Wednesday, January 18, 2012

Mitt Romney: Mister 15% and Platinum Parachutes

President Obama hasn't been killing jobs, but Mitt Romney has. And Obama has tried to help those who lost their jobs because of CEOs like Mitt Romney. Leaders such as Obama saves lives, CEOs like Mitt Romney destroys them for profits.

One way the CEOs do this is by using millions of dollars in stock-based compensation payouts for "performance" to motivate management to run their companies -- just like Romney did at Bain Capital. They pay themselves to do their jobs, to maximize profits; and they often pay themselves with "platinum parachutes" when they leave.

And because of the Bush tax cuts, these same CEOs also pay a lower tax rate on these "stock options" from the income they earn off dividends, carried interest, and capital gains (15%)...a lower tax rate than for someone else who's only earning $35,000 a year in payroll wages (25%).

(* I noticed that the tax brackets I saw displayed on Fox News and CNN yesterday were very misleading, and made me realize whose side they're on regarding the current tax law...skewing the figures to play down Mitt's tax rate, to make it look more acceptable to the uniformed, such as substituting "median income" for "household income", and using completely false numbers for the tax brackets and rates.)

Also these CEOs don't have to pay any Medicare or Social Security taxes on these stock options either (FICA); although if they earned a "base salary", of say $1 million in regular wages, their Social Security taxes are capped at the first $110,000 they earn, so they only pay this tax on a fraction of their income. But most of us who earn less than $110,000 have to pay Social Security taxes on 100% of our total earnings.

And according to Josh Harkinson at Mother Jones, for many CEOs, bankers, hedge-fund managers, and corporate raiders like Mitt Romney, the easiest way to get rich is just to quit their jobs.

Increasingly, corporations offer their chief executives fantastically generous severance packages—retirement bonuses, extended stock options, and pensions that can add up to $100 million or more. Rather than "golden parachutes", we could call them platinum parachutes.

These deals are supposed to benefit shareholders by encouraging CEOs to take a long-term view of corporate profits, but some compensation experts have their doubts.

"Too many golden parachutes and too many retirement packages are of a size that clearly seems only in the interest of the departing executive," says a new report by GMI, a corporate governance consultancy.

By way of example, the report singles out 21 CEOs (listed below) whose severance packages are worth more than the median U.S. earner would make in 49 lifetimes. In the case of GE's John Welch Jr., the figure would be 203 lifetimes. But you could still argue that the most outrageous example is Viacom's Thomas Freston, who put in just one year of work for his $100-million-plus sendoff.

Click chart to enlarge

Roger Martin, author of Fixing the Game, wrote an article for the Huffington Post (Earning a Real Return on Real Investment) detailing one example of executive compensation...and how stock values are driven by "performance pay".

Boards, executives and compensation consultants hold an almost fanatical attachment to the expectations market because they believe that the job of management should be to maximize the long-term value of the firm and the current stock price is considered the best proxy for that long-term value. Hence, boards and executives assume that if they increase the stock price of the firm today, they have contributed to the maximization of long-term value. That thinking has led to the tying of compensation to stock price through grants of stock options and restricted stock, which in turn has led to the shift in focus of executives away from building real companies and toward the manipulation of investor expectations.

Critics of eliminating the focus on stock price and stock-based compensation fear that doing so would leave companies without 'an objective function' -- something to guide their performance toward creating the value they are supposed to generate. They argue that focusing on measuring value on the basis of stock price and providing incentives that are stock-based may not be a perfect system, but it is the only one that can guide proper company behavior. And they argue that investors deserve a return on their investment in the company so it is the role of management to work assiduously at maximizing the stock price.

These arguments play fast and loose with logic. Let's say I start a company and take it public at $20/share. Ben, who helps me post these columns, buys a share for $20/share is part of the IPO. Let's imagine that Ben needs to earn 10% on his investment to account for its riskiness -- so I have to produce $2/share of net earnings for him, which would enable me to dividend it out to him and enable him to earn his targeted 10%. However, let's imagine that there is a LinkedIn-like frenzy after the IPO, the stock skyrockets to $100/share, and Arianna buys the share from Ben for $100. The prevailing theory says that I owe Arianna (who has the same desired return for her risk) $10/share of return.

But do I? Did Arianna give me $100 like Ben gave me $20? Did Ben turn around and return his $80 profit to the firm? No. Arianna gave an $80 profit to Ben who pocketed it. Did I promote or authorize or even know of the sale by Ben to Arianna? No. They decided on that transaction themselves -- my firm was not a party to it and the capital I have for investment is still $20.

So to satisfy Arianna's return requirement, I need to make $10/share based on an investment of $20 or 50% return on investment -- a very hard thing to do. All because she decided it was worth it to buy the share from Ben for $100.

She didn't give me a single dollar of investment capital -- and I don't owe her anything more than a return on the $20, which is the total capital I have ever received for the share that she now owns. That should be the only obligation to shareholders that companies ever accept: to earn them a return above their cost of capital for the capital actually provided by shareholders (plus any earnings on those shares retained by the company rather than paid out in a dividend) -- i.e., the book value of the shares. If shareholders want to trade those shares between themselves based on their expectations of the future, they should knock themselves out and do it. But those trades and the value they are made at should have no bearing on the obligations of executive management.

