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EXECUTIVE PAY-WATCH

This page contains news articles that illustrate the new "Industry Standard": 'Corporate Greed'

Executives Eliminate Worker Pensions, Get $350 Million

Some executives have received huge compensation packages even as their firms eliminated worker pensions. Ten large U.S. companies paid senior executives a total of $350 million in the five years leading up to terminating traditional pension plans for employees, a new Government Accountability Office analysis found.

Each company in the study, which does not name the 10 publicly traded companies that filed for bankruptcy in the last decade, had underfunded its pension plan by at least $100 million and had over 5,000 workers whose pensions would be affected. The Pension Benefit Guaranty Corporation, the government agency that insures private sector pensions, then became responsible for the shortfall. Some employees who were promised retirement benefits above the PBGC’s limits, such as airline pilots, say their pensions were reduced. The PBGC insures pensions up to certain limits, which is $54,000 for a person who retires at age 65 in 2010. The pension insurer had a deficit of $22 billion in fiscal year 2009.

Executives at some companies received salaries in excess of $10 million dollars in the years leading up to bankruptcy. In addition, many of the executives also received millions of dollars in stock awards, income tax reimbursements, retention bonuses, severance packages, and executive-only retirement plans. One airline in the study missed nearly $1 billion in required pension contributions, but managed to pay its top three executives over $50 million in salary, bonuses, stock, and supplemental retirement benefits. And an insurance company failed to make $29.2 million in pension contributions, but paid five executives $69.7 million in salary and cash bonuses during the same time period. Additional corporate perks included apartments, personal trips on company airplanes and helicopters, club memberships, legal fee reimbursement, and automobiles.

Representative George Miller, the California Democrat who requested the GAO investigation, says he is considering legislation that will freeze executive compensation if the company’s rank-and-file pension plan becomes significantly underfunded. “It is fundamentally wrong that executives were able to line their pockets with millions of dollars from bonuses, stock options, and free joyrides on corporate jets, while watching their workers’ retirement security slip into peril,” says Miller. “Executive compensation and golden parachutes should be aligned to the fate of workers’ retirement plan. This will create an incentive for executives to fix workers’ pension plans before they go broke.”

The GAO did not uncover any illegal activity among the 40 executives under review.

Tell us, should executives get bonuses in years when employee pensions aren’t fully funded?

 

MORE BONUSES... YOU'RE FRICKIN'KIDDING ME, RIGHT?

AIG Seeks Clearance For More Bonuses - $2.4 Million in Executive Payments Due Next Week

Washington Post Staff Writers
Friday, July 10, 2009

American International Group is preparing to pay millions of dollars more in bonuses to several dozen top corporate executives after an earlier round of payments four months ago set off a national furor.

The troubled insurance giant has been pressing the federal government to bless the payments in hopes of shielding itself from renewed public outrage.

The request puts the administration's new compensation czar on the spot by seeking his opinion about bonuses that were promised long before he took his post.

AIG doesn't actually need the permission of Kenneth R. Feinberg, who President Obama appointed last month to oversee the compensation of top executives at seven firms that have received large federal bailouts. But officials at AIG, whose federal rescue package stands at $180 billion, have been reluctant to move forward without political cover from the government.

"Anytime we write a check to anybody" it is highly scrutinized, said an AIG official, who declined to speak on the record because the negotiations with Feinberg are ongoing. "We would want to feel comfortable that the government is comfortable with what we are doing."

The payments coming due next week include $2.4 million in bonuses for about 40 high-ranking executives at AIG, according to administration documents from earlier this year. Though the actual sum may have changed since then, the payments are much smaller than those that caused the upheaval in March.

Still, officials at AIG and within the government see them as a land mine.

Feinberg, who previously managed the government's efforts to compensate the families of those killed in the Sept. 11 attacks, has the power to determine salaries, bonuses and retirement packages for all executive officers and the 100 most highly paid employees at firms such as Citigroup, Bank of America, General Motors and AIG.

AIG's upcoming payments do not fall under Feinberg's official purview, as they involve bonuses delayed from 2008. Feinberg is charged with shaping only current and future compensation. As a result, some Treasury Department officials believe they are under no obligation to offer an advisory opinion in this case, which could leave AIG officials to decide the matter on their own, according to a person familiar with the talks.

In November, AIG's top seven executives, including Chairman Edward M. Liddy, agreed to forgo their bonuses through 2009. Then, in March, facing pressure from Treasury Secretary Timothy F. Geithner and other government officials, the company restructured its corporate bonus plans for the remaining top 50 executives. As part of this agreement, the senior executives were to receive half their 2008 bonuses -- which totaled $9.6 million -- in the spring, with another quarter disbursed on July 15 and the rest on Sept. 15. The last two payments would depend on whether the company made progress in revamping its business and paying back bailout money to taxpayers.

