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The New Robber Barons

By Bruce Workman

In Medieval Europe, many noblemen made their living by either robbing those who crossed their vast estates or keeping them in their dungeons until ransom was paid. During the latter half of the 19th century many American tycoons built their wealth by building monopolies and ruthlessly exploiting labor and natural resources. The American Heritage Dictionary defines robber baron as:

  1. A feudal lord who robbed travelers passing through his domain.
  2. One of the American industrial or financial magnates of the latter 19th century who became by unethical means; such as questionable stock-market operations, or exploitation of labor or political connections.
Today a landowner can do little more than have an intruder charged with trespassing - indeed if the landowner were to take further action he could find himself facing criminal charges. These days, laws covering anti-trust provisions, environmental protections and labor fairness restrict would-be monopolists. Surely with all our laws and heightened social consciousness, these unscrupulous men could no longer exploit our economy and society. Unfortunately, this has not been the case. Almost daily we are bombarded with news reports concerning mass layoffs. Real wages for the rank and file have remained almost stagnant or even dropped in some cases (Wolff). Workers looking forward to retirement after many years of service to the same company suddenly find themselves unemployed and possibly unemployable. Yet throughout all this turmoil, at least one group has prospered. The total compensation for top executives at our corporations has experienced unprecedented growth. In many cases, chief executive officers are receiving packages that amount to a nine-digit annual income (Colvin 64). This exorbitant executive compensation in the midst of corporate downsizing is unconscionable. Modern American corporations have several stakeholders that they directly impact: shareholders, employees, communities, and the society in which they function. Disregarding the interests of the many stakeholders, the new robber barons accelerate their plunder.

For the past three decades we have heard so many reports of enormous corporate downsizing that we have almost become accustomed to the phenomenon. The layoff used to be a temporary gap in employment that only occurred during downturns in the economy. Workers-mostly blue-collar-were called back to work as soon as the economic situation improved. More recently, a layoff has come to mean a permanent termination of employment and for the remainder of this paper we will use this definition. Lately, layoffs have occurred during periods of economic growth. We have been so inundated with tidings of mass firings that we have come to accept them as status quo-for everyone but ourselves. Our work ethic leads us to believe that if we work hard we will never be laid off (Downs 18-19). We prefer the sentiment that the victims have done something to cause their own plight. Nothing could be further from the truth. There are thousands of sad stories about those who dedicated most of their lives to a company only to be unceremoniously dismissed.

It is more than laid off workers who pay. Society as a whole is adversely affected by large-scale layoffs. Communities lose major portions of their tax base right as their expenses begin to rise (Downs 19). Consider Bartlesville, Oklahoma after corporate raiders set their sights on Philips Petroleum. The resulting mass layoffs created a ripple effect throughout the entire community that ravaged banks, schools, real estate, and the city's entire economy. The effect can be so profound that even the threat of a layoff can cause communities to grant crippling tax breaks, as was the case in Shreveport, Louisiana when AT&T threatened to close its distribution center there. The town of Joliet, Illinois was so devastated by mass layoffs from it largest employer, Caterpillar, it resorted to becoming a municipality almost entirely dependent on riverboat gambling-a shaky proposition at best (Downs 55-62).

Doesn't a company have a right to hire and fire anyway it sees fit? Isn't this one of the basic assumptions of employment? Harry J. Van Buren III, doctoral student at the University of Pittsburgh School of Business, suggests there are implied psychological and social contracts between employers and employees: "...the fact that many society (and for that matter, personal) expectations of employers are neither codified into law nor included in a formalized contract is not necessarily fatal to their use in a theory of corporate responsibility.." (Van Buren 207). In fact, most relationships within a society are governed by unwritten contracts. Merely adhering to the letter of the law does not make one a responsible member of the community. "Because corporations are members of the societies in which they operate, they are subject to local social contracts. Respect for local values and mores is to be expected for the corporation to be considered a good citizen" (Van Buren 209). David Packard, legendary co-founder of Hewlett Packard, proposed the corporate triangle model, the three points representing shareholders, management, and employees. He believed every corporate decision should be based on the interests of all three. A lopsided triangle has recently emerged. Stockholders scream for higher stock prices and dividends while management demands ever increasing compensation. Employees pay the price for this imbalance through layoffs and oppressive workloads (Downs 22-25).

