Destroying Jobs and Draining Companies: Executive Pay & Other Spending
By Deb Cupples on December 30, 2008 at 12:05 AM in Banking Institutions, Current Affairs, Economy, Mortgage Crisis
During the past three months, our nation has lost 1.2+ million jobs: 533,000 in November; 320,000 in October; and 403,000 in September (USBLS).
Two months ago, the New York Times reported that major companies were thinking about cutting jobs, including giants like Alcoa, Bank of America, Coca-Cola, General Electric, Goldman Sachs, Merck, and Xerox. [Bank of America and Goldman Sachs got a combined $25 billion in bailout funds from us taxpayers; General Electric got $3+ billion in federal government contracts in 2007, alone.]
That said, how many jobs could have been saved if those companies’ Boards had simply cut executive pay?
Let’s look at a few executive pay packages — which, no matter how you slice them, amount to a redistribution of shareholders’ wealth.
Table 1. Partial 2007 Compensation for CEOs
.
| Company | CEO |
2007 Salary, Bonus, Incentives, Perks, & Stock Grants* |
| Alcoa | Alain Belda | …..$12 million |
| Bank of America | Kenneth Lewis | ……$17 million |
| Coca-Cola | Neville Isdell | …..$18.5 million |
| General Electric | Jeffrey Immelt | …..$19.3 million |
| Goldman Sachs | Lloyd Blankfein | …..$53.5 million |
| Merck | Richard Clark | …….$12 million |
| Xerox |
Anne Mulcahy |
…..$11.5 million |
* Total does not include stock options, because 1) execs pay something for them, and 2) stock option values are hard to calculate. The total also does not include deferred compensation or pension growth. Thus, the executives’ actual compensation for 2007 likely exceeded the totals listed in Table 1. The total includes stock grants, because they represent a transfer of company wealth to an executive (i.e., the company could sell those stocks and keep the proceeds).
Every dollar that flows into an executive’s personal pocket is one less dollar for a company to spend on preserving non-managerial jobs or otherwise promoting company growth.
Let’s assume that the average non-managerial employee costs each company $100,000 a year (likely a high estimate). Let’s assume that each CEO is actually worth 25 times the average employee: i.e., $2.5 million a year (another likely high estimate).
How many non-managerial jobs could have been saved if the companies listed in Table 1 had simply cut their CEO’s pay to $2.5 million a year? See Table 2 (below).
.
| Company | $ Saved by Pay Cut | # Jobs Saved |
| Alcoa | $9.5 million | 95 jobs |
| Bank of America | $14.5 million | 145 jobs |
| Coca-Cola | $16 million | 160 jobs |
| General Electric | $16.8 million | 168 jobs |
| Goldman Sachs | $51 million | 510 jobs |
| Merck | $9.5 million | 95 jobs |
| Xerox | $9 million | 110 jobs |
Just by cutting the pay of seven CEOs to $2.5 million a year each, those seven companies could have collectively saved more than 1,200 jobs for a year.
The news gets better (in a twisted way), because CEOs are not the only executives and managers diverting company dollars away from the task of saving (or creating) jobs. In other words, more jobs could be saved if more executives’ pay packages were cut.
For example, Goldman Sach’s top five executives got $324 million in compensation in 2007. Assuming that half of it were in stock options, then $162 million was directly transfered to Goldman Sachs’ top five execs.
Under that assumption, if each of those five execs’ pay had been cut to $2.5 million a year (a combined $12.5 million), Goldman Sachs would have had $149.5 million for non-managerial jobs. Based on my cost estimates, that’s nearly 1,500 non-managerial jobs.
Here’s another example of how a board’s spending decisions can destroy jobs: in 2006, Merrill Lynch spent $5 to $6 billion on employee bonuses — which amounted to between 70% and 80% of Merrill’s $7.5 billion earnings that year.
Apparently, Merrill’s executives and board members didn’t believe in reinvesting company earnings in the company: i.e., paying off debts, financing growth, or saving money to cover future losses.
