How many golden parachute dollars will go to the two top executives of Nabors Industries, the world’s largest onshore oil driller, if some energy giant buys their company out? Let’s put it this way: The tax bill alone on the golden parachutes that Nabors CEO Eugene Isenberg and President Anthony Petrello now have guaranteed will total $160 million.

But here’s the real jaw-dropper: The Nabors duo won’t have to pay a penny of that tax out of their own pockets. We explain why in this week’s Too Much.

Also this week: How Detroit’s Big Three CEOs ended up so clueless.

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Just a matter of months ago, the Connecticut town of Greenwich, a burb of 62,000 souls 30 miles from Manhattan, boasted the world’s most intense concentration of hedge funds and a tidy local department store that sold Ralph Lauren sweaters at $1,000 a pop. Now hedge funds worldwide are reeling, and the good burghers of Greenwich are starting to get a little snippy. At Miller Motorcars, the place to go for a $212,000 Bentley Continental or a $263,500 Ferrari coupe, owner Richard Koppelman didn’t want to “discuss sales” last month with a reporter from Reuters. The car dealer's take on the growing Greenwich squeeze: “We're in a cyclical business. It's obviously down right now.” Also down: sales at Betteridge Jewelers, a local retailer used to having customers who “spend $10,000 to $50,000 at a time.” The store, says owner Terry Betteridge, has experienced “a precipitous fall in business” since Wall Street's Lehman Brothers tanked in September . . .

Merchants who sell to hedge fund managers may be getting antsy. But investors in hedge funds are getting downright furious. Last month, one of the nation’s most respected hedge fund investors, Sandra Manzke, circulated an e-mail manifesto that blasted hedge fund managers for pocketing “millions of dollars in incentive fees” while “mounting losses” leave “investors with nothing.” Hedge funds, on average, have dropped nearly 20 percent in value so far this year, and the wealthy individuals and pension funds that invest in them have been rushing to yank their assets. But hedge fund managers, charges Manzke, have been locking up those assets and, to add insult to injury, charging investors 2 percent management fees on the investor cash they refuse to redeem. Last year, 25 hedge fund managers on the annual Alpha magazine hedge fund earnings list made at least $360 million . . .

Hedge fund managers these days actually have a great deal more than angry investors to worry about. Big-time hedge fund kingpins simply cannot find buyers for the mansions that no longer suit their fancy. This past April, for instance, hedge fund superstar John Paulson — who cleared $3.7 billion in 2007 — put his seven-bedroom “cottage” in Long Island’s Southampton up for sale at $19.5 million. Paulson has since, reports Barron’s, had to slash his asking price down to $13.9 million. Still, things could be worse. Foreclosures have yet to make any appreciable impact on luxury real estate pricing. Of the 886,920 foreclosures in the United States recorded so far this year through September, says RealtyTrac, only 11 have involved properties worth $5 million or more . . .

The burglars are coming. Or so the world’s rich fear. The global economic meltdown has wealthy homeowners in the early stages of a security frenzy. In London, deep-pockets are backing up their windows with steel blinds that “flip” into ceiling gaps during day-time hours. The cost: $4,600 a window, or just over $150,000 for an entire house. Home safes are flying off the sales floors, too. One British safe company, with a $15,000 model that’s insured for up to $1.5 million in valuables, has seen sales triple over the past year . . .

Britain’s rich may need protecting from more than burglars. The tax collectors are coming, too. Last week, in a abrupt change of policy, the UK Labor Party government announced plans to raise the top tax rate on income over £150,000, about $230,000, from 40 to 45 percent. The top tax rate in Britain has been sitting at that 40 percent rate since 1988. Labor took governing power in 1997, but has refused, until now, to consider moving the rate up. Britain’s top trade union leader, Brendan Barber, is applauding the Labor Party’s tax-the-rich about-face. Chancellor Alistair Darling's rate hike announcement, says Barber, “has changed the political debate by breaking the taboo that the super-rich should never pay more tax.” Until 1979, the year Britain’s Conservative Party swept into power, Britain’s rich paid taxes at a top rate of 83 percent.

