CEO pay roundtable
GEOFF COLVIN: It's annual meeting season, when the emotional
issue of CEO pay is on the front burner. Sandy Weill took home $44 million
last year for ten months' work as CEO of Citigroup. Larry Ellison of Oracle
made $40 million just by exercising stock options last year. Stanley O'Neal
of Merrill Lynch was paid $28 million.
Are these and other hyper-compensated CEOs worth it? Should you as a shareholder be griping at the pay they got - or grateful for the performance they drove in a knockout year for the stock market? Or is it just plain wrong when CEOs make so much more than other workers in a company? Daniel Steininger is chairman of Catholic funds and he's demanding CEO pay cuts at many companies. Joseph Bachelder is an attorney who has represented Lou Gerstner, Michael Armstrong, and many other leading CEOs in negotiating their mega pay packages. He joins us from New York.
Mr. Steininger, Sandy Weill got $44 million last year, but the shareholders of Citigroup got billions and billions of dollars in increased value. Where's the problem?
DANIEL STEININGER: $44 million - that's good pocket
change for our CEO. We don't begrudge Mr. Weill making more money than
the average employee. Our concern is the ratio that has exploded between
CEO comp and the average worker. Why I think our theory is very simple
and I think most shareholders would understand that the performance of
a company is dependent upon the work of everybody, not just the CEO. So
the reason Citicorp had a great year is not Mr. Weill, but all of the
employees. So why would he be the only person to experience that sort
of wonderful pay package?
COLVIN: Well, without getting into the specifics at
Citigroup where a lot of people do make a lot of money, the multiples
that you mentioned are roughly as follows, at least the latest figures
we have. In the U.S. the average CEO got 531 times the pay of the average
employee. Some comparisons around the world, in Brazil it was a multiple
of only 57, in Britain 45, in Japan a multiple of only 10. Mr. Bachelder,
the truth is you've helped many of America's most famous CEOs get those
huge paychecks. Does it really have to be that much?
JOSEPH BACHELDER: Well, I would say, Geoff, that it
is a free market, and when I say that I mean in the same sense that let's
say the stock market is free. Is a share of stock in Citigroup too high
or too low at a given point in time? I don't think that ratios really
are the most important criteria. First of all, they are a statistic that
is only a statistic. You take, for example, the basketball star Michael
Jordan at the Chicago Bulls. Should he have been paid only 100 times what
the entry level job would be at the Bulls organization when he was playing
there? Take Sandy Weill, for example, another statistic. Yes indeed, he
was paid an enormous amount of money, but for a share of stock that represented
just over a penny a share of a stock that's over $50.
COLVIN: The gripe a lot of people have with CEO pay, though, is you know folks don't begrudge Michael Jordan or A-Rod or whoever the latest athlete is to be making tons of money because those deals are negotiated in a truly open market year to year typically, and a lot of people feel that CEOs get paid by boards of directors who may be under their own control and it really isn't an open market.
BACHELDER: Well, no one is requiring a board of directors
to pay Sandy Weill or anybody else a particular level of pay. The fact
of the matter is that if you took a poll of the boards of directors of
major U.S. corporations, they would probably say, a vast majority of them,
that the most important single factor in the success of the company in
the time ahead is the CEO.
STEININGER: Precisely. We can go back to Aristotle and
the ancient Greeks about virtue and the balance of life, or we can look
at Catholic social teachings. We are the Catholic Funds. I always wonder
if Pope John Paul II had decided to become a CEO, he'd probably run a
very successful company. He brought that whole notion of solidarity to
the workplace, that a company is a community. It's made up of all of the
employees.
I can guarantee you the average employee at the average company where
the CEO is making a multiple of 500 to 1, they have lost the trust and
the loyalty of those employees because they know how they're valued. If
the CEO is paid so disproportionately, it erodes a sense of trust and
loyalty.
COLVIN: Mr. Bachelder, look, obviously no one needs as much as some of these CEOs get, and you've got to figure a lot of them probably would do the job for less if they were pressed. Why shouldn't boards insist that they do it for less, and why shouldn't some CEOs be willing to do it for less?
BACHELDER: Well, we of course want people who are leading our companies to be individuals who will not only press for growth of revenues but also enhancement of the bottom line to increase the profits of the company. Why do we want individuals that are going to say please pay me less? Again, it's a free market. No one is compelling boards of directors to pay what they're paying, but there is a market there. It's as if you were going to say to a CEO who owns a home and now is going to sell his home, you ought to sell it for a little bit less than the market is indicating simply because that would be a good thing to do. That's not the way it works.