In September, Merrill Lynch was in such bad shape that it was sold off to Bank of America. A few weeks later, Merrill Lynch was slated to receive $10 billion in taxpayer loans via the bailout plan.
‘Too bad for us taxpayers that Merrill hadn’t kept the $5 - $6 billion (instead of spending it on bonuses), so that we could have spent fewer tax dollars bailing out that company.
Note: I’m not proposing strict bonus and pay limits: I chose $2.5 million to illustrate a point.
On the other hand, $2.5 million is not small potatoes. Even if the federal taxes ate up 60%, then take-home pay on a $2.5 million salary would be more than $80,000 per month.
The reason that many executives may find $2.5 million inadequate is that execs have spent years persuading their compliant Boards to continually inflate executive pay.
If all companies deflated executive pay, the norms for executive pay would also deflate.
Yeah, I know. I too have heard the specious arguments about the need to pay executives egregiously well in order to attract and retain “talent.” Given how poorly some of Corporate America’s highly paid “talent” has performed during this decade, the attracting-talent argument doesn’t hold much water.
Despite highly paid “talent,” for example, Enron and WorldCom filed for bankruptcy protection in 2001 and 2002, respectively. At the time, WorldCom’s was the largest corporate bankruptcy in U.S. corporate history.
In September 2008, Lehman Brothers filed the new-largest bankruptcy in U.S. history. Lehman’s “talented” CEO — alone — was paid $350 million during the eight years leading toward the bankruptcy (about $43 million per year). I don’t know what Lehman’s numerous other executives pocketed as the company’s “talent” drove the company toward Chapter 11.
Over the past couple months, AIG has taken more than $150 billion in bailout funds (loans from us taxpayers). AIG paid one top exec $280 million during the eight years leading up to AIG’s need for a massive bailout.
I could go on and on (and on) with examples of executive “talent” that caused or allowed their companies to suffer huge losses — despite the enormous compensation packages that said “talent” had received.
Shareholders should be up in arms over executive pay, because every dollar funneled into an exec’s pocket is one less dollar to spend on making a company more profitable.
We taxpayers should also be up in arms, given the more than $1 trillion we’ve committed to bailing out corporations whose woes have affected our nation’s economy.
One way for those companies to give back (i.e., to actually help our economy) would be to continue employing people — even better, to employ more people.
The figures in the two tables above are not exact, but they do illustrate my point: some of America’s corporate giants do have money available to keep people employed and possibly to create new jobs.
One problem: the people making corporate spending decisions seem more focused on funneling shareholder dollars into their own pockets
than on helping their companies or our nation’s severely sick economy.
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When there was enough money to go around it didn’t matter to the share holders because they were making money off their stock portfolios. Same as the rampant corruption in government siphoning tax dollars into someone’s pocket.
Watch for those attitudes to change.
Eat the rich. This kind of pay is grotesque when so many people can barely make ends meet. I don’t have a problem with people becoming rich through hard work and determination, but as we’ve seen with the pay to play schemes involving Barky, most of the time these leeches in Armani suits do not merit this kind of pay.
…What the Hell? Damned Spam filter. As I was saying, this kind of pay is grotesque when so many hardworking individuals can barely make ends meet. I have no problem with people becoming rich through hard work and determination, but as we’ve seen with the play to pay scheme involving our own president elect (ack) Barack Obama, many who get paid this kind of money don’t merit it.
Obviously, they weren’t that good at their jobs because these corporations are under or going under.
These people can’t walk on water; they can’t heal the sick or make the blind see, so why the hell are they earning so much money per year.
There is no SOB worth that kind of money, I don’t care what kind of wiz kid he/she is. There is always a better mouse trap.
Look how much our house and senate make per year. All of those committees and subcommittees, and tasks forces we pay for… that do absolutely nothing.
I was once highly offended when I learned that foreign countries call us stupid Americans. truth hurts
Notice the one female CEO is paid the least.
It’s really impossible to justify paying these mere mortals that much money — because obviously they cannot perform miracles.
One lonely person commanding that much money — what the hell do these people really do?