How did we get from the days when people retired from the company where they had spent their whole careers to the present day slash and burn corporate mentality? The answer lies in the contemporary corporate executive's obsession with quarterly results and his own compensation package. Good management practices, such as process improvements or total quality, may take time to produce results. Reducing payroll lowers expenses immediately. For those who fixate on the short term, quarterly results, the quick payback from a layoff is attractive (Downs 16). When The Institute for Policy Studies and United for a Fair Economy released their annual pay survey for 2000, "It found that chief executives of the 52 major companies that announced layoffs of at least 1,000 employees in the first half of 2000 earned about 80 percent more on average than CEOs at 365 big corporations surveyed by Business Week magazine. It said the top job- cutters got an average increase in salary and bonus of nearly 20 percent last year, compared with average raises for U.S. wage earners of around 3 percent ..." (Gordon)

Aren't these job-cutting executives just controlling expenses and looking out for the interests of the shareholders? Alan Downs, consultant, management psychologist, and former human resources executive, states in Corporate Executions: The argument that the reduction mentality accounted for the swift growth in the 1980s just doesn't hold up according to the latest Census Bureau analysis. The study, based on detailed nonpublic corporate disclosures in the economic census, which is taken every five years, found that labor productivity fell in more that one-third of the companies that laid of workers between 1977 and 1987. The survey also found there were just as many successful "upsizers" as there were downsizers during that period, suggesting that downsizing may be limiting productivity growth rather than improving it (191).

The truth of the matter is, corporate executives don't have to be as concerned about the shareholders as they once were. Due to regulations, the proxy fight-formerly the ultimate weapon in the shareholder's arsenal-has become very expensive. Coupled with the limited success rate, the proxy fight has become too costly to undertake for most shareholders. Between 1962 and 1978 there were only 96 proxy contests involving New York Stock Exchange and American Stock Exchange firms and dissident stockholders won in only 25 percent of those contests (Dodd 60). One way that management shows its disregard for stockholders is the increasing use of stock options in executive pay packages. Giving out options cost the company's shareholders in two ways: by diluting their stake in the company when the company issues new shares to cover the options and by forcing the company to repurchase shares in order to keep options from affecting earnings per share. One study found a very strong statistical link between options use and share buybacks. The problem for shareholders arises because executives try to exercise options when the share price is at its highest. This means, in order not to dilute the stock, the company must repurchase shares of its own stock at a premium price (Fox 87-88).

A section buried within the Revenue Act of 1950 amended the tax code to make it legal and practical for companies to pay employees with a form of currency called the stock option. From this humble beginning, the executive pay madness began (Colvin 64). Stock options are simply the option to buy company stock at a specified price regardless of the stock's market price at the time they are exercised. Company financial statements treat stock option grants as though they don't cost the company anything¾of course this is just accounting hocus-pocus. As a pre-retirement gift, GE gave Jack Welch, their outgoing CEO, 3 million stock options. Similar options sold on the American Stock Exchange were $6.90 each, making the initial worth approximately $20 million. But, Jack's options are actually worth even more than the ones the public can buy. The options sold on Amex expire in three years. Mr. Welch's options last ten years. If GE shares repeat the performance of the past ten years, the profit on these options would be in the neighborhood of $1 billion. This is money the company-and its shareholders-would be giving up by selling at discount to Welch instead of full price on the NYSE (Fox 86). Although stock options have been around since 1950, it wasn't until stocks experienced a long coma in 1964 that we began to see the stirrings of today's opulent reward system. The market was going nowhere so traditional stock options weren't paying off and large raises seemed hard to justify. This is when compensation consultants entered the picture. These consultants began their continuing job of devising pay-enhancing gimmicks. They are the pay machine's expert mechanics in the conflicted role of being paid by management to advise management on how management should be paid (Colvin 66).

