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Old 05-14-2011, 11:28 AM   #1 (permalink)
Location: Charleston, SC
Are Corporate Executives Ripping Us Off?

Where do you find businesses where some of the employees get to set their own salaries and compensation packages? You’ll find them in all the large corporations such as General Electric, General Motors, IBM, Bank of America and, yes, even SCANA, etc., etc., etc. In all such shareholder-owned corporations, the compensation packages are designed by a committee of the board of directors and approved by the total board, the officers of which are employees of the shareholders. A CEO’s compensation may be “negotiated” by the CEO and the compensation committee which is made up of like-minded directors, most of whom are CEOs themselves and who are disinclined to be a naysayer because to do so could boomerang to affect their own compensation, in effect a good-ole-boys club.

All of this can take place because these high-powered, high-paid employees do not think of themselves as employees. Oh, of course, they will tell you they are, but they do not act like employees and, since there are inadequate checks and balances, they give only token consideration to their employers, i.e. the owners/stockholders. Control of the system which makes this possible is in the hands of the officers and board members, not the owners. The stockholders do not get to vote on what their employees (officers and board) are paid.

The result of such a system is to make possible the enrichment of the already wealthy at the expense of the owners. How long will we remain dumb enough to allow this to go on? When a conflict of interest leads to abuse, sometimes a revolution is the only way to correct the situation.

What can the owners do? They can start by sending in their proxy votes to the annual stockholders’ meeting and opposing (or abstaining from) (1) all the proposed board members, (2) the proposed accounting firm, and (3) all board-recommended proposals. They can also vote in favor of all shareholder proposals (most all of which are opposed by the board). If enough shareholders do this, it should get the attention of the officers and directors and influence them to change their ways so as to make compensation packages more reasonable and considerate of the owners. On the other hand, it may become necessary to clean house and install a new, shareholder-minded board and staff.
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Old 05-14-2011, 03:14 PM   #2 (permalink)
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Short answer? Yes, corporate executives are ripping us off.

Longer answer? CEO compensation was roughly 42x average worker pay as recently as 1980, but it skyrocketed in the 1980s and 1990s all the way up to around 525x, peaking just before 9/11. It's still something like 270x. And that likely doesn't include bonuses and other perks. There's this strange line that's given every time excessive executive pay is discussed, that somehow these outrageous numbers are justified in that these individuals are uniquely talented and corporations have to compete over these supermen, these John Galts. In reality, current CEOs aren't somehow 6.5 times as effective as they were in 1980, and really there's very little evidence to suggest exorbitant salaries produce better results in management or workers (though it can with manual laborers). In the end, these salaries, along with financial fraud and schemes, are largely responsible for the moving of wealth from the many to the few. It's a bubble that's either going to burst resulting in will-manage-for-food CEOs or a violent revolution.
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Old 06-28-2011, 08:49 PM   #3 (permalink)
The most likely reason for the ballooned compensation US CEOs receive is American cultural values and influence in business practices and negotiations. The competitive nature of wanting the best guy for your company's top job and never-ending increases to the compensation package resulted in the average US CEO to earn US$ 20+ million, with the top brass earning in the hundreds of millions.

Comparatively, CEOs at elite German companies earn much less than their US counterparts. Dieter Zietsche, CEO of Daimler AG (Mercedes Benz), and Josef Ackermann, CEO of Deutsche Bank AG, both never earned more than 10 million Euro in a single year of their current positions.
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Old 06-29-2011, 05:17 AM   #4 (permalink)
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It all comes down to value. I think it's difficult to say that all highly paid CEOs are universally ripping people off.

I had an example, but I totally screwed up my sources. Basically, if you look at CEO compensation/company profit ratios, you will find that many highly paid CEOs have similar ratios to CEOs of small albeit profitable companies even though these smaller companies might have CEOs making $50,000 salaries.
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Last edited by Baraka_Guru; 06-29-2011 at 05:28 AM..
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Old 06-29-2011, 10:19 AM   #5 (permalink)
Fully disagree, Guru.

Here's a comparison of three of the biggest banking groups out there:

Citigroup | Deutsche Bank | Mitsubishi UFJ

Revenue US$ 86.6bn | US$ 41.2bn | US$ 40.5bn
Total Assets US$ 1.9tn | US$ 2.7tn | US$ 2.5tn
CEO Compensation US$ 38.2m | US$ 9.3m | US$ 1.4m

Notice the difference.

Note: Took the information variously from Businessweek and Bloomberg. Citi CEO compensation dates to 2008, as since the financial crisis he has a $1 compensation.

Edit: There goes my effort to give the comparison a formatted style.

Last edited by Remixer; 06-29-2011 at 10:22 AM..
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Old 06-29-2011, 10:26 AM   #6 (permalink)
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So why do you disagree?

$38.2M compensation vs. $86.6B in revenue? What was the profit?

