CEO Pay: Money for Nothing?
By Dean Baker
t r u t h o u t | Perspective
Monday 14 January 2008
One of the standard yearend rituals is to assess the stock market's performance for the year. Many people noted the Dow Jones index rose a respectable 7.5 percent in 2007. Before anyone celebrates this modest achievement, it is important to remember the Dow includes just 30 blue chip stocks. The much broader S&P 500 index rose by just 3.5 percent, slightly less than the rate of inflation in 2007. In other words, the real return for most stockholders was roughly equal to what their stock paid out in dividends, not a terribly good story.
In fact, poor stock returns are not a new phenomenon. If we go back ten years, we find the S&P 500 has risen by a cumulative total of 52.6 percent from December 1997 to December 2007. After adjusting for inflation, the increase was 17.3 percent, which translates into real growth of just 1.6 percent a year. Add in a dividend yield of approximately the same size, and we get that the average real return on stocks over the last decade has been 3.2 percent, a bit lower than the yield that was available on inflation-indexed government bonds ten years ago.
This is rather striking. It is unlikely many people invested in stock for the sort of return that is typically associated with government bonds, which are much less risky. At least for the last decade, stockholders have not been rewarded for taking this risk.
This brings us to the topic of CEO pay. We saw an explosion in CEO pay that began in the eighties and has continued into the current decade. While the ratio of the pay of CEOs to an average worker had been around 30 to 1 in the sixties and seventies, by the end of the eighties it stood at more than 70 to 1. It crossed 100 to 1 in the early nineties. The ratio has been perched between 200 to 1 and 300 to 1 since the late nineties, with CEOs at major companies routinely pulling down pay packages in the tens of millions, and running into the hundreds of millions in good years.
This explosion of pay at the top was justified, by many economists, based on the returns CEOs produced for shareholders. The argument was that even these incredibly high salaries still were just a small fraction of the value the CEOs generated, so their pay was money well spent. These exorbitant salaries gave the CEOs the necessary incentive to produce extraordinary returns.
While this argument may never have been terribly compelling (it would have been hard to keep a company's stock prices from rising in the nineties bubble), it clearly is not true today. The typical CEO is not producing great returns for shareholders. The average return is weak, and in many cases shareholders are incurring loses due to CEO mismanagement. Even in the disaster stories, the CEOs still seem to get extraordinary pay packages.
The poster child for this new trend is Robert Nardelli. In five years as CEO at Home Depot, he lost shareholders 40 percent of the stock's value, more than $25 billion. When he was eventually pushed out the door, he walked away with a compensation package worth more than $200 million. Call it "pay for nonperformance."
In the fifties and sixties, it was common to think of corporations as bodies that served a variety of stakeholders. In addition to shareholders, corporations were also seen as having responsibilities to their workers, to the communities in which they were located, to their consumers, and even the larger society. This diverse group of stakeholders sometimes meant that a company should sacrifice short-term profit maximization in order to meet some broader goal.
In the eighties, we got the shareholder revolution, which said corporate management should focus simply on maximizing shareholder value. If this meant mass layoffs of workers or abandoning communities where a company had deep roots, so be it.
As a result of the shareholder revolution, the range of constituencies the corporation was expected to serve was drastically narrowed. Concerns for workers, communities, and the larger society were jettisoned, with shareholder value being the only true concern for the corporation and the CEOs that run them. This single-minded concern for profit maximization and shareholder value was supposed to be best for society in the long run.
It turns out, the range of constituencies has been narrowed even further than we realized. With recent evidence on returns, it doesn't look like shareholders fit in the equation anymore. At least the CEOs are still doing well.
Subprime Supremo Lands $40 Million Windfall
By Andrew Clark
The Guardian UK
Saturday 12 January 2008
Countrywide boss told to go away and "have fun." Astonishment at huge reward for catastrophe.
The boss of Countrywide Financial will scoop nearly $40m (£20m) out of the US sub-prime mortgage lender's takeover by Bank of America - enabling him to go away and "have some fun."
Angelo Mozilo, who has been vilified for his role in the sub-prime credit crisis, agreed yesterday on a deal to sell Countrywide to Bank of America for $4bn in stock. The buyout amounts to a rescue for the business, which has been flirting with bankruptcy despite a portfolio of 9 million loans worth a total of $1.5tn.
As America's largest mortgage provider, Countrywide has shouldered sizeable blame for the industry's aggressive promotion of loans to low-income households. The company is under investigation in Illinois for misleading customers about their repayment commitments.
Mozilo, a butcher's son from New York who co-founded Countrywide in 1969, was paid $142m in 2006 and has sold more than $400m in shares in recent years. Bank of America said he was unlikely to stay after the takeover, but he will get a severance package estimated by compensation experts at $36m and his stake is valued in the buyout at $3.5m.
"I would want him to stay until the deal gets done and then probably I would guess that he would want to go have some fun," said Bank of America's chief executive, Ken Lewis.
Bank of America pledged that under its ownership Countrywide would no longer make sub-prime loans. The North Carolina-based bank sees the business as a bargain-priced opportunity to bolster its historically weak mortgage offering to its 57 million retail banking customers.
Lewis said the price of Countrywide, which has suffered an 80% fall in its stock over the past year, was "very compelling." "There's no better mortgage company in the world," he said, despite twin "achilles heels" of sub-prime defaults and a collapse in funding from the money markets.
Community activists suggested the takeover was positive for Countrywide's cash-strapped borrowers. Bruce Marks, chief executive of the Neighbourhood Assistance Corporation of America, said Bank of America had a good reputation: "They're going to cleanse Countrywide. They'll transform these sub-prime loans into prime loans, which can only be done through lower interest rates."
But there was irritation at Mozilo's pay-off. "It's astonishing to me that a CEO who has destroyed 80% of shareholder value, at the same time forcing millions of people to lose their homes, would be rewarded in such a way," said Rich Ferlauto, director of investment policy at the American Federation of State, Council and Municipal Employees.
Some commentators interpreted Bank of America's move as a sign of confidence that the mortgage crisis has bottomed out. But financial stocks fell sharply in New York at fears of further write-downs by Wall Street banks. The Dow Jones industrial average fell in early trading.
Another leading mortgage lender, Seattle-based Washington Mutual, saw its shares bounce by 5% on unconfirmed reports that it had held preliminary talks on a takeover by JP Morgan.
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