Friday, April 27, 2007

America's New Royalty

This is the time of year when companies reveal to the public the salaries of their top executives. Have you noticed the amazing sums that the CEO's and other senior executives are paid these days? It is truly extraordinary. They now live the kind of fantastic surrealistic lifestyles that used to be reserved for royalty.

Back in the mid-1700's, Americans fought a little skirmish against the British called the War of Independence. Perhaps you've heard of it. It was in all the papers. It culminated in the signing of the Declaration of Independence and the Constitution of the United States of America to establish this country as a sovereign nation separate from Britain.

Why did we do this? Well, it wasn't just that Americans didn't like king George III - the king at the time, but rather that they didn't like the very idea of royalty. It was because they rejected the core philosophy of an elitist group of people that governed them and was held superior over them. Taxation without representation. The royals were lining their own pockets at the commoner's expense. The monarchy and all their royal elites were wealthy beyond measure while they taxed Americans into poverty.

So the people rose up and fought against that economic tyranny. They pushed off British rule and established their own government. A government by the people and for the people, as the paper says.

So isn't it ironic that now, after 230 years, we find ourselves in a somewhat similar position again? We have another elite privileged group - but this time it's the corporate CEO's and other C-level executives. They are in some ways very much like a modern version of an extended royal family for America.

They are paid literally millions of dollars per year, and then are also given houses, palaces really, to live in. Some are provided by the company as a perk, some are purchased out of their staggering salaries. Bill Gate's house is a custom-made high-tech palace of 66,000 feet. Larry Ellison's Japanese-style palace was listed for $25,000,000, but he has purchased 5 adjacent lots in Malibu beach for $65,000,000 to build his new castle on the sea. This was the largest residential real estate transaction in US history - and it didn't even include his house yet. Donald Trump has the most expensive house, listed at 125 million dollars in Florida. They own and drive the finest cars, and are also given limos to ride in, and even corporate jets to use for personal use - in many cases to commute to work each week. Larry, in fact, has his own Russian MiG fighter jet just as a toy, and both he and Bill Gates have ocean racing yachts worth tens of millions of dollars. Gate's old partner in Microsoft, Paul Allen, has the most expensive super-yacht in the world, called The Octopus, worth more than 100 million dollars. These corporate royals lead lives of unbelievable luxury, with people to see to their every whim. They are very much like the royal families of old, in this sense.

And they do conduct wars like the old royals did. But the wars they conduct are all financial. They do hostile takeovers of other companies and the raid the treasure chests of other kings of industry, and their foot soldiers are the legions of tens of thousands of employees that they send out to generate their wealth and expand their empires - just like the old days. The game is the same, just the details have changed a bit.

Queen Elizabeth II of England is paid the equivalent of 11 million dollars per year. That may seem like a lot of money, but keep in mind that that is about what the AVERAGE CEO in America is paid these days. And the perks are pretty similar as well. Some CEOs are compensated far beyond that. Larry Ellison of Oracle, for example, only has a salary of a few paltry million per year, however, his bonus package paid him 703 million in the last year I checked.

And these salaries are paid despite the uneven or even poor performance of the companies that they run, and despite the hardships these leaders may impose upon their subjects. The year that Ellison was paid 703 million, the company was laying off literally thousands of workers.

At Northwest Airlines the executives have just maneuvered the unions into taking a $195 million dollar cut in pay to help the company get out of chapter 11 bankruptcy. In exchange for the concession, they are giving the employees a $185 million equity charge against the company in case of complete bankruptcy. Of course when a company goes completely bankrupt, they are insolvent, and the creditors split up the assets and get just a few cents on the dollar for their equity invested. So I guess we don't know how much that equity would be worth in this case.
It's an interesting concession - in the case of a bankruptcy, the company's assets would be sold at a fraction of the original value, typically. And then the creditors split these proceeds. Well, if they go bankrupt, then the company execs give up the whole company anyway - regardless of who is standing in line to be paid. So this concession actually costs them nothing. And in fact, by promissing the employees a share of the proceeds of such a sale, what they are really doing is devaluing the interest that all their other existing creditors have in the company. In other words - they just bought their union concession with someone else's money and without their permission.