Quote of the Week

“Nearly four weeks after nine major Wall Street banks received angry letters from House Oversight Committee Chairman Henry Waxman — strongly suggesting that it would be obscene to give themselves multimillion-dollar bonuses after putting our entire economy at risk and getting a $700 billion bailout — only one of them has announced any significant change in their payout plans. That one, of course, was Goldman Sachs, former home of Treasury Secretary Henry Paulson. And Goldman is still on track to pay bonuses averaging $4.5 million to its 400-plus partners.”
Dan Gerstein, Dumb And Dumber — And Dumbest, Forbes, November 26, 2008

New Wisdom
on Wealth

Christopher Cook and Eric Quezada, San Francisco needs a New Deal, Bay Guardian, November 25, 2008. Instead of slashing services, these veteran activists argue, San Francisco city officials ought to take inspiration from FDR, who set a 90 percent top tax rate on the nation's rich.

Mark Naison, Any Long-Term Solution to the Economic Crisis Requires Raising Wages and Redistributing Income, History News Network, November 26, 2008. The federal government, says this Fordham historian, ought to deny federal subsidies to any company whose top execs make over “10 times the salary of that company's lowest-paid worker.”

Detroit's 'Underpaid' Top Auto Execs

All eyes this week will be on the return of the auto industry’s Big Three to Capitol Hill. No one knows for sure what will happen with the industry’s bailout request. But one thing seems certain: The Big Three’s CEOs couldn’t possibly give another performance as dreadfully disastrous as their appearance before Congress last month.

The auto chiefs started that fiasco by flying down to Washington on private jets. Then, in their testimony, they came across as arrogantly greedy when asked if, in return for a bailout, they would consider dropping their salaries to $1.

“I think I’m OK where I am,” pronounced Ford CEO Alan Mulally, who took home $21.67 million last year.

Detroit’s Big Three all, of course, maintain small armies of PR consultants, and these PR professionals have no doubt been advising their chief executive clients that insisting on CEO pay business-as-usual may not be the best way to win friends and influence people. So how could Detroit’s top execs have behaved, in public, so cluelessly?

The simple answer: Detroit’s top execs simply don’t understand the fuss about their compensation. Deep in their hearts, they consider themselves underpaid.

Ford's Mulally and his automaker CEO peers actually do have some reason to feel that way. Other executives at U.S. enterprises just as troubled as theirs make far more money than they do. Last year, for instance, Merrill Lynch CEO John Thain pocketed $83.1 million, and the melting Merrill certainly had no better of a year than GM or Ford.

In 2007 overall, CEOs at America's 10 top financial services firms collected a combined $320 million, in a year that the companies they led “reported mortgage-related losses that totaled $55 billion.”

On the other hand, by any rational yardstick, U.S. automaker top execs have absolutely no reason whatsoever to feel put upon at pay time. They take home far more in rewards than auto executives outside the United States who compete in the same global marketplace.

Just how much more first became vividly evident ten years ago when Chrysler merged into Daimler-Benz, the world-class German car company.

Daimler-Benz, at the time, outpaced Chrysler on every standard corporate performance measure from revenue to profit. But executives at Chrysler, remarkably, were taking home considerably bigger paychecks.

In 1997, Daimler’s top gun, Juergen Schrempp, earned an estimated $2.5 million. Chrysler’s Robert Eaton that same year took home $16 million, over six times more. Chrysler’s top five execs, together, collected $50 million in 1997 compensation. Daimler’s top ten execs pulled in only $11 million.

Pay differences between U.S. and Japanese auto executives run even wider.

In the fiscal year that ended in March 2007, Toyota’s top 32 executives — a group that included CEO Katsuaki Watanabe — together pulled in $7.8 million in bonuses on top of salaries of $12.1 million. For the comparable period, one single GM exec, CEO Rick Wagoner, raked in $10.2 million.