The efforts to align the CEO's interest with the shareholders' by using options worked better on paper than in actual practice. The options were granted on top of an already generous salary; so if the stock did poorly, the CEO simply wouldn't exercise the options (Colvin 67). Louis J. Brinidisi, Jr. of American Compensation Systems, Inc. writes: A large number of today's executive pay packages insulate the CEOs from the consequences of weak performance and low market valuations of their stock, while positioning them to benefit from any positive results that occur... (Brindisi 331) Geoffrey Colvin, editor and columnist for Fortune magazine goes further: The No. 1 earners in each of the past five years got packages valued cumulatively at nearly $1.4 billion, or $274 million on average. Yet far from delivering the superb results investors might have expected from the world's highest-priced management, four of the five companies have been marginal to horrible performers. They are Walt Disney, Cendant, Computer Associates, and Apple Computer (Colvin 65).

The bulk of stock options end up in the hands of the five or six executives whose compensation is detailed in the company proxy statement (Fox 90). The most optioned stock of Fortune 500 companies was Merrill Lynch with options representing 23.1% of outstanding shares. The impact of options on Compaq's earnings per share was -67%. At Siebel Systems, a NASDAQ stock, options represented 41.6% of outstanding shares with top executives holding over a third of those options (Fox 91-92). These can hardly be beneficial situations for shareholders.

How do the outrageous pay packages keep accelerating despite mixed performance results? When a company fires its CEO, it must pay a huge signing bonus to the replacement to compensate him for the options lost by leaving the current employer to accept the new position. The ousted CEO was probably earning a lot for doing a lousy job, so the replacement can argue that he is worth much more. If the replacement is eventually let go, the cycle begins anew (Colvin 67). "An awful lot of executives should honor Curt Flood," says Michael Halloran of SCA Consulting. Flood's challenge of the reserve clause in baseball players' contracts, though unsuccessful at the time, led to the days of free agency beginning in the 1970s. CEOs could now argue that they were surely worth more than a 20-year-old shortstop. "The counterargument-that athletes' pay, unlike CEOs, was determined in a brutally competitive open market-didn't get much airtime in the boardroom"(Colvin 66). The executives have taken this springboard to launch compensation to ludicrous heights. In a study showing comparisons of compensation in 1990 to 2000 by market sector, the largest increase for a CEO in the same position was shown to be 12,444%. Most CEO pay increases in this same period were 500% or more. In contrast, the pay for the average major league baseball player increased 217% in the same period, the average NYC teacher's pay increased 20%, the minimum wage rose 36%, and the consumer price index rose 32% (Loomis 83-84). Steve Ross' salary of $75 million and options package of $215 million as CEO of Time Warner in 1990 pales in comparison to Apple's Steven Jobs' $381 million pay and $872 million in options grants in 2000 (Colvin 70).

For those who may believe that the boards of directors determine executive pay by fair market value and in the interest of the company, Carol Loomis' Fortune magazine article, "This Stuff is Wrong," reveals some disturbing information. In order to get board insiders to speak openly, Loomis had to promise anonymity to those he interviewed. One speaker, a corporate executive with wide experience on boards, states: When it comes to relating executive pay to performance, compensation committees are really in the pockets of CEOs. There are all kinds of cozy relationships involved. And when a CEO wants the rules changed as to how people are paid, the rules simply get changed (74).

Another board insider, a well-paid CEO who has served on several boards is quoted: They now use performance formulas-based, say, on return on equity-that determine the size of the bonus pool. Most of the formulas are b.s. When you've got a formula, you've got to have goals-and it's the people who are the recipients of the money who are setting these. It's in their interests to keep the goals low so they will succeed in meeting them. You've got the fox in the chicken coop (73).