Isn't this ratio equivalent to a $50,000 CEO's company earning a revenue of $113.4M?
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot
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Old 06-29-2011, 11:44 AM   #7 (permalink)
I disagree on your statement that it all is a matter of value and that as such CEOs compensation packages are fully justified.

The merits of such compensation packages for CEOs of large US companies vis a vis the compensation of CEOs of companies with similar performance and size, but from other continents, are highly questionable.

I did not include the net income statements as they were irrelevant to the point I was making. No matter how good Deutsche Bank's performance in a financial year was, their CEO would not receive a total annual compensation exceeding US$ 15m, and it is a widely implemented CEO compensation ceiling throughout Germany. Japanese CEOs have an even lower total compensation ceiling of max. US$ 5m. Yet, some of their companies play on the same level as the biggest US companies.

There is little justification for compensation packages of CEOs of US companies sometimes ballooning into the hundreds of millions.

EDIT: Regarding profit comparison:

Net income: US$ 5bn
CEO compensation: US$ 1.5m

Net income: US$ 6.5bn
CEO compensation: US$ 26.5m

Last edited by Remixer; 06-29-2011 at 11:53 AM..
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Old 06-29-2011, 12:25 PM   #8 (permalink)
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So you would suggest that total compensation is a more important factor than value?

Don't assume that I'm suggesting that all CEOs are paid accordingly. There are probably many who are overpaid and by quite a bit. But what about those all-star CEOs who are captaining companies making record profits? What about those CEOs who are providing so much value that the boards of directors under pressure from key shareholders are pushing more money onto the all-star CEOs to ensure they're retained instead of hired away from competitors or even companies in unrelated industries?

Also, salary caps merely mask the reflection of CEO value from a market prospective. Without caps, much of what we see regarding salaries is a reflection of value, and probably not much of a reflection of corruption or anything. Like I suggested, you will likely see similar compensation/profit ratios among smaller companies with CEOs making less than $100,000.

We could also look at the professional athlete as a comparison. The top athletes provide value in terms of helping win games and selling tickets. Salary caps amongst teams merely mask the true market value of the top players. But what this does is make it easier for teams with less money to compete for talent. Is that what happens with CEOs in places like Japan and Germany?
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Last edited by Baraka_Guru; 06-29-2011 at 12:27 PM..
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Old 06-29-2011, 01:15 PM   #9 (permalink)
I believe I didn't bring my point across properly, mostly since it was made up of three comments.

My point is the discrepancy of cultural values and their influence on business practices, especially the monetary evaluation of a CEO's performance. To me, the US values embedded with CEO compensation levels are a direct cause of the loose control exerted onto the markets and the practical non-existence of limits.

The obvious difference between the US, Germany and Japan is, that while all three are free market economies, Germany and Japan have much more socialistic-oriented populaces, cultural values and business practices.

This interweaves with your point of the masking of the CEO value. Not only do the socialistic values require a level playing field, but it also requires for the wealth gap of the citizen not to increase too quickly (or at all); pertaining to a an overall advancement in wealth of the entire society. The mentioned values then result in a compensation ceiling.

Further, one aspect I believe you to be wrong in is the apparent assumption that German and Japanese CEOs have difficulty in quickly changing their employers, as otherwise (from an entirely opportunistic perspective) it does not make sense not to go for an executive position at a different company in a foreign country and receive a much larger compensation package.

Some of these German and Japanese CEOs belong to the very elite of business folks. If they went to work for a large US company, their skills would quickly ensure them a large compensation package (consider the similar size in assets between Citigroup, Deutsche Bank and Mitsubichi UFJ).

However, these elite CEOs stay in their home countries, continue the prosperity of their companies and in effect aid the growth of their respective societies.

Josef Ackermann and Akio Toyoda are very big players in their international business fields. Or take Porsche's genius former CEO Michael Mauer for example, who with his extreme feat between 1996 till 2007 expanded the size of Porsche as a company by over 1000%. Mr Mauer still works for Porsche and his compensation still does not go above the German CEO compensation ceiling, even though there can be no doubt he has received very lucrative offers by other companies over the years.

To get to the essence of it: the reason Japanese and German companies so easily retain their elite CEOs with such small compensation packages is due to the stark difference in the cultural values between the two and the US. The German and Japanese societies, as a generalized statement, put a strong emphasis on the "common good and benefit". Something sorely amiss in the US and reflected by the CEO compensation packages, in my opinion.

While what I say may appear dubious in nature, I hope to have conveyed properly the fundamental values which allow for some countries' elite CEOs to still receive "small" compensation packages, and other countries' elite CEOs swimming in cash.

In conclusion, I do not believe the US CEOs' compensation packages to be justified. A small CEO compensation package doesn't stop German and Japanese companies to play in the top league.

I am pretty tired right now, and if I haven't made sense in some parts I'll rectify it tommorrow.

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excessive compensation, wealth inequality

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