But because this is not the case and executives routinely accept the obligation to earn a return on the market price of the shares rather than the book value of the shares -- and have their incentives tied to the former, they engage in extremely risky actions when their share price rises. Michael Jensen wrote a very good article on the subject entitled "The Agency Costs of Overvalued Equity and the Current State of Corporate Finance", which argues that spectacular crashes including Enron, WorldCom and Nortel could be traced to this problem. Management feels the obligation to earn a spectacularly high return on the investment resources they were actually given in order to earn a minimally acceptable return on value based on the expectations of investors. That article was written in 2004, well before the 2008 crash, but the actions of the big American banks bore a great similarity. The stock price of Citibank went up by 15X during the 1990s and headed another 50% higher in the time before the crash. What did Chuck Prince think he needed to do when he took over as CEO in 2003? I suspect that it was to earn an acceptable return on the wildly inflated stock price of Citibank -- however risky that was to accomplish. And it was riskier than anyone could have imagined for Prince and the other "too big to fail banks".

At the very heart of the problem are two deeply flawed theories -- first, that the obligation of management is to earn a return on the expectations of shareholders, however insanely high those expectations happen to be: and second, that stock-based compensation provides a useful motivation for management to take care of their company. They both sound good on the surface, but shareholders would be better off in the long-run if management felt the obligation to earn a fair, risk-adjusted return on the investment capital they were given and if their performance incentives were based on their company's performance in the real game.

Moderator: To an "efficiency expert" such as Mitt Romney, if they work for "performance" bonuses, you're all expendable. No job is safe, not even yours.

If CEOs are "incentivized" to use automation, lay off workers, and outsource jobs just to increase the value of their own stock-options for "performance" (and also benefit from paying a lesser tax rate, paying less for capital gains then they might for corporate taxes), it only encourages more CEOs to do more of the same - - without any regard to the long-term value of a company, but only for shareholders (and their own) short-term and low-taxed gains.

Meanwhile, by cutting their costs for labor, these CEOs (like Mitt Romney) are also reducing consumer demand by creating a smaller work force -- and/or by cutting wages -- and thereby lowering the living standard for average working American families....essentially, eliminating our middle-class.

And then finally, we also end up with a much reduced revenue stream from any potentially collected income taxes, the revenue that's necessary to fund our government. That's what ALL the Republicans mean by lower taxes and less government...lower taxes for the rich (the 1%) but less benefits for us (the 99%).

Mitt Romney just announced yesterday that he will release his tax return in April, but only for the year 2011. If so, we might not ever be privy to all his other previous tax shelters. Republican New Jersey Governor Chris Christie said, "It's probably much ado about nothing." Oh really?

Mitt Romney and Bain Capital's investment in Staples was considered "venture capitalism"; but their "leveraged buy-outs" in companies such as Ampad is better known as "vulture capitalism", which is perpetrated by corporate raiders strictly for fast and easy short-term profits for investors, and doesn't create jobs or long-term growth. Mitt wasn't a "job creator". It's all in the book: The Real Romney

It's just like a narrator recently said of Mitt Romney on the Stephen Colbert Report: "As head of Bain Capital he bought companies, carved them up, and got rid of what he couldn’t use. If Mitt Romney really believes corporations are people my friend, then Mitt Romney is a serial killer. He’s Mitt the Ripper.”

Mitt Romney practically re-invented the practice that created our current "income inequality", just look at his history at Bain Capital. And now he (and other GOP corporate shills) are running for the job as president to be our "job creators". Don't you find this totally absurd?

Robert Reich recently wrote, "Mitt Romney is casting the 2012 campaign as free enterprise on trial by defining 'free enterprise' as achieving success through hard work and risk. Wait a minute, who do they think is bearing the risks?"

Martin Luther King, Jr. once said, "We have socialism for the rich, and rugged free-market capitalism for the poor."

While everything these CEOs have been doing for the past 30 years is perfectly legal, most of us are beginning to wonder if it's morally ethical. The leaders of the corporate and financial world have greatly benefited from our "free enterprise" economic system of government, but now we're all starting to question why we have been paying so much more for our freedom.

Virgil Bierschwale of Keep America at Work writes, "If free enterprise is on trial, I will cast my vote as one of the 300 million jurors that is determining its verdict." He would find them all GUILTY, and would say in his best Clint Eastwood style, "Hang 'em high!"

If Mitt Romney ever becomes president, expect more of the same: expect a far wider disparity between rich and poor, expect less regulation of the banking industry, expect more tax breaks for the rich, and expect more corporate influence in our politics...just like you would if you voted for any of the Republican candidates.

But Mitt Romney is the poster child for the top 1%, and represents everything that has been squeezing and eliminating our middle-class for the past 30 years. Unlike the folks like Mitt Romney, we'll never get a platinum parachute...all we could expect are more pink slips and eviction notices.

It's a shame that so many Republican voters (like those in South Carolina) would rather vote against their own best interests (for someone such as Mitt Romney) rather than for someone more like President Obama (who knows what it's like to go without), simply because he's black.

My related Posts:

PHOTO: The ticker tape that the top 1% used to make all their hard-earned money with back in the old days...when capital gains and stock-options used to be taxed as "regular income". This was before 1921, during the first Gilded Age.


  1. Along with conceding that he benefits from a lower tax rate than most Americans, Mitt Romney tried to downplay another income source that would allow most Americans to live very well over several years. "I've got a little bit of income from my book, but I gave that all away, and then I get speakers fees from time to time, but not very much," he said. For the nine speaking engagements he declared on his 2010 financial disclosure form -- from February 2010 to February 2011 -- Romney pulled in well over $350,000 in speakers fees alone..."but not very much".

    Also read "The Romney Tax Loophole" by Robert Reich

  2. Mitt Romney and Off-Shore Bank Accounts

    ABC: "As one of the wealthiest candidates to run for president in recent times, Romney has used a variety of techniques to help minimize the taxes on his estimated $250 million fortune. In addition to paying the lower tax rate on his investment income, Romney has as much as $8 million invested in at least 12 funds listed on a Cayman Islands registry. Another investment, which Romney reports as being worth between $5 million and $25 million, shows up on securities records as having been domiciled in the Caymans."