Yet another interviewee, the CEO of a very successful Fortune 500 company, says: The way I see it, the stockholders are going to continue to get screwed. Workman 10 Baseball players will get paid according to their batting averages, entertainers will get paid according to the size of their audience, and CEOs will get paid according to a system that scorns objectivity and market forces (76).

The big guys make out like bandits even if they leave the job. This is accomplished via change of control triggers for severance pay, more commonly known as "golden parachutes." When William Agee resigned as the chief executive of Morrison Knudsen Corporation in early 1975, that company had recorded a loss of $114 million over the previous two years. During that time, Agee received $3.5 million in cash and other unspecified benefits. On leaving the company, his severance package was estimated to be between $1.5 million and $4.8 million by a compensation expert. Ironically, at time of paying Agee his generous golden parachute, Morrison Knudsen laid off 277 workers with no severance pay (Downs 29) John Riley of Cooper Industries has his options and restricted shares become vested immediately should he quit for "good reason" following an outsider purchase of 15% of the stock. Donald Graber of Huffy Corp. would get $4.5 million if he quit for any reason after two people not nominated by the company join the board. Several key Sprint executives decided to quit after the company was forced to vest $1.7 billion in options when shareholders approved sale to WorldCom-the payout was not affected when federal regulators squashed the deal. Three executives at US Airways shared $45 million in severance pay even though the sale to United Airlines was aborted (Condon).

Even a national tragedy cannot seem to slow down the plunder by the new robber barons. The recent airline financial rescue package, following the events of September 11, did little to force top executives to give up their lavish remuneration. To make matters worse, the biggest airlines balked at providing standard severance packages and other assistance to laid-off employees¾layoffs in travel-related industries could reach 500,000. Contrary to some early misconceptions, the airline relief bill does not limit current airline executive pay. It limits those who made at least $300K to no increase in salary, bonus and benefits for the next two years (Asker).

Clearly there is a disturbing trend in this country's corporations. Chief executives continue to receive ever-increasing compensation while employees face increasing economic uncertainty. If we do not wish to become a nation of haves and have-nots, like some third-world plutocracy, we must do something to stem the tide. The new robber barons must be deposed soon.

Perhaps the first step toward dethroning the new robber barons is exposing the magnitude of their spoils. As recently as 1992, 72% of the respondent to a USA Today poll said $1 million was too much to pay a top executive no matter how well a company performed (Osborn). Yet, other surveys suggest that most people were unaware that more than half of the top executives at the 500 largest corporations made over $1 million in salary and bonus in 1992. One of the problems is the complex pay packages executives receive. The combinations of salary, bonus, stock options, and perks that compensation committees hand out are too complicated for anyone other than an accountant to comprehend. At least two organizations are working to correct the public awareness situation: AFL-CIO's Executive PayWatch and United for a Fair Economy The PayWatch website offers specific information about the total compensation of the top executives at nearly all American corporations and both sites provide instructions to help the average citizen become more actively involved in the war on wage disparity.

Any attempt to make corporations become more responsible toward their communities and workers must be national in scope. As evidenced by the numerous companies that are incorporated in Delaware despite not being headquartered or having substantial operations there, corporations use differences in state and local laws to their advantage. Even the most ardent supporter of states rights can't argue that the overwhelming majority of corporations don't engage in interstate commerce. I certainly wouldn't propose that states and municipalities don't have the right to set their own tax policies. I would, however, propose that federal regulations be enacted that require any corporation granted a state or local tax abatement not to reduce the local workforce for the period of that abatement. This would address situations such as the aforementioned dealings of AT&T in Shreveport. This would also hinder some of the aggressive deal shopping between corporations and local governments. Corporations and localities may be more prudent in their negotiations if both parties know they will have to live with the results for some time.

The shareholder proposal exclusions in SEC 14a-8 are purported to prevent frivolous proposals from wasting the company's time and resources. Raising the minimum investment requirement to $10,000 should prevent a rash of frivolous proposals. Recent SEC rulings and amendments to Rule 14a-8 permit shareholder proposals concerning social issues. Surely the average shareholder is just as interested in the compensation and continued employment of the company's directors and top executives as he is in whether or not free-range chicken is served in the corporate lunchroom. I propose Rule 14a-8 be amended so that shareholder proposals concerning the termination of board members or the companies top 5 highest paid executives are required to be placed on the company's next proxy statement. Perhaps executives would become more compassionate if the specter of the sudden loses of employment hung over them the same way it haunts the average worker.

