Not All Pirates Are in Somalia

General Electric Co. made news last month when it reported U.S. profits of $5.1 billion and worldwide profits of $14.2 billion, but paid no federal corporate income tax. GE even reaped a net tax benefit of $3.2 billion. What the newsies do not mention is that the government additionally subsidized the ridiculous wealth GE and other corporations lavish on their executives. Uncle Sam must miss a lot of sleep staying up nights to figure out how to pour tax dollars into corporate treasuries.

We Bring Good Things to Immelt
General Electric Co. Chairman and CEO Jeffrey R. Immelt’s 2010 compensation more than doubled to $15.2 million as the company benefited from a recovering economy, equalling the annual pay of 1,000 minimum-wage workers (MWW). Since all of this compensation is deductible on the corporate tax return, the U.S. taxpayer absorbed 35% of the outrageous compensation packages for Immelt and his cohorts.

The 2010 record holder is Philippe Dauman of Viacom, who was paid $84.5 million–that’s equal to 5,600 MWW–for just nine months as C.E.O. Other CEOs who received bloated paychecks included Ray R. Irani of Occidental Petroleum,$76.1 million or 5,000 MWW; Lawrence J. Ellison of Oracle, $70.1 million or 4,600 MWW; John F. Lundgren, of Stanley Black & Decker,$32.57 million or 2,150 MWW; and David N. Farr, of Emerson Electric, $22.9 million or 1,500 MWW.

A small change in the tax code could address an economic problem that is syphoning corporate wealth into the pockets of top executives–impoverishing stockholders, employees, and the public at large. The median compensation for chief executives has risen at several times the inflation rate since the beginning of the century. Compare this to stagnant wages in the lower 99% of the workforce. The gains by these mercenary managers might be defensible if their pay were in proportion to their achievements. It is not.

Overcompensating Underachievers
A 2006 study by the Corporate Library, “Pay for Failure: The Compensation Committees Responsible,” named 11 public corporations whose chief executives’ pay had exceeded $15 million during the last two years despite five-year shareholder losses. “The disconnect between pay and performance is particularly stark” at Verizon, AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent Technologies, Merck, Pfizer, Safeway, Time Warner and Wal-Mart. For example, Ivan G. Seidenberg, chief executive of Verizon Communications, received $19.4 million in salary, bonus, restricted stock and other compensation in 2005. This was 48% more than in the previous year. As his compensation nearly doubled, the stock fell 26%, bondholders lost value as the company’s debt was downgraded by credit agencies, and 50,000 managers saw their pensions frozen. Verizon closed its books with 5.5% earnings. Mr. Seidenberg’s $75 million five-year total pay is an egregious affront to shareholders, who stood a loss of more than 26% in the period.

You Scribble my Check and I’ll Scribble Yours
Verizon’s board received a grade of D from the Corporate Library. One reason was that Verizon’s compensation committee–the group of board members who recommend what executives should receive–consists entirely of chief executives or former chief executives. Three of the four members sat on other boards with Mr. Seidenberg. On Wyeth’s board, Seidenberg helped set the pay of John L. Stafford, a member of Verizon’s compensation committee. He is past chairman and chief executive of Wyeth.

Verizon’s compensation committee was led by Walter V. Shipley, former chief executive of the Chase Manhattan Corporation, and was made up of Richard L. Carrión, chief executive of Banco Popular de Puerto Rico; Robert W. Lane, chief executive of Deere & Company; and Mr. Stafford, formerly of Wyeth.

Many of the Verizon directors who were on its compensation committee also met Mr. Seidenberg at board meetings of other public companies. At Wyeth meetings, Mr. Seidenberg encountered Mr. Shipley, who was the chairman of Verizon’s compensation committee and who was a member of Wyeth’s committee, sitting with Mr. Carrión, at least until 2006.

Mr. Seidenberg saw Mr. Stafford when the board of Honeywell International met. Mr. Stafford was chairman of Honeywell’s compensation committee, which included Mr. Seidenberg. A tally of the 29 directors of Exxon and Verizon who sat on multiple public corporation boards showed that the two boards were very tightly interlocked. Ten of the 29 were Exxon board members and 12 sat on the Verizon board, with three sitting on both boards. However, another interesting connection crops up–11 of these same board members sat on the board of Wyeth. Three were Verizon/Wyeth directors and two were Exxon/Wyeth directors. One director, Walter V. Shipley, sat on all three boards. This concentration of board seats ensured that these 29 directors who held down 92 public corporation board seats controlled all three companies.

Friendly Persuasion
Another factor that helped Seidenberg fatten his paycheck was that Verizon’s executive team had its “outside consultant,” Hewitt Associates of Lincolnshire, Ill, firmly in its pocket. Outside consultants are supposed to be independent and objective, but Hewitt, a provider of employee benefits management and consulting services with $2.8 billion in annual revenue, did much more for Verizon than advise it on compensation matters. Verizon was one of Hewitt’s biggest customers in the far more profitable businesses of running the company’s employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management. Hewitt received more than a half-billion dollars in revenue from Verizon and its predecessor companies between 1997 and 2007. Hewitt was all over Verizon, operating its employee benefits Web sites and acting as actuary for three of Verizon’s pension plans. Hewitt also performed extensive work for Verizon’s predessor companies. Objectivity is compromised when the firm evaluating the executive’s compensation depends on its relationship with the executive for a large portion of its revenue.

By packing their boards of directors with cronies and ensuring that their “independent” consultants will provide the advice they desire, corporate CEOs persuade their boards to award them immense wealth. These graspers get writer’s cramp from signing so many checks to one another. Think of it this way: It is as if bank robbers formed a guild and then were allowed to elect one another as bank presidents. The story of corporate gluttony would be an amusement piece, like “Lifestyles of the Rich and Greedy,” but for the fact that these bloated compensation packages are being subsidized by lower and middle class investors and taxpayers.

Welfare for the Truly Greedy
We also subsidize these rapacious managers with a tax deduction. The corporate income tax rate is 35%. Therefore, for every million dollars the board votes to give the CEO, it only costs the corporation $650,000. The other $350,000 is paid by the government–that is the American taxpayer.

Stem the Hemorrhage
It is time to put these robber barons in the “time-out chair.” Send a message to the pirates of the big board that it is time to curb this fiscal abuse. One way would be to limit the corporate deduction for executive compensation to 100 MWW. If the minimum wage is $7.50, that would be $15,600 per year for full time employment. The corporation could deduct up to $1,560,000 per year in executive compensation. Executive pay could be more than that, but it would not be deductible.

This modest change in the tax code may have little effect on executive pay, but it would at least trim the public subsidy. However, cutting the deduction may have a profound effect. It is a government guideline as to the maximum reasonable paycheck for one person, no matter how prideful and self-important. CEOs who are used to receiving whatever outrageous compensation package they have the gall to demand will be given the message that they are committing the second deadly sin.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2011 John B. Payne, Attorney
 
 

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