COLVIN: Well, Mr. Steininger, look, if a CEO is getting 500 times the lowest or the average worker's pay, which you say is way too much, but is delivering tons of shareholder value, I mean the shareholders, including your shareholders, are counting on those stocks to perform to pay for retirements, to pay for college educations. Isn't there a lot of social good in getting those stocks to perform? And if you have to pay a CEO a bundle to do it, what's wrong with that?
STEININGER: You're talking about a long-term, sustainable
organization that develops a culture for success, to do those sort of
things deprives a company of long-term success, and we believe shareholders
should be in it for the long run. Let's face it, Enron, WorldCom, all
these companies, Tyco, had a quick run of it. You can get success on a
short-term basis. Most shareholders should want to see long-term performance.
If you have these incredible pay packages, you're hurting the long-term
success of that corporation, because you're creating a culture that will
eventually unravel.
COLVIN: Mr. Bachelder, there is of course a lot of popular discontent now over CEO excess. The Tyco trial has just been declared a mistrial. Dennis Kozlowski was at one time a client of yours. It all seems to indicate CEOs out of control. What do you have to say about it?
BACHELDER: Well, I don't think that you can take a particular
situation and draw a generality; for example, General Electric, and the
individual executive, Jack Welch. I think as he drove the company's market
cap from about $13 billion to over $300 billion on his watch that he took
out about a billion dollars. Now, this comes out to approximately 10 cents
per share for that type of capital growth over 20 years, and few would
dispute that General Electric is a very well run company.
COLVIN: Mr. Steininger, can you name some companies where you think the CEO pay plan does make sense and is structured so that it really is creating value of the kind you like to see?
STEININGER: I like what's happening at Starbucks. They
have stock options, which has fueled so much of the problem we're seeing
in American companies. And again, I keep reminding Joe and others, other
companies in other countries who successfully compete against us don't
pay these kinds of pay packages. But Starbucks is one. They make stock
options widely available to everyone throughout the company, even part-time
workers.
COLVIN: Although it has to be said that the CEO there is the founder, and he makes his money because he's an owner and has a lot of the stock.
STEININGER: Right, and every time, when you have a Microsoft
and Bill Gates, you have a genius every now and then that comes along
in the form of a CEO and that individual probably should be paid. But
on average, for the average CEO of the average company, this makes no
sense. And I want to add something, Geoff, and I think this is very important,
every time I go to a board meeting and raise these issues
I'm told that the independent directors, usually in an outside consulting
firm, determine that they had to offer this pay package to be competitive.
I have yet to see a company hire an outside consulting firm that came
back and said, you know, your CEO is being paid too much. They always
say the same thing, the guy has to be paid more. Isn't that amazing? And
how long would they last working with that company?
COLVIN: What about other companies that have good CEO
pay plans?
STEININGER: We think, of course speaking as a good Wisconsin
boy, companies like Harley Davidson, S.C. Johnson. But I think it's important
to understand, and this is what's so ironic about life, is that the companies
that are managing well, paying reasonable pay in terms of the ratio between
what the CEO makes and the average employee, you don't hear about them.
They're hard to identify. They're not out tooting their own horn. They're
quietly doing a good job.
It's the dramatic examples we see in the market that have got our attention,
but you don't, they never talk about themselves, so it's almost hard to
identify them. But there are a lot of good companies out there. Our theory
is real simple. We want companies to do well. That's why we became an
advocacy fund, because we want to be there owning them to let them know
you can do better than what you're doing under your current pay practices.
So we're there to remind them.
COLVIN: It's a debate that's not going to end, but we
appreciate the contributions both of you have made tonight. Joseph Bachelder
and Dan Steininger, thank you.
STEININGER: But I think really the main reason is, and
I can blame my profession, the legal profession, and Joe's, and it's not
Joe's fault, but if you look at the average proxy statement, which your
investors get, I defy most of them to understand it. It's written in a
special foreign language. It's called "obscuranda." You cannot figure
out what these gentlemen are going to make. And I think if they were written
in the English language, and said, well, we're giving 9,000 shares, stock
options, at a strike price of such, if the stock doubles or triples, he'll
make $90 million, shareholders might be upset. They never know until after
the fact. Now the after the facts have been happening, and shareholders
are obviously concerned, and it's creating some serious problems, most
importantly I think in the competitive practices of American companies.
I always find this very interesting.
This is the last point I want to make, is that CEOs are quickly to say
that this is what the market demands, yet they're quickly to shift jobs
overseas, saying that in order to be competitive we have to ship jobs
to foreign countries, whether it's China or India. And I understand that
may have to happen. Why is it, as Adam Smith said, that the top managers
of the company never talk about their own pay? Why aren't there CEOs cutting
their own pay and their own benefits and their own packages before they
ship these jobs to India or China? You never hear them say, and they always
quote Adam Smith, well, Adam Smith is on our side on that one.
