Monday, May 01, 2006
CEO Compensation: A Shameful Conspiracy of Greed
The trial of former Enron executives Ken Lay and Jeffrey Skilling is the latest reminder that government oversight of unscrupulous executive behavior is unfortunately necessary. But only a relative handful of executives participate in illegal behavior. We should be more concerned with the legal pillaging of corporate coffers by CEOs and other corporate officers that occurs every day. Illegally cooking the corporate books is a rarity. Excessive executive compensation is anything but rare.
From the annual Forbes CEO compensation report we learn that Terry Semel of Yahoo landed the top spot in 2005, earning $230.6 million. John Hammergren of McKesson is Semel’s bookend in the top 100, with compensation of $13.4 million.
A simple list of very large numbers can numb the mind and obscure the enormity of the problem. To illustrate how grossly excessive CEO compensation is, I’m going to pick on Richard Fairbank, CEO of Capital One Financial, and number ten on the Forbes list. You’ve probably heard Capital One’s commercial slogan, “What’s in your wallet?” Well, I don’t know what’s in your wallet, but thanks to Forbes I do know what’s in Mr. Fairbank’s. And I’m sure you’ve never owned a wallet like his. His compensation in 2005 was $56.7 million and over the past five years it totaled $226.3 million.
If we assume that Fairbank paid his fair share of taxes, his disposable income last year was around $31.2 million, and over the past five years it totaled $124.5 million. Contrast that with a median U. S. household income of approximately $45,000. If the discrepancy doesn’t immediately offend you, perhaps a little real world perspective will.
Every American household has three primary expenses: food, shelter and transportation. At $45,000 per year the average American has income sufficient to purchase food, but must acquire shelter and transportation on credit. For most Americans it will take 30 years to purchase a home and five years to purchase a car.
Contrast that with the purchasing power of our representative CEO. How many homes or cars could Mr. Fairbank purchase with the $31.2 million he “earned” last year? If we assume the average home price is around $200 thousand, even if we reserve an excessive amount for food, Fairbank can purchase 155 average homes. If Fairbank prefers to spend his money on transportation, assuming the average automobile costs around $20,000, he could buy 1550 automobiles. That’s purchase. Free and clear. No mortgage and no car payments.
And that’s only one year of compensation. It’s even more shocking when you consider that the $124.5 million he accepted over the past five years translates into 620 homes or 6200 automobiles.
Such greed is not only shocking, it’s disgusting. Nobody needs that kind of wealth and certainly no public company can justify the transfer of corporate assets of this value to one individual. Every dollar that goes into a CEO’s wallet is money that could have gone to employees, shareholders or investment in the business.
How is this legal pillaging of corporate assets accomplished? It’s simple. The fox is guarding the henhouse. Boards of directors determine CEO compensation and boards are mostly composed of CEOs or former CEOs of other businesses. Every time a board votes to increase a CEO’s compensation, the compensation bar is raised for every CEO. Board members return to their day jobs as CEOs and wait for their own boards to recognize it’s time for another raise for their CEO. This self-serving escalation of executive compensation is nothing less than a shameful conspiracy of greed.
The recent Securities and Exchange Commission proposal to require additional disclosure of executive compensation in annual reports will do nothing to curb the pillaging. The only people who actually read the fine print in such documents are wealthy investors who are quite willing to go along with this conspiracy. I’m not sure what ought to be done about it, but it might be a good start to require that every CEO hold an annual company meeting of all employees. The only topic of discussion would be executive compensation. The CEO and each member of the board would stand up and state how many average homes or cars could be purchased with his or her compensation of the past year. Maybe a little bit of shame could go a long way toward curbing this shameful conspiracy of greed.