A few year ago Time Warner hired a CEO and paid hid some outrageous sum of money — and suddenly a whole lot of Time Warner employees got pink slipped. For me this one of the clearest cause effects I’ve seen. When the number of individuals fired was compared to the bloated salary of this hot shot CEO — one could easily see where the money came to hire this vulture.
Something has got to give — and the CEOs could easily take a cut — or heaven forbid why not TIE their pay directly to how well the company is doing or improving.
Notice the one female CEO is paid the least
And why do I have the gut feeling that this person works the hardest for it?
She the question here is not the money. Its that these “bonuses” are supposed to based off of profit/margin of the company. If these companies were so bad that they needed to lay off people and get money from the government. The bonus should have been a big fat 0.
Did that happen, no. lets be simple here. These politicans didn’t want to help out workers or these companies. They wanted to let the executives keep their bonus pay. So they paid them just enough to make up for the losses with pay cuts.
You are a complete and utter moron if you vote for any representative who voted for any of the bailout bills. You will find out why next year. When the economy tanks, all these executives with bail with their money to a foreign country and leave you and your family in poverty. Thats all this money did, it was moving expensive for the depression.
I don’t care if the new guy is some homeless hippie that wants to use chickens to run windmills. You need to vote for the other guy, republican OR democrat.
Why are stockholders not allowed to bring class action suits against the boards and management of these companies when their actions lead to bankruptcy and management walks away with millions? If those who own shares see an increase in their investment, they would have no problem with the bonuses, stock options and salaries, but they have no legal recourse when they lose so the boards can do pretty much as they please. And, what they please to do is line their own pockets.
Obama did try to do something. Really!
He sponsored his “Say on Pay” bill which was to allow shareholders the right to deny executive bonuses.
But, in true Obama fashion, it was watered down. The measure isn’t worth the paper it’s printed on. It was simply for optics.
On the one hand, he can dubiously claim he tried to stem excessive executive pay knowing that the media wouldn’t really move past the surface and expose him.
But it also helps Obama with executives who, you always should have wondered why they loved him so much.
The Democrats are as much a part of this problem now than the GOP were. Probably more. At least with the GOP, they may have been completely wrong but they weren’t lying and being deceitful.
great post. I work at Wells Fargo in Accounting. Thousands of us are losing our jobs. They are moving them to 2 big service centers out of state. Lots of companies do this and it is usually just to hire new employees at a much lower pay rate. This was announced shortly after a new Finance exec was hired. Gee, bet he is promised a big fat bonus, eh.
Our city was whining about the loss of property tax revenue when our Governor cut property tax. But when the city seen there was no way to change it, my, my, my, they found some ways to cut expenses pretty damn quick. County commissioners who only work part time were getting paid $65,000 a year!! Their pay got cut in half. City employees won’t get a pay raise. Boo hoo…be glad to have a job. Employee take home cars were cut and $400,000 saved. What amazes me is this is waste whether the economy is good or bad.
Our schools are still complaining about the cuts that will affect their budgets but I haven’t heard a word from them on what they plan to do to cut waste and there is plenty of it I’m sure.
How culpable are Boards Members of corporations regarding having failed to properly oversee management of these bankrupt companies?
Shouldn’t their names (and salaries) be revealed to the public as they too are responsible for failure of these businesses?
I agree.
Seriously, I don’t even care how much they get paid. What they do, or don’t do, with their money is their business.
That being said, why should we give them a damn dime? I’m not responsible for their failure, especially when I have my own life to deal with. They screwed up then they screwed up. But this is the game being played. Say they are too big to fail and your jobs depend on it, then fork over billions. This has got to be the biggest con in history.
Yes, indeed, why do stockholders not complain?
Instead, more people buy into this rigged “house” game by purchasing stock in companies that pay outrageous bonus packages to their employees. Everyone’s sucked into perpetuating a scam, hoping to make money on the deal.
There’s no way around it: Until people decide to stop buying stock in these miserable corruption scam companies, these inflated bonus and benefits packages to corporate CEOs will continue.