COLVIN: By the way, people often wonder what a big-time
CEO spends all that money on. One of the main answers is multiple homes.
A FORTUNE
500 CEO might have a main home that could cost $25 million in Greenwich,
Connecticut, a city apartment in Manhattan at $16.8 million, an Aspen
house at $9.2 million, and a beach house at $7.2 million. Add up real
estate taxes, maids, and gardeners, and pretty soon you're talking about
real money. A half-way respectable yacht can easily cost $100,000 a month
to operate. And if you want to put your name on a business school, be
prepared to write a check for $25 million - expensive, but you'll be helping
to educate future CEOs.
Unemployment discussion
KAREN GIBBS: The view from the corner office may look
pretty good these days, but workers toiling away on the factory floor
and in those cramped cubicles are seeing things differently. There was
a huge jump in the number of people hired last month - 308,000 new jobs
were created. But there are still millions of missing jobs. FORTUNE's
Anna Bernasek has been tracking the case of the missing paychecks and
she joins us from New York. Anna, are the numbers as good as they look?
ANNA BERNASEK: Karen, without a doubt, these are good
numbers. This is really good news for the economy. Basically this is the
first time that we've seen any decent, broad-based job creation in the
economy for at least four years. So, yes, I would even go so far as to
say that this is somewhat of a turning point in terms of the labor market.
Of course once we sort of adjust to the good news, the next question is,
you know, what is going to happen in the future? Just really the big question
that we all want to know the answer to is: how fast is job creation going
to be going forward?
GIBBS: Of course there's some people that say they're lies, damn lies, and then there are statistics. Is there political fodder for either political party in this number?
BERNASEK: Look, definitely. And the reality here is you're going to hear a lot of spin on either side, but it is good news, and it's good news for the Bush presidency. But basically I think we need to step back for one minute and just look at the labor market as a whole. This is one month's number. And you have to realize that this job market has been really weak over the last three years. In fact if you look at it, what's happened is we've actually all been working much harder, been getting paid less, and have been worried about our jobs. And that's not something that's going to turn around in one month. That's going to take a long time.
GIBBS: What is the root of this labor market unease?
BERNASEK: Basically, you know, Karen, the situation
is this. We have very, we've had up until this month very little job creation,
and what's happened is companies have just been cutting costs and cutting
costs because it's really competitive out there, and they've been using
technology to increase productivity. And they haven't needed to hire.
And basically none of those trends are going to change anytime soon.
I mean what we've really seen is record productivity growth, and all
that productivity growth has been going to companies in the form of profits,
because at the same time they've been able to keep wages down. So workers
have actually been experiencing a wage squeeze. And so you really have
this unprecedented situation where we're working much harder and we're
getting paid less, and we're also worried about our future job prospects.
Because who knows whether technology or offshoring could replace your
job in the future. So that's the situation of the unease I think.
GIBBS: Well, I guess because of this record productivity,
many people think that this is a very unique situation. But I understand
you've combed through the headlines and found that this is not really
so unique. Let's go back to the, I think it's September of 1996, the Washington
Post, the headline there, "In the Modem World White-collar Jobs
Go Overseas." It's the same thing all over again, huh?
BERNASEK: Right. And that's a fascinating story that I came across, written in 1996, and it could have been written today. And it's all about information technology service jobs being exported to India. So we have to remember that the offshoring situation is not something that just developed overnight. I mean it's been with us for awhile.
GIBBS: Now we had a March 1996 headline from the L.A.
Times which was reacting to the February 1996 employment report, which
said the job boom sends Wall Street into a 171-point tailspin. There again,
you saw much larger job creation than had been expected. Why was Friday's
reaction so different?
BERNASEK: Basically, for a start, the figure that created all the havoc back then was a job gain of about 700,000-plus jobs. Now that was really something. I mean our 300,000-plus jobs is important in the context that we really have seen barely any kind of job creation, but it's not in terms of unusual statistics like that one was back in '96. But today the situation is different because we're not really sure whether this is going to be able to continue at the same pace. And I think back then the immediate implication was rates are going to rise, and whereas this figure today has made it more likely, we still need to wait until next month.
GIBBS: What about the pessimism then that we're seeing? Is it warranted, Anna?
BERNASEK: Look, I think, you know, we all depend on our jobs, or most of us really depend on our jobs. And I think that, yes, this situation has been different in some ways, largely because of the productivity and the wage squeeze and the cost cutting. But on the whole, I think you can be upbeat about the future. I mean back in '96, we were all worried about our jobs, and it turned out to be quite good after that. In fact, unemployment went to a record low. So I think there are reasons to be optimistic in the end.
