9.20.2006

LINKS

THIS IS ALL CAPS WORTHY. SO IS THIS. SO IS, OF ALL THINGS, GREGG EASTERBROOK:

Bad enough is the matter of executives insisting what they receive be called "compensation." Workers get wages, white-collar employees get salaries and executives get "compensation," as if they were lofty philantrophists. Keep in mind Orwell's maxim that we cannot think clearly about things unless we call them what they are. By insisting their pay be referred to using a silly euphemism, executives make it harder to think clearly about their excesses...

Next, consider that executive income usually is rubber-stamped by boards of directors whose members may be engaged in self-dealings with the firm, or who have a self-interest in rising CEO pay. As Julie Creswell noted in the New York Times, "Five of the six active Home Depot board members are current or former chief executives of public corporations … CEOs benefit from one another's pay increases, because compensation packages are often based on surveys detailing what their peers are making."...The board members know the more they inflate CEO pay, the more they themselves will be able to pilfer from their own shareholders...

Recently the Business Roundtable released a study purporting to show that CEO pay rose 9.6 percent annually from 1995-2005, while stockholder returns rose 9.9 percent in the same period. So things aren't so bad, eh? The Business Roundtable said the study "sets the record straight." The Business Roundtable is, by its own description, "an association of chief executive officers of leading U.S. companies." As Gretchen Morgenson, dean of Wall Street journalists, laid it out in the New York Times, the study systematically understated the income of CEOs in two ways. First, the numbers exclude dividends received by CEOs on restricted stock holdings, and this is often a big chunk of executive income. Second, Morgenson wrote, "The study counts only the value of the options and restricted stock received by executives on the dates the awards were made."

That renders the study about as truthful as an Enron balance sheet. Suppose I award you an option for a share of Tuesday Morning Quarterback Enterprises, on a day the stock is selling for $10. Naturally the value of my company skyrockets -- based on hat and T-shirt sales, perhaps. The stock price hits $50, you exercise the option, sell the share at $50 and realize a $40 gain. According to the Business Roundtable you made $10. Include the value of gains on stock options and restricted grants, Morgenson found, and CEO pay increased far faster than shareholder returns in the last decade. Now guess who the chairman of the Business Roundtable was when the "sets the record straight" study was being prepared: Hank McKinnell of Pfizer. How does it serve the interests of CEOs for their trade association to be blatantly dishonest toward the public about CEO pay? Unless the Business Roundtable is saying that CEOs as a group wish to deceive the public.
ANNALS OF CAPITALISM. (DIDN'T ALL CAPS HIM, BUT THINK HOW MUCH MORE POWERFUL IT WOULD'VE BEEN.)

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