And for the excellent job they've done in leading the company (into bankruptcy), and then cutting the pay of all it's workers, The executives at Northwest are well-paid. CEO Steenland at Northwest has a total compensation package of $1.46 million per year. That's roughly 7 times as much as the job of President of the United States pays. This is what they pay this CEO to run a single company. And it's a FAILING company at that.

Is it that the job of CEO is so complicated that only a genius can do it? Is there some aspect to the job such that only some super-human being can hope to perform the daily tasks? Why do stockholders feel compelled to pay these king's ransom-like salaries? Are there no cheaper alternatives? Is there no one qualified to do the job willing to take less than millions upon millions of dollars per year?

Where is the effect of competition that the capitalist system is so famous for? These are not capitalist investors for the most part - these are just employees. They go from company to company doing the job of CEO, CFO, COO, etc. Why is there no competition for the position that would lead to a lower cost? Is there a shortage of CEO-level people in this country? Capitalism is normally based on supply and demand.

The capitalist system was designed to compensate the innovative risk-taker entrepreneurs who invest CAPITAL (hence the name) into a company and are therefore entitled to the rewards if they absorb the risks and run it well. But usually, these CEO's are not the original capital investors that founded the companies anymore. More often, they are simply hired professional managers. The capitalists are those that invested in the stock market.

So are professional managers entitled to the same returns and perks as the capital investors in this system now? Are they truly entitled to make more money than world-class political leaders who run entire countries? Is running Germany, or England, or Australia less important or less complicated? Is running the United States less demanding? Less important? And are these CEOs entitled to these amazing salaries and perks even as their companies spiral down into ruin and their employees are forced into the street, or are forced to accept pay cuts? Even in total failure, to get them out of their positions, the shareholders must again pay millions and millions in exit clause payouts of staggering proportions.

Is this fair? Is this what we had in mind when our forefathers threw off the yoke of servitude to royal elitists?

I don't think so.

I like a capitalist system in general. I like the concept that if someone invests the money into a company then they should get the reward. They assume the risks, and they may win or lose depending upon how clever, innovative, and imaginative they are in producing products and services that are needed. That system rewards those who do things that benefit the marketplace and the society, because they provide better quality products and services. It sure beats a communist system, where everything is controlled by bureaucrats who have no incentive to excel.

But it seems that this situation of having a hired executive class of employees that are paid sums of royal weight regardless of their performance, ingenuity, innovation, or problem solving skills is counter to the actual goals of capitalism itself. This is a system of fat cats rewarding their buddies. This is elitism. This is the old royal club in a new form. This is essentially the core principles of what we fought against and rejected 230 years ago.

I think maybe we need a new system. What do you think?


At 5/13/2007 10:53 PM, Anonymous Igor said...

... I like the concept that if someone invests the money into a company then they should get the reward ...


1) I buy IBM stock
2) the stock goes up
3) I sell the stock for profit
4) I cash the profit to buy my new house.

Is it according to what you mean?

At 5/15/2007 10:00 PM, Blogger Val Serrie said...

Well, I was really more concerned with the owner of a company who runs it himself. He invests his capital and lives with the risk, for good or bad. If he mjanages the company well, he might succeed. If he doesn't, he might fail and lose everything.
To compensate him for his risk, his faith and courage, and his innovation, his ingenuity, etc. - this system might give him a very wealthy lifestyle indeed.

I suppose, on a much smaller scale, a smaller stockholder also invests, takes a risk, and lives with the outcome for good or bad. Except he is not running the company. He is not contributing more than just capital into the company. Still, his gains or losses are comensurate with his investment.


At 5/16/2007 7:50 PM, Anonymous igor said...

Obviously, the social value of investing in business is high - so should be the rewards, I would never argue that!

But in the case I described: if I buy IBM stock - which is available on NYSE - I do NOT contribute ANYTHING to the IBM company. It's not the IBM who gets my "investment", my money goes to the previous owner of the stock, do you understand that?

Then, could you please explain what was my reward for?


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