The exact range of the payments due this month to AIG executives was unclear in company disclosure filings.

AIG's proxy statement filed last month explains why AIG initially instituted the retention payments. The company stated that after the federal bailout began in September, "we needed to confront the fact that many of our employees, perhaps the majority, knew that their long-term future with us was limited, and our competitors knew that our key producers could perhaps be lured away. . . . Allowing departures to erode the strength of our businesses would have damaged our ability to repay taxpayers for their assistance."

The Treasury declined to comment specifically on the bonuses due this month. In a statement, a department spokesman said, "Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives. . . . We are not going to provide a running commentary on that process, but it's clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance."

Feinberg did not respond to an e-mail seeking comment.

The recent discussions between the company and Feinberg illustrate how politically sensitive the bonuses have become, both for AIG and for the Obama administration. No development in the government's bailout of financial firms has angered lawmakers and ordinary Americans more than the disclosure in mid-March that the global insurer was paying more than $165 million in retention bonuses. They were aimed at retaining 400 employees at AIG Financial Products, the troubled unit whose complex derivative contracts nearly wrecked the global insurance giant.

Ultimately, some of these employees vowed to return more than $50 million -- but not before the resulting firestorm threatened to undermine the government's effort to rescue the financial system. Lawmakers, including key allies of the administration, sponsored bills that would have levied harsh taxes on AIG and other bailout recipients offering bonuses to their executives.

Afraid of such congressional action, firms rushed to pay back federal aid, while others shied away from cooperating with the government in some of its bailout programs. Some initiatives had to be scaled down as a result.

The issue of bonuses, which had earlier been viewed by officials as minor relative to the larger problems in the financial system, began to consume the attention of top officials within the Treasury and Federal Reserve. Geithner attended long meetings to review payments, even those for low-ranking AIG executives.

Separately this week, a Citigroup analyst warned that AIG might be worthless to shareholders if or when it ever pays back the billions it owes the U.S. government.

"Our valuation includes a 70 percent chance that the equity at AIG is zero," Joshua Shanker of Citigroup wrote in a note to investors. He cites the continuing risks posed by the company's exotic derivative contracts, called credit-default swaps, and its sale of assets at low prices. AIG's stock plummeted by more than 25 percent yesterday.

 

 

Let's bring corporate excess to heel

How much more pay should a CEO at a company get than the employees? Ten times more? A hundred?

In America today, average CEO pay is 344 times higher than average worker pay. At Wal-Mart, CEO Lee Scott took in more than $30 million in total compensation last year - about $15,000 an hour for the CEO compared with about $10 an hour for the average Wal-Mart employee.

This is not good for our country. Not when success isn't shared and the result is an economy that saps strength and prosperity from the workers - the consumers - who are the lifeblood of economic growth and vibrancy.

People are working harder: Productivity is up nearly 20% from 2000 to 2006. Yet last year, real median household income was $1,175 less than it was in 2000, and the average family spent more than $4,600 more for basic expenses like gas, the mortgage, food, health care, appliances and phone service. So now the average household carries thousands in credit card debt, and in the past year, nearly 1 million people lost their homes to foreclosure.

This isn't the promise of America - and it's why President Barack Obama supports an important nongovernmental solution called the Employee Free Choice Act to make sure that workers, not just CEOs, can have the chance for a voice at their companies.

This measure ensures that workers can have the freedom to decide to join together in a union and work together with their companies for fair wages, benefits, retirement security and quality services and products for clients and consumers.

In the 110th Congress, the measure was supported by majorities in both the House and Senate, but it's no surprise that some corporations, corporate law firms and big-business lobbyists oppose employee free choice. After all, if you're paying yourself 344 times more than your employees (or a lot more in the case of Wal-Mart), it's not hard to understand why letting your workers decide whether to have input isn't a top priority. Workers in unions earn 30% higher wages on average and are 59% more likely to have employer-provided health coverage.

Instead of admitting that they simply don't want working people to gain real input at a company, CEOs are spreading "sky-is-falling" claims about this legislation. But smart policy decisions should be informed by facts, not rhetoric or hyperbole.

A study of union-organizing drives by MIT professors found that between 1999 and 2004, only 20% of 22,000 petitions filed by workers requesting a federally supervised election resulted in a collective bargaining agreement with employers and the formation of a union. It's no surprise that CEOs are supporting a system that is so skewed in their favor rather than support a process that lets workers decide whether a traditional election or choosing to sign up a majority of their co-workers on membership cards is a more fair and free way to choose a union at their workplace.

