CEOs fly closer to the golden sun - Providence Journal

Lee Drutman: CEOs fly closer to the golden sun
01:00 AM EDT on Thursday, May 15, 2008
LEE DRUTMAN
WASHINGTON

THOSE WACKY CEOs are at it again. Why look, there’s “crazy” Kenneth Chenault at American Express, raking in $46.23 million, even as the company’s stock fell 13 percent for the year. And there’s “rich” Richard Fuld Jr., of Lehman Brothers, bringing home 40 million in baco-bits while the company’s stock dipped 14 percent for the year. And don’t forget about Merrill Lynch’s John Thain, whose money train delivered a $78.52 million package, despite a 41-percent tumble in the company’s stock. And so on and so forth, a parade of designer suits whose lack of modesty is only outdone by their lack of modesty.

You might think that a down economy and the continued public outrage that CEOs make roughly 400 times the average worker and that new disclosure rules make it harder to hide perks and that shareholders have become more active in going after excessive pay have some impact, that it might at least put even a small dent in the golden cufflinks atop corporate America.

But alas. The new pay disclosures for 2007 are now public, and depending on whose analysis you like, CEO salaries at large publicly held companies are up between 5 and 12 percent, to between $11 million and $12 million, on average. Nobody, however, disputes the gravity-defying hot air keeping corporate executives soaring high, high in the sky.

So how does this keep happening? One reason seems to be that up in the rarified stratosphere that CEOs and their boards inhabit, a very special logic prevails. Worth reading on this subject is a book called The Myths and Realities of Executive Pay, by Ira T. Kay and Steven Van Putten, a pair of executive-pay consultants for Watson Wyatt Worldwide. (These are the guys whom companies hire to advise them on how much to pay the CEO — nice work if you can get it!) They reveal the self-serving claims that inspire such generous compensation: 1) the right CEO makes all the difference (forget anybody else in the company); 2) the pool of talent for executive leadership is exquisitely tiny (and remember the old saw about supply and demand); and 3) CEOs can only perform at full Apollo-like capacity if they are given a gazillion shares of company stock (incentives, incentives, incentives!).

Yet, too often the reality of these CEO pay packages is that they tend to overflow with the kinds of tails-you-win, heads-you-win-even-more incentives that insulate corporate leaders from the stakes of actually running a large company. Consider the case of KB Home CEO Jeffrey Metzger, who despite presiding over a $929 million loss (on $6.4 billion in revenue) still got a $6 million cash bonus for meeting “objectives.”

Or even better, take Bear Stearns, whose wanton foray into the wild world of mortgage speculation ended in a quite spectacular implosion. Pity CEO James Cayne. He had to trade in his stock for a mere $61 million, instead of the $1 billion he might have made had he been smart enough to sell it all at right time.

But don’t worry. Cayne, a 10-time national bridge champion, will be okay. He already has about $1 billion to his name. Perhaps, then, this was just for thrills. Why not gamble big and see if you can make it $2 billion? After all, beyond a few million, money becomes more a way of keeping score than anything else. Might as well go for the gold. Keep the hot air pumping! Closer, closer to the golden sun!

Meanwhile, back on the ground, the poor specs are struggling. According to the Economic Policy Institute, over the last 20 years, while the top 5 percent of America’s families have seen a 60 percent jump in their wealth, the bottom 20 percent have seen just an 11 percent rise (and if you control for inflation, 1 percent). The divide is growing, and if/when we are in a recession, we know who is going to have a harder time getting through it. We know which homeowners are being foreclosed on now and which get to keep their penthouse apartments.

The disconnect is obviously troubling, but it is at least historically accurate. At the top of the economy, there are always those who have figured out the game, so that no matter what else happens, they win. Problem is, it never lasts forever. Simple economics: If working-class Americans owe everything to the banks, they can’t keep buying new computers to keep the economy growing. Today’s levels of American inequality were last reached in 1928. And we all know what happened in 1929.

Lee Drutman, a frequent contributor, is a Ph.D. candidate in political science at the University of California, Berkeley, and a former writer for The Providence Journal and The Philadelphia Inquirer.