Monday, June 20, 2011

Executive Pay and "Irrational Exuberance"

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This weekend, the Washington Post started a series on Executive compensation. The first article highlights the compensation discrepancies between the rich and the rest of us while the second covers stock options and bonuses. From the first article:

It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale.

Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.

The evolution of executive grandeur — from very comfortable to jet-setting — reflects one of the primary reasons that the gap between those with the highest incomes and everyone else is widening.
And from the second article:
Hefty stock awards and bonuses drove total compensation up more than 20 percent for Washington’s highest-paid chief executives last year, reflecting a nationwide trend among the largest public companies.

The awards came in a year when many top executives were busy steering their companies out of the worst economic downturn since the Great Depression. And for many, the packages are the last before new government rules take effect this year mandating nonbinding “say-on-pay” votes by shareholders.
I wonder if there is really ten times the difference in value between the Dean Foods CEO of the '70s and the one today? And it continues to amaze me sometimes how CEOs are worth all this extra compensation whether good times or bad, profitable or not.

I don't know if it was just a coincidence but the NY Times' Gretchen Morgenson also had an article on executive compensation yesterday (Sunday 6/19):
WHEN does big become excessive? If the question involves executive pay, the answer is “often.”

But despite the reams of figures about pay in any given year, shareholders often have to struggle to put those numbers into perspective. Companies typically hold up pay from previous years as a benchmark, but just how this paycheck stacks up against, say, a company’s earnings or stock market performance is rarely laid out.


Answers to that question come fast and furious in a recent, immensely detailed report in The Analyst’s Accounting Observer, a publication of R. G. Associates, an independent research firm in Baltimore. Jack Ciesielski, the firm’s president, and his colleague Melissa Herboldsheimer have examined proxy statements and financial filings for the companies in the Standard & Poor’s 500-stock index. In a report titled “S.& P. 500 Executive Pay: Bigger Than ...Whatever You Think It Is,” they compare senior executives’ pay with other corporate costs and measures.


If shareholders could size up the impact of pay on a company’s operations, they’d be more informed, Mr. Ciesielski said. For example, why not show a company’s total executive pay against its overall labor costs? Or disclose top pay as a percentage of marketing expenditures, if that is what propels a company’s results?
And really, the report Morgenson is mentioning doesn't seem to go that deeply into the executive perks. For example, let's go back to the Dean Foods example from the Washington Post again. While the CEO of the '70s had an office on the second floor of a distribution center, today's is occupying 9 floors of a 41 story office tower. How many millions are those offices costing Dean Foods? How much more than $10M is that private jet costing Dean Foods?

All these CEO compensation articles though at a time when Un and Underemployment is running at 25M to 30M people. How many people could be employed if the CEOs and other executives compensation got a little less irrationally exuberant? Friday, Bloomberg had an article on how consumer confidence was out of synch with Wall Street for the last two years:
The Bloomberg Consumer Comfort Index has stalled near its recession average as the Dow Jones Industrial Average has risen 83 percent from a 12-year low in March 2009. A tight correlation between the index and Dow that lasted more than two decades has broken down as joblessness above 9 percent, stagnant wages and near $4-a-gallon gasoline outweigh the benefits of higher share prices, even after a 6.6 percent retreat in the Dow since the end of April.


Wages and salaries made up 48.9 percent of gross value- added for domestic businesses in March, according to Commerce Department data. That’s up slightly from 48.7 in December, the lowest since records began in 1929. Meanwhile, corporate profits posted a sixth quarterly gain in January-March this year from a year earlier.

The 18-month recession shaved 4.1 percentage points off gross domestic product before ending in June 2009, making it the deepest downturn since the 1930s. Growth has averaged about 2.8 percent since then, enough to restore only 1.8 million of the 8.8 million jobs lost as a result of the slump.
Is it any wonder there's a disconnect between Main St and Wall St when there is such a disconnect in compensation between workers and executives? MSNBC also does a variant on the Main St/Wall st disconnect in this article:
This month marks the second anniversary of an economic expansion that began at the end of what is now being called the Great Recession. But for millions of small businesses and households, the economic recovery has yet to arrive.


Economists say the lingering effects of the Great Recession help explain why so many businesses, investors and consumers remain so gloomy about the outlook for the U.S. economy. The mood appears to be worsening, leading to a concern among economists and others of a self-fulfilling prophecy -- that worried consumers will slow spending, further hampering the recovery, and perhaps raising the risk of a double-dip recession or at least yielding years of sluggish growth.
Of course, it couldn't possibly be something like this from Arizona (via the NY Times) where the unemployed are losing checks because the legislators can't make a one word change that is needed:
That last extension of unemployment benefits — typically received in weeks 80 through 99 of unemployment — is paid for entirely with federal money and does not affect state budgets. But because of ideological opposition and other legislative priorities, Arizona and a handful of other states, like Wisconsin and Alaska, have not made the one-word change necessary to keep the program going.

Right now about 640,000 jobless Americans are receiving this last tier of benefits, according to the National Employment Law Project. The money, appropriated in the 2009 federal stimulus package, was initially intended for states with jobless rates higher than they were two years earlier. Since the recovery has been much slower than predicted, though, Congress decided last December to allow states to continue receiving the money if their unemployment rates were higher than they were three years earlier. States simply needed to change “two” to “three” in the relevant state law.

Some economists say that cutting off the long-term unemployed from extended federal assistance could backfire by putting further strain on state economies instead. Indeed, most states were quick to make the one-word change, counting on the federal money not only to support ailing families but also to serve as a strong stimulus (jobless benefits are normally spent more quickly than, say, tax refunds). Nearly every state — Arizona included — had opted into the extended benefits program when it was introduced.
Or could it be this situation from today's NY Times on the predicted length of recovery for many US cities?
Two years into a fitful recovery, unemployed Americans are getting painfully accustomed to the notion that it will take years to bring back the jobs eviscerated by the financial crisis.

In some regions, those years are in danger of turning into a decade. According to a report to be released Monday, nearly 50 metropolitan regions — or more than one out of seven — are unlikely to bring back all the jobs lost in the recession until after 2020.
I think the pessimists are a whole lot closer to reality than the "relentlessly optimistic" folks on Wall St. Of course, the Wall St folks deal with the overly compensated CEOs, so I guess they do have a reason to think it's all good.

And because I can:

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