When we look at the facts about what happens when workers have a chance to choose to form a union at their companies, we see good things for our economy and our communities - not a falling sky.

The Employee Free Choice Act just makes sure workers can have a fair process to form their union at the many corporations that use threats and intimidation against employees to deny it. It's a key solution to building long-term success for our economy so that it works for everyone - not just those at the top.

Dian Palmer is a registered nurse and president of SEIU Healthcare District 1199 Wisconsin, a union representing nearly 5,000 health care workers.

 

 

Why the Mortgage Credit Crisis Matters

As taken from AFL-CIO web on CEO-Paywatch


The U.S. mortgage market is the financial market most closely linked to the lives of American working families. For many Americans, their home is their most valuable asset and an important source of financial security for their retirement. Yet for a growing number of working families, the American Dream of homeownership has become a nightmare.

American workers are being hit by a double-whammy as they lose not only their homes, but also their retirement savings, as pension funds bear the brunt of overwhelming losses faced by financial institutions. The International Monetary Fund estimates that the financial turmoil triggered by the collapse of the mortgage market could total nearly $1 trillion.[1] 

The mortgage crisis can be blamed on the combination of artificially low interest rates and a lack of regulation of the mortgage industry. For years, policymakers aimed to keep interest rates artificially low to prop up the economy through consumer borrowing instead of crafting economic policies that would lead to higher wages. As a result, consumer spending now accounts for nearly 70 percent of the U.S. economy, up from slightly more than 60 percent in the early 1980s.

Because of stagnant wages and the resulting increase in income inequality, the share of the nation’s income flowing to the top 1 percent rose to 22.9 in 2006 from 16.9 percent in 2002, a level not seen since 1928, at the peak of the stock market bubble.[2] Corporate chief executives are among those at the very top. CEOs of large U.S. companies averaged $10.8 million in total compensation in 2006, more than 364 times the pay of the average U.S. worker, according to the latest survey by the United for a Fair Economy.[3] 

So long as the Federal Reserve Board complied with keeping interest rates low, the American Dream of owning a house seemed within reach of millions of low-income workers. Stagnant wages and rising housing prices left homeowners with no choice but to treat their houses as piggy banks, using the loans to pay for household bills.

The housing bubble was stoked by the lack of regulation of the mortgage industry, which enabled brokers and lenders to exploit the weakest sections of society—low-income workers, minorities and immigrants—with misleading mortgages they couldn’t afford or with low down payments and artificially low, teaser interest rates on their mortgages that reset after a brief period of time.

The result was millions of subprime mortgages, those with low or no down payments, and adjustable interest rates, built around the fairy tale that housing prices would keep rising. As a result, these subprime mortgages accounted for 20 percent of all new mortgages in 2006, up from 5 percent in 2001.

With real estate prices dropping, foreclosures are on the rise and many homeowners find that they owe more on their mortgage than what their home is worth. In many states, falling real estate prices also have affected renters who face eviction if their landlords can’t pay their mortgages. For the first time, Federal Reserve Board Chairman Ben Bernanke acknowledged that the U.S. economy could be slipping into a recession.

The mortgage crisis also is hurting the retirement savings of working families. In the first three months of 2008, the benchmark Standard & Poor's (S&P's) 500 index fell 10 percent as events unfolded. Mutual funds, money market funds and pension funds face major losses from securitized mortgage bonds (many of which contain a “subprime” component) that were sold to them with AAA ratings from credit rating agencies as safe investments.

What Caused the Mortgage Credit Crisis

Since 2000, mortgage lenders have made more than $2.5 trillion in subprime loans. A large proportion of these mortgages was sold to those with credit scores high enough to qualify for conventional loans with far better terms. Instead, individuals often were pushed into subprime loans by unlicensed mortgage brokers motivated by the more favorable commissions and using deceptive tactics.[4]

The absence of effective regulation of the mortgage market emboldened lenders to flood the market with exotic mortgages that were misleading and exploitative. For example, many home buyers were sold loans with artificially low interest, or “teaser,” rates or interest-only mortgages that then reset to significantly higher interest rates creating unaffordable payments. Others were given payment options that included paying less than the interest charged each month so that the loan balance actually increased over time.[5]

Wall Street played an important role in exacerbating the real estate bubble. Investment banks repackaged their risky mortgages into securities known as collateralized debt obligations that, because they also contained some element of conventional mortgages, were characterized as safe investments by the various rating agencies. But this financial wizardry often resulted in a concentration of risk for speculation by hedge funds that bet on ever-increasing real estate prices.[6] Investment banks, themselves, also got hurt because they bet an increasing share of their own capital on mortgage-related investments.

