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 salaries. 

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 surprises?

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 shareholders. 

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 pay outs. 

With more disclosure of management compensation, shareholders can decide more clearly whether management is working for the shareholder, or for themselves. 

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