American Feudalism

Daniel Drew,  12/12/2014



If you make $20 per hour and are unhappy about it, take note that Larry Ellison only has to work 2 seconds to make more than you.

Larry Ellison retired from his CEO position at Oracle in September, but not before making $76,900,000 last year for his services. How much is that?

$38,450 per hour
$641 per minute
$11 per second

On December 3, the Association of Executive Search Consultants released their annual executive compensation report. 44% of executives at the CEO level had compensation gains from the previous year. This is not what the average American experiences. Until 1975, wages were more than 50% of the gross domestic product, but in 2012, wages fell to a record low of 43.5% of GDP. From 1973 to 2011, worker productivity grew 80%, while inflation-adjusted median hourly compensation only grew 10%.

So much for "working smarter." Boost your efficiency, and watch your wages decline. This is the opposite of the way CEOs are compensated: destroy shareholder value, and boost your compensation.

The ratio of CEO pay to the average worker has increased by about 1,000% in the last 40 years. Instead of making 20 times as much as you, now they make on average, about 200 times as much as you. As the system compounds on itself, the trend will only continue.

Executive Compensation

Lucian Bebchuk, a professor at Harvard Law School, discusses CEO pay in his 2006 book Pay Without Performance: The Unfulfilled Promise of Executive Compensation. From 1993 to 2002, the total compensation of the top five executives in all public companies amounted to $250 billion.

How did we get to this point? The executives are supposedly being compensated for their production value to the shareholders. But are they really adding any value? An academic study that was published in October says no. It's actually the opposite: CEO compensation is negatively correlated with future stock returns up to three years, with underperformance of 8%. The effect is the strongest for CEOs who receive high relative incentive-based pay and CEOs who have been in their position the longest.

This study obliterates the whole concept of incentive-based pay. The only incentive created is to insider trade, manipulate their stock prices, and exercise their options and sell their shares at just the right moment. Who cares about the long term performance of the stock, the pension funds, the retirees who have been told to buy and hold? Why do they matter? Once they get their money, they can retire and become board members, and they can hire the next generation of capitalist gods.

In theory, the power rests with the shareholders. But you try taking your 100 shares of Coca Cola and voting against the board members. See if you are successful. Who decides how much the board is paid? The board. Who decides how much CEOs are paid? The board. It gets better when the CEO is also the Chairman of the Board. Even when the CEO is not the Chairman, the board is staffed with cronies. They are on the compensation committee and decide how much to pay the CEO.

Stock Performance

In 2004, nearly 75% of publicly owned companies in the Fortune 500 had CEOs who were also the Chairman of the Board. 60 companies that had separated the role had installed the former CEO as chairman. Only 34 companies had a fully independent chair.

Companies that separated the CEO and Chairman positions had outperforming stock returns in a 5 year period. The companies with a combined CEO/Chairman role outperformed for 1-3 years, but then underperformed on a 5 year time frame. This is not surprising because the stock option compensation package creates an incentive for the CEO to manipulate the share price. Researchers found that in the year prior to vesting dates for big option grants, CEOs spent significantly less on long-term investments: research and development in particular, as well as advertising and other capital expenditures.

Outrageous CEO pay exacerbates wealth inequality, which is at a 30 year high in developed countries and is reducing economic growth by 6% - 7% in the United States.

69 of the 100 largest public companies in America have a CEO who is also the Chairman of the Board. That would be like Obama being the Speaker of the House of Representatives. Yeah. It makes zero sense.

Conflict of Interest Conflict of Interest Conflict of Interest Conflict of Interest