Ironically, Ford’s current CEO, Alan Mulally, came into the auto industry from Boeing, a company with a relatively egalitarian — by U.S. standards — pay tradition. In Boeing’s golden years, observes author David Kusnet, whose new book explores the aircraft giant’s history, a Boeing CEO would never have considered flying into Washington in a luxurious private jet.

“Even though Boeing makes jets,” Kusnet noted last month after the Big Three’s initial bailout request, “flying around in corporate ones would have been as alien to them as wearing Gucci loafers.”

Back in 1969, Kusnet relates, Boeing CEO T. A. Wilson took a regular commercial flight to Washington to testify before a congressional committee.

“Instead of a limousine,” he adds, “Wilson was met at the airport by Geoff Stamper, the son of Boeing's second-in-command, Mal Stamper. Geoff Stamper was a student at American University, and he drove Wilson into town in a rusted jalopy.”

America’s automakers, lawmakers are now declaring, are going to have to transform their industry if they want to get their hands on taxpayer dollars. But America needs a transformation that goes far beyond how the auto industry makes cars. We need a transformation of our entire corporate pay culture.

Grossed Out in America's Executive Suites

The RiskMetrics Group, Gilding Golden Parachutes: The Impact of Excise Tax Gross-Up Provisions. Governance White Papers series, November 24, 2008.

Bailouts and buyouts have dominated our headlines for months now, as America’s financial and industrial giants scramble to avoid sinking into meltdown mode. Big companies, in the process, have become even bigger, gobbling up one former competitor after another.

But top executives at the formers typically don’t at all mind getting gobbled. For good reason. These execs almost always have clauses in their personal employment contracts that guarantee them a hefty bundle of severance cash — a “golden parachute” — should their company undergo a “change in control.”

Last week brought news of still another round of these “golden parachutes,” this time at Wachovia, the troubled national banking power about to be swallowed up by Wells Fargo. If this merger finalizes, ten top Wachovia executives will be eligible to walk off with $98 million in severance.

Getaway windfalls like these have become standard operating procedure in America’s executive suites. In fact, note researchers from RiskMetrics, a firm that advises institutional shareholders, the top five execs at the nation’s 500 top companies are currently “strapped in” to golden parachutes that entitle them, on average, to over $50 million in severance per company.

The really “gross” part: Most of these executives, explains this new RiskMetrics report, will not have to pay a penny of income tax on their severance windfalls. Their companies will pay the taxes for them.

These taxes can mount up quickly. Back in 1984, to discourage the then-emerging golden parachute phenomenon, Congress stuck executives with a 20 percent tax penalty on any “change of control” termination pay that exceeded over three times an executive’s average pay for the previous five years.

Almost ever since, corporations that gobble up other corporations have footed the bill for these tax penalties. These outlays, naturally, count as income to executives, and the executives also owe tax on this income. Corporate America routinely pays these taxes, too.

All these tax reimbursements, “gross-ups” as they’re known in boardroom land, can end up totaling tens, even hundreds, of millions of dollars. In 2006, for instance, Capital One Financial shelled out an incredible $107.6 million to cover the tax bill due on the golden parachute that went to a single executive, former North Fork Bancorp CEO John Kanas.

Overall, says RiskMetrics, the average top five executives at U.S. corporations that “gross up” will pocket, as a group, $60.7 million in severance if their company gets gobbled — and another $11.7 million in tax reimbursements.

The bailout legislation that Congress passed earlier this fall barely puts a dent into any of this. Under the bailout, execs whose companies get gobbled can still collect up to three times their recent average annual pay in severance — and, if their company “grosses up,” not have to worry about paying taxes on any of it.

Stat of the Week

How could the United States undo the nation's rise in income inequality since the late 1970s? Larry Summers, the newly named Obama administration National Economic Council director, has worked out the math. If every top 1 percent household — current average income: $1.7 million — wrote a check for $800,000, and if all these checks were pooled together, then $10,000 could be sent to every household in America making less than $120,000 — and Americans would be as economically equal, by income, as they were three decades ago.

Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org.