals.Recent SEC rulings and amendments to Rule 14a-8 permit shareholder
proposals concerning social issues.Surely
the average shareholder is just as interested in the compensation and continued
employment of the company's directors and top executives as he is in whether
or not free-range chicken is served in the corporate lunchroom.I propose Rule 14a-8 be amended so that shareholder proposals
concerning the termination of board members or the companies top 5 highest paid
executives are required to be placed on
the company's next proxy statement. Perhaps executives would become more
compassionate if the specter of the sudden loses of employment hung over them
the same way it haunts the average worker.
Furthermore, golden parachutes should be eliminated. Current
law limits the tax deductibility of excessive severance pay, but I propose the
practice be eliminated entirely. Top executives should receive severance
packages based on the same formulas used for other dismissed employees and in no
case should severance pay be issued to someone who quits their job for any
reason.Workers don't receive
guaranteed protections against changes of control and neither should executives.There is no plausible justification for the fat cats not to face the same
employment uncertainties that the rest of the workforce does.
Also on the legislative front, Congressman Martin Sabo(D-MN) has introduced the "Income Equity Act-2001."This bill would limit an employer's tax deduction for any employee's
compensation to an amount equal to 25 times the company's lowest full-time
employee's salary.Mr. Sabo's
bill would not limit the amount a corporation may pay an executive; it would
only limit taxpayer subsidization.Although
current federal law limits the amount of deductible salary to $1 million, the
exemptions for performance based pay leaves loopholes large enough for any compensation committee to easily
circumvent any restrictions.The
latest version of the "Income Equity Act" includes virtually all forms of
compensation.This marks the
eleventh time that Congressman Sabo has introduced a version of this bill.The previous ten versions--dating back to 1993--were all referred to
committees where they were tabled and suffered a silent death.Mr. Sabo has no illusions the2001 version will fare much better in the Republican-controlled
House (Sabo).Perhaps through the educational efforts of organizations like
the AFL-CIO and United for a Fair Economy, enough public pressure can be brought
to bear on Congress to force a serious debate on the issue of outrageous
executive compensation.
Works Cited
Asker, James R. ?Unions See
a ?Slap? to Laid-off Workers.? Aviation Week and Space Technology 1
Oct. 2001:40.
Boisseau, Charles. ?Workers
foot bill for boosts in bosses? pay.?Houston
Chronicle 7 June 1996: B1+.
Brindisi, Louis J.?Creating Shareholder Value: A New Mission for Executive
Compensation.?Stern, Stewart
III, and Chew Jr. 323-338.
Colvin, Geoffrey. ?The Great
CEO Pay Heist.?Fortune
25 June 2001: 64-70.
Condon, Bernard. ?Chairman
of the Hoard.? Forbes 1 Oct. 2001: 54
Dodd, Peter. ?The Market for
Corporate Control: A Review of the Evidence.?Stern, Stewart III, and Chew Jr.45-65.
Downs, Alan.Corporate Executions : The Ugly Truth About Layoffs---How Corporate Greed
Is Shattering Lives, Companies, and Communities.New York: American Management Association, 1995.
Fox, Justin. ?The Amazing
Stock Option Sleight of Hand.?Fortune
25 June 2001: 86-92
Gordon, Marcy.?Layoffs Bring CEOs Hefty Boosts in Pay, Study Finds.?Detroit News 29 Aug. 2001: B3.
Loomis, Carol J. ?This Stuff is Wrong.?Fortune 25 June 2001: 72-84.
Osborne, Michelle. ?$ 1 million too much to pay
executives.?USA Today 11
March 1992: 1B
Sabo, Martin Olav.Congressman
Sabo?s Home Page.14 November
2001.24 November 2001.http://www.house.gov/sabo
Stern, Joel M., G. Bennett Stewart III, and Donald H. Chew Jr., eds. Corporate
Restructuring and Executive Compensation. Cambridge,
MA: Ballinger Publishing Company, 1989.
Van Buren III, Harry J. ?The Bindingness of Social and Psychological
Contracts: Toward a Theory of Social Responsibility in Downsizing.? Journal
of Business Ethics 25.3 (2000): 205-19.
Wolff, Edward N. ?Working Paper No. 300: Recent Trends in Wealth Ownership,
1983-1998.?Jerome Levy Economics Institute. 12 Apr. 2000. 14 Oct.
2001 <http://www.levy.org/docs/wrkpap/papers/300.html>
If you would like a copy of this
essay right-click here and chose "Save
target as"