GIBBS: Anna Bernasek, thank you very much for joining us.
BERNASEK: Thank you.
Farr and taxes
GIBBS: And of course it's the job picture that's behind
much of the sound and fury in the presidential campaign. But it's debatable
whether or not any president can actually create new jobs! One thing a
president can influence is tax policy. Senator Kerry wants to take away
the bush tax cut for people making over 200 thousand dollars a year and
that idea alone is providing plenty of employment for at least one group,
the political spinmeisters!
We asked Wall $treet Week with FORTUNE contributor Michael Farr
to provide us with some real world perspective. Well, Michael, what would
be the ramifications of rolling back tax cuts for the wealthy?
MICHAEL FARR: Karen, earners in excess of $200,000 a
year represent about 5 percent of earners in the U.S. If you increase
their taxes by essentially 4.6 percent, you will increase tax revenues
by around $25 billion. Now that's a big number, but it's not really big
compared with a deficit of $550 billion. So it might be a good start,
but it won't make a huge difference.
GIBBS: It does look like a drop in the bucket there. And when you look at the tax receipts, you're also comparing it to spending that seems to be also out of control.
FARR: Well, the issue of course is the deficit is at
an all time record high, $550 billion. Spending has increased at a time
when taxes were lowered, so revenues are lower, spending is higher. That
doesn't work in your house or my house. Addressing the problem is a hot
topic, and there are a lot of very diametrically opposed opinions.
GIBBS: In fact you went out and you found two high income
wage earners and they have two differing points of view.
FARR: They do. I went out and saw Ed Quinn, who is President
and CEO of T. W. Perry Lumber Company in Maryland, and Sheldon Cohen,
who is former IRS Commissioner and a tax attorney.
ED QUINN: For us, for example, my partners and I, we,
we're not wealthy people, but we do make over $200,000 a year, so we're
very much in favor of continuing the tax cuts that are now in place.
FARR: And with those tax cuts that are now in place, what sort of a difference has that made to you, both monetarily and in terms of your business QUINN: The critical element is cash flow, and anytime we can increase cash flow we have more funds available to fund growth, and growth for us is hiring new people, it's buying more equipment. We have hired 14 people already, net new additions. And in the pipeline we're trying to recruit another 10. FARR: So how do you feel about Senator Kerry's proposal to do away with that tax cut? It would mean 4.5% higher taxes. QUINN: Well, I don't like it. Not only are we taking some of our tax savings and generating new jobs, but these people are generating new taxes. So if you look at the whole sequence of events, giving people with higher than normal income a tax incentive through reduction eventually helps build the economy, in my opinion.
SHELDON COHEN: My next dollars of earnings is not critical
to supporting my family. It's helpful. I mean I could go out and have
a lark, I could go out and have a dinner, I could go out and take a vacation.
It won't change my standard of living. If I made another $10,000 next
year, it would be nice and my grandchildren would appreciate it, but it
would not change anything that I do. It would not change the car I drive,
the house I live in, or the vacation I take.
FARR: You have more money that you're keeping now since we've seen this Bush tax cut. What have you done with that money? COHEN: I save the money or I give it to my grandchildren. I've set up college funds for all of my grandchildren. I put it in a brokerage account and I invest it partially in stocks and bonds and partially in fixed investments. FARR: You make over $200,000 a year? COHEN: I am, yeah. So I'm not advising anything that wouldn't affect me. It would affect me. FARR: And you're willing to pay a higher tax rate. COHEN: I'm willing to pay a higher tax rate. FARR: I've been told that this should not be repealed because individuals are better investors and would be more productive with these funds than the government will be. COHEN: That isn't a question. If the government is going to spend the money it's spending, the money is going to have to come from somewhere. So if I save it and the government borrows it, it's still the government spending it. So we haven't avoided that problem, and the people who say that are looking at it very simplistically, because the net savings of the United States haven't increased, because I saved the money and the government borrowed it, and its net zero. FARR: And they're borrowing more and creating a larger deficit, but why should they solve that deficit by taking it from an area that's more productive, meaning the way you invest it, and taking it and doing something less productive with it, which is typically what perhaps the government will do? COHEN: Well I mean the government argues that we ought to be in Iraq and we ought to be saving these people or we ought to be in Afghanistan, and if we are then we have to pay for it. You know, we have to pay for it or our grandchildren have to pay for it, and I prefer if we got ourselves into this problem, we ought to deal with the problem. I don't want to pass it on to the next generation. My favorite quotation in that respect is "If there be trouble, let it come in my time that my children may have peace."
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