June 23, 2004
After observing a plunge in the value of Putnam on his
watch, the former head receives a $78 million pension as he gets pushed out
the door. Most of the dispute
between Grasso and Spitzer is on the size of the pension Grasso received.
A year before almost everyone involved in the program left the
company, Delta created a $25 million pension program that will prevail even
if the company does not.
At the same time, households with traditional pensions
are plunging, cash contributions to non-defined programs are being slashed
and many near retirees are being pushed into less lucrative and less secure
cash based retirement programs. Those
Delta pilots will not have secure pensions if the company folds (the
government pension insurance does not fully protect such high income
recipients as the Delta pilots).
When are the workers and shareholders going to get mad
and not take it anymore?
I thought that when we learned about the rapid climb in
salaries by chief company managers in the past two decades, there would be
some moderation. Indeed, some
compensation experts opined that the climb from about 100 times the
compensation of the average employee in 1980 to more than 400 times that
employee in 2000 was solely the result of rising stock values.
There have been very few rising stock values since 2000
(the average fund shows very small single digit gains over that entire
period) and employee compensation has continued to slow to less than 4
percent annual gains in the past few years.
By contrast, senior management has enjoyed gains averaging more than
16 percent per year. And that
normally does not include those pensions, which are growing even faster than
Do not get me wrong.
I do not begrudge people who create value and develop new
enterprises. Bill Gates
deserves the hundreds of billions that would not exist without his efforts.
People who create value ought to get their fair share of what they
helped to create. (Almost no
one creates value alone. Even
those ball players who believe no one would show up without the stars must
realize that they would not have a job if there was no league.)
What troubles me is the raid upon shareholders’ value
made by managers of existing companies.
The argument supposedly is that pay must be competitive. The board’s compensation committee usually hires a
compensation consultant to survey the pay of
managers in “equivalent” firms.
Then the Lake Woebegone effect takes hold. No company’s officers are below average, or they would not
continue in their jobs.
But that must be true of all company officers in all
companies. Nevertheless, those
continuing in their jobs are paid at least the average of all company
officers in equivalent firms. This
process, alone, guarantees faster than average growth of wages over time.
If the problem ended at base wages, there would be
growing disparity with regular workers over time, but it would not lead to
such dramatic payouts as we currently see.
In addition to base salaries, most senior management
receive bonuses for meeting corporate goals.
Too often, the managing consultant knows the magnitude of additional
bonus pay but not the degree of difficulty in making that bonus,
Was the bar set so almost everyone gets nearly full bonuses almost
all the time? Or is the bonus
truly something that only occurs when the company delivers positive
Then there is long term compensation.
This supposedly is tied to the increased shareholder value provided
by management. It might be paid
in restricted stock, stock options, or cash settlements related to
enterprise performance. In the
past decade, stock options as a percentage of existing outstanding stock has
grown dramatically. Thus,
management’s share of the company is growing at the expense of the
Under no circumstances, other than the development of
new businesses within the existing enterprise or the saving of a sinking
enterprise, could I see justification for management increasing its share of
enterprise value through long term compensation.
In addition to the Institutional Shareholder Services
group worrying about independence of boards and compensation committees, it
should begin requiring a graphic disclosure for up to ten years of the
percentage of total corporate compensation that is being paid to senior
management. Any pension
provisions should be evaluated by the current value of their annual expected
With more disclosure of management compensation, shareholders can decide more clearly whether management is working for the shareholder, or for themselves.