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October 26, 2009 |
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Last week, in Singapore, a government minister asked the citizens of his nation — Asia’s second-most unequal — to recognize that our globalized world economy essentially makes ever wider income gaps “inevitable.” Over in the UK, about the same time, a top Goldman Sachs executive opined that folks angry about banker windfalls simply “have to accept that inequality is a way of achieving greater opportunity and prosperity for all.” Inequality as inevitable. Inequality as necessary. These tired old excuses for our top-heavy status quo are coming across, more and more, as the last gasps of a dying mindset. People just aren’t buying the old trickle-down any more. But the windfalls are still flowing — and last week’s much-anticipated pay ruling from America's “pay czar” isn’t going to stop them. We have that story this week in Too Much. Also this week: a look at a cogent new paper that details just how little “opportunity and prosperity for all” inequality has brought us. |
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Some fine wine — that belongs to a top U.S. energy industry CEO — has apparently seen its time. Next month, in a California auction set to be simulcast in Hong Kong, Chesapeake Energy chief exec Aubrey McClendon will be selling off 5,500 of his most exquisite bottles. The expected auction take: $3 million, or almost $550 per cork. McClendon, who collected $114.3 million for his CEO labors last year, seems to be intent on simplifying his life. Last December he sold his prized map collection to Chesapeake — for $12.1 million. Why is he now selling off wines? A McClendon spokesperson last week had a logical explanation: “100,000 bottles is a bit too much for him.” You can’t take it with you. But billionaires can certainly try. Earlier this month, Wall Street investment banking legend Bruce Wasserstein, the 61-year-old chief exec at Lazard Ltd., died suddenly after an unexpected hospitalization. Wasserstein’s pay deal with Lazard automatically triggers — 30 days after death — the immediate vesting of all stock awards that have come his way since he took the Lazard reins four years ago. The current value of these awards: $188 million. Forbes last month estimated Wasserstein’s total net worth at $2.2 billion. Late on the day of his passing, according to news reports, some 50 Lazard partners held a “quiet memorial” for their legendary leader. After brief remarks and a moment of silence, a firm official ended the ceremony with a few final and fitting words: “Okay, let's get back to work.” Banker bonus pools aren’t just swelling in the United States. British analysts last week estimated that UK banks will shell out £6 billion in bonuses by year’s end, the equivalent of nearly $10 billion. UK banks, says Bank of England governor Mervyn King, have so far collected £1 trillion in taxpayer subsidies. Noted King last week: “To paraphrase a great wartime leader, never in the field of financial endeavor has so much money been owed by so few to so many.” Some Londoners don’t mind the new bonus binge. Peter Rollings, a luxury realtor, is calling the new bonus surge “great for us.” His firm earlier this fall asked $5.2 million for one listing — and drew so many offers, Rollings gushed last week, that the price ended up at “5 per cent higher than top of market in July 2007.” More encouraging news for the super rich: The going price for a luxury lifestyle, according to the latest Forbes Cost of Living Extremely Well Index, has stopped skyrocketing. The index rose just 1 percent for the year that ended last month, the smallest annual hike in the cost of luxury since Forbes first tabulated the high-end index 33 years ago. America’s deep pockets can multiply their savings, Forbes notes, by taking the time to do some global comparison shopping. Best price for a Hermes purse? That’s London, just $6,214. Want a Rolls-Royce Phantom? Hop over to Moscow. You can make one yours for a mere $380,000. A pair of Gucci loafers? Try Zürich. A steal at $707. |
Quote of the Week “Only those who are thoroughly immersed in the culture of greed would believe that their firms will attract good candidates only if they are offered several million dollars a year, and bonuses to boot; only those thoroughly immersed in the culture of greed would be attracted by such demeaning invitations.”
New Wisdom Derrick Jackson, Don’t Bail on Wall Street Outrage, Boston Globe, October 20, 2009. Why the White House rationale for not moving more forcefully against executive pay abuses doesn't cut it. Linda McQuaig, Ever upward trend for bankers' pay, Toronto Star, October 20, 2009. A columnist asks if there's “anyone — beyond members of the financial elite and their relatives — who still believes extraordinary pay levels at the top are deserved or necessary?” Joseph DiStefano, Executive compensation: Is it criminal? Philadelphia Inquirer, October 25, 2009. A fascinating intro to the newly published work of an innovative criminologist.
