Politics and Corporate Compensation 4-16-04

Politics and Corporate Compensation


Richard J. Garfunkel

April 16, 2004



It is great when you have smart friends and relatives. I applaud both of you for your thoughtful remarks.  Both of you are much more neutral than I am, and therefore you have the luxury of looking for solutions that are more apolitical. From my perspective, for better or worse, the political centrist leadership (of the post WW II era) of the past has disappeared. We had patriotic presidents who knew how to work with Congress and for better or worse could keep the extremes in their parties marginalized. In a sense even Nixon was a pragmatist of the center right. I didn't like him, and he exploited issues, but personality and psychosis aside, he wound up being a practical leader who understood domestic needs. He also understood the power of the Democratic majorities in the Congress. Even to a degree with Ford and Carter, there was a sense of the centrist perspective to satiate the common weal. They were not great leaders. They inspired no one. Ford was a caretaker that should have never run on his own. Even though he only lost by a whisker to Carter he should have been beaten by a mile. His remarks “Drop dead NY” and his incredible debate faux pas over Poland haunted him. But he was an uninspiring dolt who contributed the WIP button to his forgotten political legacy. Carter was the ultimate outsider, who was elected because of the Ford pardon of Nixon if nothing else. He was over his head, but still could have beaten Reagan if it wasn't for the hostage crisis in Iran. So what if he could have won. The real political change came with Reagan! Reagan and his cohorts really opened the door for the right. Of course he was too “spaced out” to pay any attention to what was really happening. Certainly even Barry Goldwater was frightened by what Reagan loosed on the body politic. In a sense our free society has, by the nature of being so free, drifted towards libertarianism of the left and the right. On the left everybody wants something and wants the freedom to do it, or try it. If it feels good and no one is harmed, so what's the problem! We have all felt that way for a time. (In the words of Winston Churchill, “Any man who is under 30, and is not a liberal, has no heart; and any man who is over 30, and is not a conservative, has no brains.”) So through it all, with conservative or liberal government there are no standards, period. But on the right we are seeing the new social Luddites, who want economic freedom, with as little regulation as possible and taxes as low as they can be made. No regulation, laissez-faire, and every man for his/her self. In other words whatever he/she can take, so be it. Just look at the salaries posted in the Wall Street Journal's Executive Pay in the Journal Report of April 12, 2004. Fitting, in an ironic way, that this should come out on the anniversary of FDR's death. 


Salary and Bonus- some selections: Freeport-McMoRan-CEO- $5,540 million in 2003 with $10M in stock options and $50M more in potential options, Merrill-Lynch-CEO- $28M in 2003 with $37M more in unrealized stock options, Time-Warner-CEO, $9.5M and $11.6M in stock options with another $18.9M in unrealized options.  Also the front page of the NY Times' Business Day section, bonuses top $41.4 million at troubled Interpublic for its executives. With Federal taxes at 35% for anyone over $300,000 per year they should cry? This compensation is way out of control. Where did they get all of their stock? They didn't buy it!


Some critics of pay ratios, say formulas that exclude options are useless. “Usually it's a charade,” says Mr. Alan Johnson of Johnson & Associates, managing director of pay consultants in NY. He says, “employees see through it. They know the CEOs are making millions on stock, so limiting them on salary means nothing. It is a PR gimmick.” (Wall Street Journal). It is a known fact that in and around 1970, CEO's of Fortune 500 companies made in real dollars a ratio of 43 to 1 over the average salary of their employees. In real dollars, wages, taking in account inflation over the past 34 years or so, have gone up slightly. In other words, the $17,000 of 1970 is not worth much more than the $35-40,000 of today. Of course times have changed, and our economy has shifted greatly over the last 30 or so years. Our manufacturing has shifted to overseas, and we are much more of a service economy today. No question “freer” trade has brought more total prosperity to America. But where is that prosperity concentrated and what will be the affects. In that light, executive compensation is now 1000 to one! So we have seen what has happened. The GOP/Right has encouraged the lowering of taxes, the conglomeration of industry, the exporting of jobs overseas, the deregulation of industry, and the accumulation of greater money in fewer hands. Now as in 1929, less people own more of America!


Of course, one immediate result is that the “entitlements;” Social Security and Medicare are under attack. Certainly they are threatened by the demographics facing us. We have a large “baby-boom” population (64-74 millions) that is aging. This population emerged from parents that had 2.6 children per family. It is now being replaced by a generation that is composed of 2.1 children per family. Generally speaking this smaller population is not as wealthy and earns less in the service sector than its parents, the baby-boomers, earned in the manufacturing sector! Is the answer less taxes for this wealthiest of classes? It was said that to tax these people at previous levels would only bring in 4% more! Well 4%, if that is correct, will bring in $40 billion at least. (Also why is $75 billion being used from the Social Security trust fund for the general fund?) I am sure that figure of $40 billion is probably incredibly low. I have also noticed that a recent report has stated that the IRS has been lax regarding the issue of corporate taxation. In fact, US Corporations are not paying their fair share, and many have been running to offshore tax shelters for years, while they drape themselves in patriotism! The case of Stanley Tool recently comes to mind! So with corporate taxes at all-time lows (post WWII) and the capital gains tax at 15%, and the highest marginal rate at 35%, one can readily see why we have a $500+ billion deficit that is growing. Should we continue down this path until we are broke?


In conclusion, to have a vibrant and just society, we all have to contribute. I cannot and will not equate Hollywood silliness, gay marriage, social promotion, foul language, indecent activities, Michael Jackson, Howard Stern, Don Imus, the NBA, college athletic abuses, and other ridiculum with the hypocrisies of Rush Limbaugh, and his rightwing shock jock colleagues.  The abuses of Enron, World Com, Global Crossing, Tyco, and the rape of children by Catholic priests is not the product of liberal, or libertine largess. In other words, where are we going? To tell the truth, I have no clue!  But for sure I hope that we throw Bush II out, and get new reasonable middle of the road leadership.




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