Meanwhile, government regulators, including the Federal Reserve and the U.S. Securities and Exchange Commission (SEC), failed to adequately police these practices. More than a dozen companies are now under investigation by the FBI for practices that were fueled by the crisis, such as accounting fraud and insider-trading.

The Bush administration’s response to the crisis has been to recommend overhauling the financial system not by beefing up regulation, but by proposing a plan favored by the U.S. Chamber of Commerce that would further reduce the effectiveness of the SEC to police securities markets.

 

How Runaway CEO Pay Helped Fuel the Crisis

Over the past several years, CEO pay has exploded at many of the companies responsible for creating the subprime mortgage crisis. Too often, their compensation programs encouraged corporate executives to maximize short-term financial gains at the expense of long-term sustainability. In effect, boards of directors rewarded their CEOs for generating financial results that were often based on taking on irresponsible levels of subprime mortgage risk.

For example, large stock option grants encouraged excessive risk-taking by CEOs to maximize their potential gains through short-term stock price increases. Stock options promise executives all the benefit of share price increases with none of the downside risk. In the worst case scenario, the stock options will expire worthless. In effect, stock options allow executives to gamble with their shareholders’ money at no risk to themselves.

Too many CEOs have their incentive compensation tied to performance measures that rewarded financial results without regard to the risk involved in generating those results. At some companies, focusing on revenue growth encouraged CEOs to expand into the subprime lending business at the peak of the real estate market. Return on equity, another popular performance measure for CEO pay, encouraged executives to use increased leverage.

The pay packages of CEOs at mortgage lenders and investment banks also were sheltered from the inevitable decline in the real estate market because many of them were not required to hold their equity awards for the long term. This allowed CEOs to cash out before the bubble collapsed. Large golden parachutes further insulated CEOs from the financial risk of catastrophic results.



 

[1] “Subprime Crisis to cost nearly $1,000 bn,” Financial Times, April 9, 2008.

[2] “Striking it Richer, the Evolution of Top Incomes in the United States” by economists Emmanuel Saez and Thomas Piketty, updated March 15, 2008.

[3] Executive Excess 2007, United for a Fair Economy, Aug. 29, 2007. 

[4] “Subprime Debacle Traps Even Very Credit-Worthy,” The Wall Street Journal, Dec. 3, 2007.

[5] “New Rules for ‘Exotic’ Loans,” The New York Times, Oct. 15, 2006.

[6] “Wall Street Wizardry Amplified Credit Crisis,” The Wall Street Journal, Dec. 27, 2007.

Golden Goodbyes

 

Several CEOs departed in 2006 who received generous exit packages despite their poor performance, costing companies and their investors millions of dollars. Pfizer’s Henry McKinnell and Home Depot’s Robert Nardelli received exit packages of more than $200 million each, despite poor stock performance during their tenures.[1] 

 

These large exit packages are due primarily to executive employment agreements. Employment agreements are legally binding contracts that spell out the terms under which executives are hired. The problem is that they may guarantee a specified level of compensation regardless of performance, as in the case of Robert Nardelli.[2]


 

Average Worker vs. Average CEO Severance Pay
   
Who Weeks of Salary for Each Year Worked
Average CEO ousted in 2006 170
Average CEO without a contract 18
Average Worker 2

Source: “Has the Exit Sign Ever Looked So Good,” The New York Times, 4/8/2007.

 

Employment agreements also spell out what executives will receive under different termination scenarios. Such employment agreements often include what has become known as a “golden handshake” in which the company promises payment upon retirement or termination. Executives also may receive “golden parachute” payments if the company undergoes a change in ownership or if the executive is terminated because of a change in control. 

  Median Household Income (in 2005 dollars)
 
   
20001
 
20032
 
20043
 
20054
 
$ Change from 2000 to 2005
 
% Change from 2000 to 2005
   
  Idaho
42,635
 
44,966
 
45,841
 
44,176
 
1,541
 
3.6
   
  U.S. Total
47,599
 
45,970
 
45,817
 
46,326
 
-1,273
 
-2.7
   
 
  Median Weekly Wages
 
   
20045
 
 
 
 
 
 
   
  Idaho
562
 
 
 
 
 
 
   
  U.S. Total
638
 
 
 
 
 
 
   
 
  Average Annual Wages
 
   
20016
 
20027
 
 
 
 
   
  Idaho
27,768
 
28,163
 
 
 
 
   
  U.S. Total
36,219
 
36,764
 
 
 
 
   
 

Source:

1. U.S. Census Bureau, "Table H-8. Median Household Income by State: 1984 to 2005."

2. U.S. Census Bureau, "Table H-8. Median Household Income by State: 1984 to 2005."

3. U.S. Census Bureau, "Table H-8. Median Household Income by State: 1984 to 2005."

4. U.S. Census Bureau, "Table H-8. Median Household Income by State: 1984 to 2005."

5. Bureau of Labor Statistics, "Highlights of Women's Earnings in 2004," September 2005. Data are for full-time wage and salary workers.

