Monday, December 19, 2011

12 Days of Christmas - Eight Maids a Milking

So I had thought to do a whole bit on geese and the golden eggs and link that to a lengthy discussion on CEO pay and why I think that is one of the biggest reasons for business stagnation and is just as responsible for the economic woes we are experiencing.

Life got in the way.

So we can shift the conversation and talk about milking the system. I think there is milking of the system on all levels. There are families or communities who have gotten caught up in the system of publicly funded social services, services designed to lend a helping hand short term have been co-oped and turned into a way of life. This is problematic. The solution to this is much more complex and I don't see any quick fix. It now goes back generations.

On the upper end of the spectrum, we have a culture, particularly in business and I am speaking about large corporations, publicly traded companies specifically. I am not a US Senator or Representative, who will talk about small family owned businesses but mean their biggest campaign contributor - ie a large multinational corporation. I am not talking about the small company that is family owned and privately held.

I am talking about AMR (parent company of American Airlines), GE, Merrill Lynch, Chase Bank just to name a few. I am talking about companies where the upper most tier of management make a salary, are almost always guaranteed a bonus (who reading this is guaranteed a bonus???), who gets an annual grant of stock options which is valued in the millions, who has a golden parachute, who gets grants of restricted stock, privately held preferred stock, pays no health care premiums or next to none, is guaranteed a free flight on the corporate jet, in many cases gets a housing allowance, has a huge insurance policy on his/her life, no premium... I could go on but I won't.

All of these perks and at a time when the rank and file employee likely has increasing insurance premiums, is being told to work longer hours with no raise or conversely is being told they have to cut back their hours, as there is not enough money in the "budget" for overtime. Worse yet, companies are laying off again quietly, right before the holidays. Happened right here in CMH. Well known education publisher, over 500 hundred jobs nationwide. Merry Christmas and Happy New Year.

So let's look at the numbers. I will say McGraw Hill does pay a dividend. As an aside, I only purchase and hold companies in my modest investment account, that pay a dividend. We can discuss this at a later date and I will say this example of McGraw Hill would be worse had they nixed the dividend.

So the CEO of McGraw Hill made in fiscal year 2010 - $9,591,916, his annual salary was $1,390,500.

Most of his other earnings in fiscal year 2010 are connected to grants of stock, both restricted stock and stock options. One its face it seems ok. He has been with the company for since 1980. Clearly I think it is fair to say he paid his dues.

But wait a minute. How do we measure performance. His role is to lead the company, make strategic choices and make money for the shareholders. Looking at these charts, I wouldn't say he hit it out of the park, but nor did he lead McGraw Hill to financial ruin either. Is his leadership worth $ 9 million? I don't know. Is he putting in the hours to earn his nearly $1.4 million in salary. Maybe?

Let's look at AMR. A company that is in bankruptcy, something I think we can all agree is approaching financial ruin. Or at the best is an undesirable outcome. Here is some salary information on AMR's retired CEO Gerard Arpey. I was heartened to see that he did not take a bonus last year. News reports indicate he did not get severance when he left. (I am not sure if he walked away nothing or not and if he did they did not call it severance.) Most of his compensation was tied up in stock and frankly the stock is about worthless at the moment. That said, he was the CEO for a long time. His management decisions can be credited with landing the company in bankruptcy. There is no shareholder value. Is he really entitled to anything? This is crux of the problem. Is he entitled to any compensation for running the business to the ground?

Furthermore let's think this through. So often airlines or other businesses want to squeeze the rank and file employees paycheck but then think nothing of adding in more perks to executive compensation. For ever concession he squeezed out of the pilots and flight attendants, did he take a similar one? Did he takes his lumps. After all, when he was squeeze the schedulers, mechanics, pilots and flight attendants, was he adding shareholder value or adding to his own personal bottom line? Did he take an equivalent squeeze? I would say it is doubtful.

I think the business community needs to look at themselves in the mirror and think long an hard about what we define as valuable. Who is adding shareholder value, I mean who is really adding it? The amount of over inflated incentive compensation at the executive level is crazy. The sense of entitlement. At a rate of 2.5 to 3 million per year, 2-5 regular people jobs could be saved if the average executive commitment employee took a modest ($300,00 to $400,000 pay cut.)

While we are speaking about entitlement, let's talk about the notion that we must pay these over inflated salaries in order to attract and retain the "best." I am not buying it. I will tell you why. Most entrepreneurs, true visionaries don't do it for the money. They like the big idea pay off. They like the hunt, the design and the coup of creating or cornering a market. Look at Steve Jobs, he left Apple - dabbled with Pixar and then came back to Apple, only to unveil a string of revolutionary products. I would argue he liked the creation process and not so much the stewardship of business process. Managing  a mature business was not his goal. Did he get crazy rich in the process yes... but bilking or milking the company for all it was worth was not his motivation. I don't think there is anyone who can argue that he did not add value. Was he perfect no.

So how do we define value? How do we define leadership? Does it really make sense to have the executive committee making millions in salary, even if the company is losing money left and right? How is it that Corporate Boards are endorsing contracts where bonuses are guaranteed? (that is the big one in banking folks, a guaranteed bonus??? Talk about NO SKIN in the game.)

I don't agree with most of Occupy Wall Street. I also don't agree with much of what Wall Street is doing. The conversation we need to be having is multifaceted and complicated. I am a firm believer in the free market. Which we don't have. Not by a long shot.

I will also say this. The average person is so disenfranchised at the moment. We are seeing declining wages or frozen wages. Unemployment levels at record numbers in some states. We see banks who make all the rules, don't know their own rules, who are paying HUGE executive comp and foreclosing on people left and right, so that houses can sit empty. This is not good corporate citizenship. We the consumer have no rights. We are faced with agreement documents so loaded with double talk and company protection, binding arbitration and gotcha moments, it has become in many cases protected grand larceny on the part of the business.

This is what we should be protesting. This is what we should be upset about. We have fixated on taxation and the wealthy who don't pay their fair share. Perhaps this is one avenue. I suggest shifting our focus and have the value conversation. Why is there the huge disparity in wages? Why is the cog worth so very little to those controlling the wheel? Why are we willing to work for so little when the executive committee on one hand cries poor, ladles the gravy onto their plates and mismanages the company to boot. I don't understand this and folks, I have an MBA.

I would humbly submit however that the milking or the bilking of the economy, the decimation of the middle class is not solely occurring at the IRS. It is occurring when companies are REWARDED for moving jobs to China. When companies choose to freeze salaries and benefits or cut benefits all while still paying the executive committee over inflated wages and bonus. I am of a mind that the CEO should be paid last, not first. His job is to inspire and lead. His job is to make the company money. In any year that he has to lay off workers - he should forgo his bonus. A good leader worries about those under him, not as a number, but as people. It is never a success, when you have to lay off entire departments and trim the workforce. It does not add value when you "save" the amount of your bonus through laying others off.

It is milking the system. The business community, specifically those in positions of leadership have grown soft. They have very little skin in the game. I used to think stock options and restricted stock were enough incentive. They aren't, obviously. If they were, people like Stan O'Neil and Gerard Arpey would have done the right thing, worked like a dog to solve the problems facing the companies they ran, made those companies profitable instead of running them into ground and then sailing off in to the sunset, whistling all the way to their banks. They failed and yet they do not face financial ruin, they are on easy street, all the while the employees who came to work day in and day out are told, to do more with less and tighten their belts and that my friend is the true inequity. When the rank and file have more skin in the game and more to lose than the CEO. Think about Lehman Bros. The actions of a few, killed an entire company. I ask you, did all that executive comp - did it get the best. I really don't think so...

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