Sunday, August 26, 2012

Stock Returns & Worker Pay Down, CEO Pay High

2012 - "According to a new report by the AFL-CIO, the average CEO at companies in the S&P 500 earned an average of $12.9 million dollars last year. That's 380 times more than the average worker. That total CEO pay figure includes salary, bonus, stock and option awards and other corner office perks." "Back in 1980, CEOs made 42 times what the average worker earned."

July 3, 2012 - Huffington Post - A study shows CEO pay grew 127 times faster than worker pay over the last 30 years. "American CEOs saw their pay spike 15 percent last year in 2011, after a 28 percent pay rise the year before in 2010. Meanwhile, workers saw their inflation-adjusted wages fall 2 percent in 2011, according to the Labor Department."

That's in line with a trend that dates back three decades. CEO pay spiked 725 percent between 1978 and 2011, while worker pay rose just 5.7 percent, according to a study by the Economic Policy Institute. That means CEO pay grew 127 times faster than worker pay.

Pay for Performance?

According to BusinessWeek, the average CEO of a major corporation made 42 times the average hourly worker's pay in 1980. By 1990 that had almost doubled to 85 times. In 2000, the average CEO salary reached an unbelievable 531 times that of the average hourly worker.

"Pay for performance", tying executive compensation to the financial success of their company, has become very popular in the past decade. In the face of the largest bull market ever, that isn't surprising. It also isn't realistic.

CEOs have been using many gimmicks to increase "shareholder value" (stock prices), one being: using overseas and untaxed profits to buy back their own company shares.

May 23, 2012 - Wall Street Journal: "The Journal/Hay survey says that total direct compensation for 248 CEOs in place more than one year rose 2.8% last year, to a median CEO pay of $10.3 million. That compared with an 11% jump from a slightly different group of 225 CEOs in 2010. Total direct compensation includes salary, annual bonuses and the value of equity and performance-based long-term bonuses at the time of grant."

The highest-paid CEO, based on total direct compensation, was Apple Inc.'s Tim Cook, at $378 million. Apple directors in August granted Mr. Cook one million shares of restricted stock, valued at $376.2 million, when he succeeded Steve Jobs.

A greater and greater percentage of CEO pay is now being given through stock options. In 2010, 54 percent of CEOs’ total pay was in stock and options. Last year, that proportion rose to nearly 59 percent.

NOTE: A lower tax rate is also imposed on capital gains for their stock options (at 15%) whereas, a regular base salary or wage can be taxed up to 35% at the top marginal rate.

Bu contrast, middle-class wages of $50,000 a year are taxed at 25%. Also note: A CEO's wages are capped at $110,000 for Social Security taxes and they are not TAXED AT ALL for Social Security or Medicare on their stock options, which often runs in to the millions of dollars every year for each CEO.

It's also worth noting that 50% of ALL Americans earn LESS than $26,000 a year, forcing married couples to both become wage earners in an attempt to keep up with the cost of living; and why most households depend on at least two incomes to pay for the very basics, such as food, rent, and electricity.

But when it comes to the CEOs and those on the Forbes Fortune 400 list, $1 trillion every year in personal income is not taxed at all for Social Security or Medicare.

CEO Pay Versus Performance

Robert Toth, the CEO of Polypore International, earned $15,163,959 last year, up 727 percent - but shareholder return in the company was only up 8 percent.

Bank of America CEO Brian Moynihan’s compensation rose from $1.2 million in 2010 to $7.5 million in 2011. The bulk of that change was a $6.1 million performance-contingent stock grant. The Charlotte bank had a total return for shareholders of negative 58 percent in fiscal 2011.

Among the other CEOs, five saw their pay more than double. Two of them – phone company Fairpoint Communications’ Paul Sunu ($4.3 million, up 448 percent) and tobacco company Lorillard’s Murray Kessler ($13 million, up 250 percent) – were CEOs only part of the year in 2010, accounting for much of the increase. Fairpoint had a negative return of 82 percent, while Lorillard had a return of 46 percent for shareholders. Horizon Lines CEO Charles Raymond retired in 2011, and saw his pay increase 113 percent – mostly due to severance payments – while shareholders saw negative returns of 96 percent.

Lawrence Rogers, CEO of Sealy Corp., saw his pay rise 285 percent, to $4.5 million. The increase was due to a $3.7 million restricted stock unit award he received in 2011. The company had a negative return of 41 percent for shareholders. Sealy said that as a result of the performance, Rogers received no cash bonus. The board awarded him 1.4 million shares of restricted stock that will vest in 2013.

In 2011 Western Refining CEO Jeff Stevens saw his total compensation jump 82%, but his shareholders only realized a 25.6% return on their investment.