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The Pay Czar Ruling: The Hype, the Hoax Responsible people can do reckless things, most often when emotion clouds their better judgment — and no emotion probably clouds judgment any more regularly than greed. Wave enough dollars in our faces, and we’ll be tempted to do what we shouldn’t. Over recent years, to grab those waving dollars, America’s top execs have done plenty of what they shouldn’t. In the process, they crashed the economy. So how best to fix the economy — and prevent more crashing? Stands to reason we ought to curb the rewards that create all those incentives for reckless behavior, right? At first glance, the pay plan that White House “pay czar” Kenneth Feinberg unveiled last week seems to do that curbing. “U.S. to Order Steep Pay Cuts at Firms That Got Most Aid,” read one early headline on Feinberg’s plan. “U.S. takes aim at executive pay,” read another. Headlines like these undoubtedly brought cheer to White House PR types. The reality behind those headlines, unfortunately, makes for disappointing public policy. The new pay czar pay ruling does precious little to throttle the cascade of dollars pouring into America’s executive suites. One reason: The pay czar has jurisdiction over executive pay at just seven firms — Citigroup, Bank of America, AIG, General Motors, Chrysler, and automaker financing arms GMAC and Chrysler Financial. Wall Street’s top players, Goldman Sachs and JPMorgan Chase, don’t fall under the pay czar’s purview. Neither do any of the rest of the companies, outside the pay czar’s less-than-magnificent seven, that make up the Fortune 500. But the problem with the new pay czar ruling goes well beyond its limited scope. The numbers that kept turning up last week in articles about the ruling — an average 90 percent reduction in cash compensation, an average 50 percent drop in total pay — turn out to conceal more than they reveal. Typical executives at the seven bailed-out firms under the pay czar’s thumb will see cutbacks nowhere near that severe, mainly because special cases have “skewed” the pay cut averages. The most glaring of these special cases: Citigroup last year awarded trader Andrew Hall $98 million in bonus. He was due to receive this year another $100 million. But Citi has sold the subsidiary where Hall does his wheeling and dealing. He’ll still get his $100 million, but Citi’s pay outlays for 2009 now show up as $98 million less than last year. For most top execs, the pay czar’s plan will shift pay more than cut it. Execs at the seven firms will have to take less pay in cash and more in stock. At Citigroup last week, top officials assured worried execs and traders that “the net impact of Mr. Feinberg's rulings will be minimal because the cut salary will be shifted from cash to longer-term stock grants.” One Citi executive, in comments to the Wall Street Journal, would be more blunt. He called claims about a 50 percent cut in total executive pay “a bit of a hoax.” The fine print in the pay czar’s new plan helps explain the absence of pay panic at Citi. The bank’s three top earners, under Feinberg’s ruling, will this year each collect $475,000 in salary, at least $5.6 million in company stock that they can start cashing out the year after next, and another $3 million in “long-term restricted stock” — a $9 million total for each of the three. The bottom line: Despite the pay czar's ruling, big-time executives and bankers in the United States will still have ample incentive to pump up their enterprise earnings by any means necessary. They’ll continue to “perform” by squeezing consumers and plotting merger deals that trigger super paydays for executives and pink slips for workers. Indeed, last week’s media scrum around pay czar Feinberg totally ignored the latest of these pink-slip merger blitzes: Sun Microsystems will shortly be laying off 3,000 employees, 10 percent of its workforce, to get set for its impending takeover by business software giant Oracle. Oracle's top “performer,” CEO Larry Ellison, just happens to currently rank third on the Forbes list of America’s 400 richest, with a $27 billion fortune. The pay czar’s new pay plan does, to be sure, sport some welcome provisions. Executives, for instance, will have to gain pay czar approval before they can get over $25,000 in perks like country club memberships and free personal rides on corporate jets. But the pay czar’s overall plan, as New York Times analyst Louise Strong notes, “will not bring an end to big paydays.” Nor will the pay guidelines that emerged last week from the Federal Reserve, to cover senior executives, traders, and loan officers at the nation’s top financial institutions. These new Fed principles aim to discourage risky behavior. But they “do not,” as one analyst relates, “impose caps on pay or prohibit multimillion dollar pay packages.” The movers and shakers of the U.S. economy, in short, will still be seeing lavish rewards waving before their faces. Beware the consequences. “Unless we change the incentives that drive Wall Street to take huge risks,” as venture capitalist and management consultant Peter Cohan put it last week, “we'll be back to those days in the blink of an eye.” |