Furthermore, golden parachutes should be eliminated. Current law limits the tax deductibility of excessive severance pay, but I propose the practice be eliminated entirely. Top executives should receive severance packages based on the same formulas used for other dismissed employees and in no case should severance pay be issued to someone who quits their job for any reason. Workers don't receive guaranteed protections against changes of control and neither should executives. There is no plausible justification for the fat cats not to face the same employment uncertainties that the rest of the workforce does.

Also on the legislative front, Congressman Martin Sabo (D-MN) has introduced the "Income Equity Act-2001." This bill would limit an employer's tax deduction for any employee's compensation to an amount equal to 25 times the company's lowest full-time employee's salary. Mr. Sabo's bill would not limit the amount a corporation may pay an executive; it would only limit taxpayer subsidization. Although current federal law limits the amount of deductible salary to $1 million, the exemptions for performance based pay leaves loopholes large enough for any compensation committee to easily circumvent any restrictions. The latest version of the "Income Equity Act" includes virtually all forms of compensation. This marks the eleventh time that Congressman Sabo has introduced a version of this bill. The previous ten versions-dating back to 1993-were all referred to committees where they were tabled and suffered a silent death. Mr. Sabo has no illusions the 2001 version will fare much better in the Republican-controlled House (Sabo). Perhaps through the educational efforts of organizations like the AFL-CIO and United for a Fair Economy, enough public pressure can be brought to bear on Congress to force a serious debate on the issue of outrageous executive compensation.

Works Cited

Asker, James R. "Unions See a 'Slap' to Laid-off Workers." Aviation Week and Space Technology 1 Oct. 2001:40.

Boisseau, Charles. "Workers foot bill for boosts in bosses' pay." Houston Chronicle 7 June 1996: B1+.

Brindisi, Louis J. "Creating Shareholder Value: A New Mission for Executive Compensation." Stern, Stewart III, and Chew Jr. 323-338.

Colvin, Geoffrey. "The Great CEO Pay Heist." Fortune 25 June 2001: 64-70.

Condon, Bernard. "Chairman of the Hoard." Forbes 1 Oct. 2001: 54

Dodd, Peter. "The Market for Corporate Control: A Review of the Evidence." Stern, Stewart III, and Chew Jr. 45-65.

Downs, Alan. Corporate Executions : The Ugly Truth About Layoffs---How Corporate Greed Is Shattering Lives, Companies, and Communities. New York: American Management Association, 1995.

Fox, Justin. "The Amazing Stock Option Sleight of Hand." Fortune 25 June 2001: 86-92. Workman 16 Gordon, Marcy. "Layoffs Bring CEOs Hefty Boosts in Pay, Study Finds." Detroit News 29 Aug. 2001: B3.

Loomis, Carol J. "This Stuff is Wrong." Fortune 25 June 2001: 72-84.

Osborne, Michelle. "$ 1 million too much to pay executives." USA Today 11 March 1992: 1B

Sabo, Martin Olav. Congressman Sabo's Home Page. 14 November 2001. 24 November 2001.

Stern, Joel M., G. Bennett Stewart III, and Donald H. Chew Jr., eds. Corporate Restructuring and Executive Compensation. Cambridge, MA: Ballinger Publishing Company, 1989.

Van Buren III, Harry J. "The Bindingness of Social and Psychological Contracts: Toward a Theory of Social Responsibility in Downsizing." Journal of Business Ethics 25.3 (2000): 205-19.

Wolff, Edward N. "Working Paper No. 300: Recent Trends in Wealth Ownership, 1983-1998." Jerome Levy Economics Institute. 12 Apr. 2000. 14 Oct. 2001

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