6. Bureau of Labor Statistics. "Table 1. Average annual wages for 2001 and 2002 for all covered workers by state." (Includes workers covered by Unemployment Insurance and Unemployment Compensation for Federal Employees programs.)

7. Bureau of Labor Statistics. "Table 1. Average annual wages for 2001 and 2002 for all covered workers by state." (Includes workers covered by Unemployment Insurance and Unemployment Compensation for Federal Employees programs.)

Supporters of such severance agreements argue that they provide managers with the incentive to maximize shareholder wealth without worrying about losing their job as a result of a change in control. However, the amounts guaranteed by golden parachutes and golden handshakes may add up to millions of dollars. When these packages become excessive, they may motivate executives to engage in a merger, even though it may not be in the interests of shareholders. Golden parachutes also may result in lower firm valuation, according to Harvard professor Lucian Bebchuk.[3] 

 

Typically, exit packages involve a cash severance of two or three times salary plus bonus. These agreements also often call for accelerated vesting of stock awards, option awards and pension benefits, quickly boosting the size of the total payment. Sometimes the termination terms for stock awards, option awards and pension benefits are not included in the employment agreement, but in the individual plans for each of those benefits. 

 

Moreover, if the golden parachute payment received upon a change of control exceeds 2.99 times the executive’s average annual salary and bonus for the five preceding years, then the amount exceeding the average annual salary and bonus cannot be deducted by the company, meaning that it must pay taxes on it.[4] 

 

The executive also must pay a 20 percent excise tax for golden parachutes on everything over his or her average base salary and bonus for the preceding five years, though many companies offer to “gross up” or pay that tax as well,[5] costing shareholders even more. 

 

Because executive employment agreements are legally binding, companies must pay the executives according to the terms specified under them. In the case of KB Home, former CEO Bruce Karatz could collect as much as $175 million, despite his involvement in backdating stock options at the company. That’s because the company accepted his retirement, and he was not fired for cause.[6] 

 

Karatz’s compensation is frozen until an agreement is reached between him and KB Home on how much he actually will receive.[7] Investors have urged the company not to pay Karatz. However, because of the legally binding employment agreement, KB Home has a weakened case if it decides not to pay him. It is all the more important for shareholders to be cognizant of the terms of exit packages when they are drawn up, not when the executive receives the payment.

 

 

In previous years, it was difficult to ascertain the value of executive severance packages, until an executive actually left a company. The new U.S. Securities and Exchange Commission (SEC) executive compensation disclosure rules now require companies to disclose the terms of written or unwritten arrangements that provide payments in case of the resignation, retirement or termination of the “named executive officers” or the five highest-paid executives of a company. The SEC rules also require companies to detail the specific circumstances that would trigger payment and the estimated payment amounts for each situation.

 

Though the new SEC disclosure rule will show whether an executive has an excessive severance package, it does not provide investors with a way to limit them. Congress is considering legislation that will require public companies to hold a non-binding vote on executive pay plans, including an advisory vote if a company awards a new golden parachute package during a merger, acquisition or proposed sale. 

 

This advisory vote will give shareholders a way to voice their support or opposition to a company’s golden parachute. Knowing they will be subject to some collective shareholder action will encourage boards of directors to address shareholder concerns before approving a questionable golden parachute.

 



[1] “An Ousted Chief’s Going-Away Pay Is Seen by Many as Typically Excessive,” The New York Times, Jan. 4, 2007.

[2] Employment Agreement between Robert Nardelli and Home Depot.

[3] Bebchuk, Lucian Arye; Cohen, Alma; and Ferrell, Allen, "What Matters in Corporate Governance?" (September 2004). Harvard Law School John M. Olin Center, Discussion Paper No. 491.

[4] Treas. Reg. §1.280G-1, Q&A 30(b), Example 1.

[5] See note 4.

[6] “Exiting Under a Cloud, with $175 Million,” Los Angeles Times, Nov. 20, 2006.

[7] “U.S. Prosecutors Examining Options Case at KB Home,” The New York Times, Feb. 24, 2007.