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
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| 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).
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| 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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