Gregg Engles, 54, founded Dean Foods in 1994. His total compensation in 2011 rose 52% to $8.5 million, even though the company lost $1.6 billion amid big write-downs.

Dan DiMicco, CEO of Nucor, was paid $8.1 million, up about 20 percent from 2010. While the company’s return for shareholders was a negative 6.3 percent.

SPX Corp awarded CEO Chris Kearney $7.8 million for 2011, up 18 percent from 2010, but shareholders saw a negative 14 percent return in 2011.

Here's just a short list of other CEOs who received salary increases despite shareholder losses. There are many, many more.
  • Terrance Marks - The Pantry Inc. (resigned last year) $3,088,225, up 105 percent. Shareholder return: Negative 47 percent.
  • Eric Pike - Pike Electric $2,285,826, up 15 percent. Shareholder return: Negative 6 percent.
  • Charles Raymond - Horizon Lines (retired last year) $1,446,218, up 113 percent. Shareholder return: Negative 96 percent.
  • Michael Hough - Hatteras Financial $1,398,164, up 64 percent. Shareholder return: Less than 1 percent.
  • Murray Kessler - Lorillard Inc. $13,006,468, up 250 percent. Shareholder return: 46 percent.
  • Steve Macadam - Enpro Industries $5,526,357, up 32 percent. Shareholder return: Negative 21 percent.
  • Charles Swoboda - Cree Inc. $5,351,671, up 25 percent. Shareholder return: Negative 48 percent.
  • Carolyn Logan - Salix Pharmaceuticals $5,027,041, up 32 percent. Shareholder return: only 2 percent.
  • Robert Harrison - Alliance One International (now retired) $4,707,022, up 74 percent. Shareholder return: Negative 21 percent.
  • Edward Fritsch - Highwoods Properties $3,584,448, up 5 percent. Shareholder return: Negative 2 percent.
  • David King - Laboratory Corp. $10,870,216, up 14 percent. Shareholder return: Negative 2 percent.
  • Richard Noll - Hanesbrands Inc. $10,259,939, up 5 percent. Shareholder return: Negative 14 percent.
  • Brandon Bethards - Babcock & Wilcox $5,769,562, up 1 percent. Shareholder return: Negative 6 percent.

Performance Debunked

BusinessWeek: Graef Crystal, a pioneer in compensation consulting, analyzed the 2009 pay of 271 chief executive officers. His findings? "Simply put," Crystal says, "companies don't pay for performance."

In an ideal world, Crystal and many investors agree, stock performance and CEO pay should be closely aligned. But no matter how he parsed the numbers, Crystal discovered there's no relationship between shareholder returns and CEO compensation.

Crystal created a "fair pay" model that redistributed the $2.7 billion aggregate payroll of all of the CEOs according to each company's shareholder return, and adjusted it for company size. Under that model, CEOs such as Frank Baldino Jr., the founder of Cephalon, was the most overpaid, according to Crystal's algorithm: He took home $11.15 million, 800 times more than what the model said he deserved.

Crystal recommends awarding stock options with a strike price that's the average of the last 90 days and can't be exercised for five years to avoid "opportunistic" pricing. He also suggests reducing bonuses if incentive targets aren't met.

Some of Crystal's former clients have called him a Judas for criticizing the system he used to be a part of. He prefers to be compared to Mary Magdalene. "Maybe I was a hooker," he says. "But I'm hoping to end my life as a saint."

According to Crystal, the companies that overpaid their CEOs by the most were:

  • Cephalon, 732 percent overpaid
  • Allegheny Energy, 554 percent overpaid
  • Eastman Kodak, 278 percent overpaid
  • Exxon Mobil, 278 percent overpaid
  • Comcast, 256 percent overpaid

Old Fashion Greed

As corporate taxes have gone down over the last 30 years, CEO's pay packages have gone up. As good jobs have been outsourced overseas for cheaper labor, domestic wages for the CEO's employees have gone down. As wages go down for domestic workers (and tax loopholes increased for American CEOs) tax revenues have declined as a percent of GDP, because of the tax laws that congress writes favoring large corporations and their CEOs, not average American workers or REAL small businesses owners (those that actually hire workers, not hedge fund managers, etc).

Corporations are always breaking the law for profits, but because they have "limited liability" their CEOs often don't get sued personally or go to jail - the company is usually slapped with a small fine. To see another list of CEOs who committed crimes and fraud (and who were caught and punished so far), read my posts: Job Creators: The Root of Most Evil and Proof that CEOs are Evil Psychopaths

* To see the original SEC document for each company and more detail (called a DEF 14A) go to this link.

Also, Google: Bud Meyers tax evasion


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