[Corp. Watch] Corruption in America: Corporate compensation

[Corporation Watch]

Executive Whining About Salary Caps is Getting Tiresome

  by Michael Hiltzik

(L.A. Times, April 23) -- Watching people desperately trying to hang  
on to their little all following a disaster is an experience, as  
Aristotle would have appreciated, certain to excite pity and terror in  
the human breast.

	If only we didn't have to spend so much time these days watching  
bankers and corporate executives do it.

	Every day seems to present yet another example of the disjunction  
between the financial community's sense of entitlement, and the real  
world occupied by everybody else.

	The other day, the inspector general for the government's financial  
bail-out program (known as TARP) revealed that Chrysler’s lending arm  
requested $750 million in new money, but was turned down because its  
top 25 executives wouldn't agree to the compensation limits TARP  
requires.

	That's after the government had already given Chrysler Financial $1.5  
billion. (Chrysler says, for its part, that it decided it didn't need  
the additional money after all. Nothing to do with the pay caps, it  
says. But of that original $1.5 billion, so far it has re-paid only  
$3.5 million.)

	Meanwhile, a passel of Wall Street professionals unburdened  
themselves to New York magazine about the punitive cuts in pay and  
bonuses they’re suffering -- imposed, to their minds, by jealous  
people less talented and successful than they.

	Portfolio magazine just published a lament purportedly by the  
anonymous wife of a bailed-out CEO. "I haven't even looked at spring  
clothes," she writes. "Needless to say, we fly commercial. Using the  
company plane is now out of bounds."

	(She blames Alan Greenspan and Barney Frank for the crummy state of  
her husband's banking business.)

	It's hard to know who the audience is for this article, assuming it's  
not satire. Fellow commiserating "TARP wives"? Greenspan and Frank?  
(By the way, how come she was on the company plane in the first place?)

	The real issue raised by this attitude isn't so much how wealth is  
distributed in the U.S., as it is how much pay people deserve.

	Financial professionals love to claim that their pay packages reflect  
their superb brainpower and competitiveness. Maybe that's true.

	But a more important factor may be their location at the exact spot  
where cash changes hands -- a money-making principle understood  
equally by bond traders, the owners of boutiques at Caesars Palace,  
and hot dog vendors with carts at the corner of Broad and Wall Streets.

	For several decades, the professional financial and corporate class  
has been able to base its pay on its own self-esteem.

	Consider the corrupt process by which public companies compensate  
their top executives. These officials sit on each other’s boards,  
passing judgment on each other's pay packages. Even when there's no  
direct quid pro quo, they certainly share a common mindset.

	When the salary and bonus decisions for Fred or Jane come to the  
board, what goes through the mind of the average outside director?  
"Hmm, they're almost as good as I am, so, $10 million each? Sure, why  
not?"

	This log-rolling has been almost impossible to break up, partially  
because government efforts in that direction have been confined to  
toothlessly outlawing tax deductions for "excessive" compensation --  
with "excessive" defined about as rigorously as my dog defines "edible."

	The government seldom has had the leverage to go further, say by  
placing a hard ceiling on pay. The one time it does have indisputable  
leverage, if it chooses to use it, is when it's providing businesses  
with survival capital -- like it's doing today for banks and financial  
companies.

	The last time business leaders came hat-in-hand to the Treasury while  
maintaining that no change was necessary in their status was during  
the 1930s. It's instructive to examine how the government managed  
their self-delusion then.

	In May 1933, when the railroad industry had its palm out for $336  
million in loans from the Reconstruction Finance Corporation (RFC),  
the bail-out agency of the day, RFC Director Jesse Jones set a maximum  
salary of $60,000 for any executive of a railroad with a government  
loan.

	(In today’s money, that would provide $980,000 in purchasing power,  
so it wasn't exactly a poverty wage.)

	Jones arrived at this figure after conferring with President  
Roosevelt. According to his memoirs, FDR believed that $25,000 should  
be the top salary of any railroad executive.

	The best-paid were then pulling down $150,000, or $2.5 million today.  
(It's telling that many modern executives, including those running  
crippled companies into the ground, would consider an annual salary of  
$2.5 million to be insulting.)

	A business executive himself, Jones knew that "most men who had been  
accustomed to drawing $100,000 a year salary usually lived it up, and  
to cut them to $25,000 would be too severe, particularly since nearly  
everybody was in debt."

	Instead, he mandated that any salary between $100,000 and $150,000 be  
cut by 60%, with smaller reductions down the compensation scale.

	The compensation cap met with some resistance. The Pennsylvania Rail  
Road, which was on the hook to the RFC for $27 million, at first  
refused to comply. But after the RFC threatened to take the matter to  
court, Penn president W.W. Atterbury (a $150,000-a-year man) knuckled  
under.

	For the most part, Jones wrote, business leaders had had such "bad  
dreams about our carving knife" that his announced limit brought  
"smiles of obvious relief."

	Those must have been more sensible times. Today's executives treat  
pay caps as an unpardonable intrusion into managerial discretion,  
threaten to walk, and complain about having to fly commercial.

	"It wasn't long ago that America celebrated successful companies, and  
the people who run them," writes Portfolio's Mrs. TARP.

	But it isn't that our esteem for success has disappeared, it's that  
we've discovered that many "celebrated" companies were built on a  
foundation of rot.

	If their leaders and managers still think they should be paid and  
admired as though none of this was their fault, no wonder they're  
unhappy.