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What Has Made Us So Unequal? John Schmitt, Inequality as Policy: The United States Since 1979. Center for Economic and Policy Research, Washington, D.C., October 2009. 8 pp. A quarter-century ago, midway through the 1980s, some perceptive analysts of the American scene began pointing out a most alarming development. The middle class — America’s pride and joy — was shrinking. The nation, after decades of growing equality, was suddenly and rapidly becoming significantly more unequal. Mainstream economists scoffed, initially, at these observations. But the data kept rolling in, year after year. Income and wealth were unquestionably concentrating at America’s economic summit. The question soon became, why? Mainstream economists had some answers. Technology did it. Too many workers, they contended, didn’t have the skills they needed to do well in the emerging “Information Age.” Globalization did it. In the new global economy, poorly educated Americans were losing the competitive race against less “expensive” workers elsewhere. These two explanations for inequality, notes Center for Economic and Policy Research economist John Schmitt in this valuable new monograph, continue to define — and distort — “polite political discourse in the United States.” Over the years, a number of fine books and papers have exposed the inadequacies of this “polite political discourse.” But few works have done this exposing with either the clarity — or the brevity — that Schmitt offers in Inequality as Policy: The United States Since 1979. His most basic point: New technology and globalization don’t “make” societies more unequal. They present societies with choices. The choices that societies go on to make reflect each society’s internal power dynamics. In the United States, from the 1930s into the 1970s, these dynamics regularly worked to the advantage of working families. Average Americans — organized in a series of social movements — could hold their own and then some. Throughout these years, America's social movements won one landmark battle after another. The labor movement built a mass middle class. The civil rights and women's movements prohibited discrimination in employment, housing, and credit. The environmental movement kept our air and water safer. Against these movements, Schmitt notes, the nation’s economic elite “generally fought a losing battle, able to shape and contain the specific policies that grew out of the various social movements, but ultimately unable to prevent the enactment and enforcement of a host of policies that worked strongly against employers’ immediate economic interests.” That all began to change in the 1970s when “the economic disruption” rooted in two major oil crises “gave capital and employers a political opening.” The U.S. economy, elites argued, needed to become more “efficient.” If we tamed unions, deregulated corporations, privatized public services, and embraced “free trade,” they promised, the nation — and everyone in it — would prosper. All these policies to increase efficiency, Schmitt relates, had a “common thread.” They all “worked to lower the bargaining power of workers relative to their employers.“ They all, together, have left the United States fundamentally more unequal and the lives of average Americans enormously less secure. “In my experience, European workers, even European economists familiar with the U.S. economic system, have trouble appreciating just how unprotected U.S. workers are,” notes Schmitt. “Even relatively well-off U.S. professionals work in a legal and social environment that almost no worker in western Europe would have to tolerate.” Changing that reality, forging a more equal United States, will take a much more direct challenge to our nation’s “polite political discourse” than we’ve so far seen. This concise and clear new work from John Schmitt might just help move that challenge along. |
Stat of the Week In 2008, researcher Phil Mattera reveals in a new Good Jobs First report, 14 top execs at firms that get over 80 percent of their revenue from federal tax dollars walked off with more than $1 million in pay — some much more. The top exec at Johnson Controls pocketed $17.4 million last year. The take-home for his counterpart at Raytheon Technical: $15.1 million.
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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 Subscribe to Too Much. |
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A blue-ribbon panel in Australia has just stretched the global mainstream on CEO pay reform — but not nearly far enough. The Aussie “Productivity Commission” 