Stop buying stock. The market is a rigged game. No one produces anything anymore except wealth redistribution.
Half of the market is nothing more than a Ponzi scheme, deliberately complexified to conceal its actual nature from gullible investors.
News flash: We can not all get rich by taking in one another’s laundry. But a lot of clever people will get rich by convincing us that this is possible.
The DOW has tumbled to around 8500 because 8500 is a far truer reflection of actual value than +13000. The difference was just another bubble.
thanks for the article Deb…Hmmmmm…Lots to consider.
Corporate Person-hood: A really bad fucking idea.
First, make all these bastards personally accountable.
Second, make them irrelevant.
Of all the institutional failures, I think the Federal Reserve has to be the biggest. Both Volcker and Greenspan have played central roles in creating this mess. Greenspan the bubble-blower is only outdone by Volcker who invented “too big to fail” starting with Continental Bank in the early 80s. Volcker also engineered the refinancing of the bad bank debt to the third world countries in workouts that were very harsh to the people of those countries but saved the big banks. We keep saving the big banks and always the rationale is because they are too big to fail. Well, it’s a poor capitalism that indemnifies finance at the expense of the economy. And America never recovered from Volcker’s (and Reagan’s) policies which closed industry here and shipped it abroad.
I assume they will succeed, eventually, in re-inflating finance, but it won’t do much for the economy most of us live in. Furthermore, the “recovery” will be anemic and centered on the next bubble. No real changes will take place because Obama will never step on finance’s toes.
Thanks for this, Deb.
You don’t get it, do you, Annie Oakley? The FED is a huge success! It took them less than 100 years to loot us, ruin our monetary system and enslave us.
All these guys in top jobs and on corporate boards, they’re all in on it.
Huge corporations bought up all the independent media, used their advertising budgets to bully the media. We have FOREIGNERS who own our major media!
No warning about monopoly and anti-trust violations came from the media, did it?
I could go on and on.
But what we need are real solutions, not just whining or dire forecasts.
Haven’t seen any yet.
THANK YOU. THANK YOU. THANK YOU. Now, please, those of you who have not heretofore considered the facts contained in this article, will you stop blaming line workers and their ‘greedy’ ways for U.S. relative loss of competitiveness; or ascribing the fact that other countries enjoy product advantages over us on your bogus theory that their per unit cost is not as high due to lack of inflated labor costs, attributable, to the adverse impacts of employee unions?
Good point!
How much is that “talent” worth when there are no markets for their products or service?
These workers who are being displaced are also the consumers!
I don’t have an MBA, like “W”, but even this pea-brain can figure out that without a mutual pact, no company can succeed.
Great to see you writing Deb Cupples. Thanks for a review, it reminds me of the Robber Barrons of the turn of the 20th century.
Hope to see more in the New Year. Best Wishes.
In retrospect, the first round of massive bailouts were sold to America by methodically pumping up national hysteria over what would surely happen if the administration didn’t get carte blanc to do whatever the hell they wanted to do. Does this remind you of anything?
Of course it does.
The only difference to the sell was the object of our fear. Simply take the conjured image of a mushroom cloud rising over the ruins of an American city that was used to sell the invasion of Iraq, and replace it with the conjured image of total economic collapse.
The similarities don’t end there, either. Before the fact with both, we were given little in the way of specific information. Once the go-ahead was given, we were told next to nothing concerning strategy and tactics. And once again, afterward, nobody will tell us specifically where billions upon billions of dollars have gone. By design, there is no specific mechanism to find out.
Clues abound.
Which corporations raked in untold billions of taxpayer dollars in Iraq War contracts? Oddly, they were big supporters of the war, before the war began.
As someone above already asked, why do CEOs who presided over corporate disasters deserve multi-million dollar bonus packages? Because the corporations want to keep the talent? Exactly what talent would that be?
We’re apparently a nation of suckers.
SCREW STOCKHOLDERS! PROFITS
ARE LABOR UNCOMPENSATED!
It is time that the overlords and criminal corporatists be put asunder….simply for the ensured survival of the human race
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