This is Part II of the Corporate Observer’s Special Reports on Executive Compensation (Part I can be found here). Please enjoy this second installment, on the gradual but substantial shift of wealth towards the executive class.
Our interest in executive compensation grows out of being hit in the face with the startling data illustrating a massive redistribution of wealth over the past decade away from the middle class and into the pockets of senior executives. Noted executive pay scholar Albert Meyer had this to say in the WSJ:
Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs… There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.
Such a profound change takes more than a few executives getting a raise here and there. It takes the efforts of an army. First, a cottage industry of consultants devoted to devising new and innovative ways to compensate CEOs; second, a willing and too often a greedy executive class; and third, the almost blind consent of the Board of Directors and those “specialists” on the compensation committees. Where is the army on the other side? Who devises plans so shareholders (like pension funds and college accounts representing millions of average folks) can benefit from increases in corporate value?
Stock options have become an increasingly important component of executive compensation. Seems like a good idea on its face. Executives receive more value for increasing the stock price; it would seem to align the priorities of stockholders and execs. A higher stock price benefits all, right?
Sadly, in practice corporate gaming and greed take over. Too many managers have been caught manipulating the short term earnings to get a bump in the stock price. Or at a higher level, they were managing for the market – being slaves to analysts and making the quarterly numbers. Often that meant reporting soft earnings or camouflaging toxic liabilities for the next guy or the guy after that to swallow. “Call in the consultants” stock options alone won’t work.
Next, restrictive stock grants became a popular tool. “Mr. CEO, we want you to stay and make us a stronger company; long term value is what we are all about. Here is a million shares of stock, but you’re going to have to wait 5 years to “begin” cashing in.” This is better—it hedges against some of the short term greed—but still far from perfect. CEOs have been known to use those restrictive shares as a hedge or collateral for larger cash positions. In fact, senior management can promote corporate stock repurchase programs that, given the rules of supply and demand, will increase the price of the stock and thereby increase the value of their restrictive stock.
Indeed dividends, a shareholder’s reliable old friend, provide another arrow in the executive’s quiver of pay options; this despite being issued more grudgingly to shareholders over the past quarter century. Yep. When the company issues a dividend those top corporate executives are paid just like everyone else. But unlike most of us they have amassed millions of shares. A 5% dividend becomes a huge chunk of change and is often heaped on top of a seven- or eight-figure salary, stock options, etc.
Determining the right mix of executive compensation is a tough balance to be sure and it is not black and white. But the numbers don’t lie. The pendulum has swung over to the executives and remains there. Shareholders must devise ways to create some momentum in the other direction.