Overpaying America’s CEOs

Using statistics supplied by the federal Bureau of Labor Statistics, the AFL-CIO found that the average CEO pay of a major US corporation is $12,259,894 while the average worker in those companies is $34,645, a ratio of 354 to 1. Narrow that category of companies to America’s 200 largest corporations, and that CEO pay level rises to $19.3 million (Gretchen Morgenson writing for the NY Times, June 17th). The AFL-CIO also numbers looked at the ratios around the world. The UK ratio is 84 to 1, Germany 143 to 1, Australia 93 to 1, and Canada (the next highest) 246 to 1. No matter how you look at it, US practices are way out of step with global practices.

But when you read the annual reports of just about every one of these top companies, regardless of stock performance and dividends, even in obviously underperforming public companies, you will see complex analyses that always justify that exorbitant CEO pay. Compensation committees on these boards (and the compensation experts they rely on) will tell you that competition for top CEOs in the American marketplace is fierce, that they have to pay these numbers to get the best.  Oh, and I am the Easter Bunny.

“Any investor who plows through these pay documents will recognize a common corporate theme: The amounts awarded to the chief executive are aligned with shareholders’ interests because the pay is grounded in the company’s performance.

“But companies use a bewildering array of benchmarks in their compensation decisions. These gauges often vary, even within the same industry, making apples-to-apples comparisons difficult and hampering an investor’s ability to determine when an executive is overpaid.

“‘It is amazing how complicated companies make the proxy and how studiously they avoid the simple informative presentation of relative pay for relative performance,’ said Stephen F. O’Byrne, president of Shareholder Value Advisors, a firm specializing in compensation design and performance measurement.

“The most common performance metrics used by companies can be problematic. Total shareholder return, according to a recent study by Equilar, a compensation analysis firm in Redwood City, Calif., is the single most popular measure related to pay at big public companies.

“Companies love total shareholder return in part because it is easy to calculate. But a company’s stock can rocket even when its operations are being run into the ground. So basing pay on total shareholder return can encourage an executive to manage more for a company’s share price than for its overall health.

“‘When you look at total shareholder return relative to pay, you’re not looking at the underlying returns of the business,’ said Mark Van Clieaf, managing director at MVC Associates International, a consulting firm. ‘That can take investors down the wrong path.’” New York Times, June 17th.

But what if you applied a more common-sense metric? How does this CEO pay shine in that light? “A better way to measure whether a C.E.O. has created value at a company is to look at its return on capital over a period of years. This reveals how effectively a company is using its own money to generate profit in its operations… When you compare these returns to an executive’s compensation, you see where pay is justified and where it isn’t.

“[NY Times’ Gretchen Morgenson] asked Mr. O’Byrne and Mr. Van Clieaf to analyze returns on capital among the top 200 companies whose compensation was [recently] reported by The New York Times... The goal was to see how the executive pay at each company stacks up against its corporate performance and highlight which companies are giving away the store to their chief executives and which are getting their money’s worth…

“Among the top 200 companies, the study concluded that 74 overpaid their chief executives in 2015 based on five years of underperformance in return on capital. The total overpayment last year to the C.E.O.s at these companies, the study found, was $835 million.” NY Times. Why would you pay an underperforming CEO under the guise of “that’s what the market for CEO talent bears”? Seems much more like an unholy alliance between boards and management – literally an insider’s club “taking care of its own” and twisting and squirming to justify this horrific reflection of American income inequality (the absolute worst among major economies in the developed world).

We have regulatory and taxation powers to level this playing field, and we have a Congress hell-bent on seeing that never happens, that the playing field continues its tilt toward the incumbent wealthiest segment. We may brag about how we are bringing manufacturing back to the good old USA, but we are silent on the fact that it’s now and automated world where much of the income that used to be paid to workers is going instead to those who own the automation. Not exactly a creator of good jobs, is it? We may talk about GDP success, but that is a number that hardly reflects the economic realities for “most of us” (see my April 19th blog, If Not GDP, What? to see how using that number totally favors that continuing system-tilt to favoring the mega-rich, and my April 26th blog on corporate accounting practices, Lying with Numbers – Advanced Course).

I’m Peter Dekom, and as long as we lie to ourselves in economic measurements and allow insider elites to call the shots, no matter the lip service we pay toward “leveling the playing field,” that income inequality (the worse since the federal government kept these numbers) will just continue to get worse.

The U.S. Doesn’t Believe in Its Own Future Enough to Invest in It

  Railroad Station in Wuhan, China

I’ve blogged about the collapse of public educational standards in this country – and Bernie Sanders’ rise to popularity among the young has more to do with staggering student loans and college tuition burdens as much as anything else – and how governmental research has slowed to a trickle. These represent what a government does today to make sure it has a bright tomorrow. Right now, we are all living on the investments from past generations, failing to understand the bitter difference between spending without a rate of return (a hallmark of most defense spending) and investing where there is a rather clear economic payback. We think blind austerity with blind defense spending are good for the country. Think again.

I’ve blogged a lot less about American infrastructure, a third leg of government investment, which is today’s topic. A little look back. “America saw two great booms in infrastructure spending in the past century, the first during the Great Depression [think Hoover and Grand Coulee Dams, the Tennessee Valley Authority the Pulasi Skyway bridge in New Jersey], and the second in the 1950s and 60s, when most of the interstate highway system was. Since then, public infrastructure spending as a share of GDP has declined to about half the European level. America is one of the most car-dependent nations on earth, yet it spends about as large a share of GDP on roads as Sweden, where public transport is pretty good... The federal government scrimps on airports and sewage pipes so it can pay for pensions and health care.

“[Money for infrastructure is hardly a federal priority these days.] The Highway Trust Fund, a pot of federal cash that covers a quarter of spending by states on infrastructure, will have to start withholding money this summer to keep its balance above zero, as required by law. ‘The problem with the trust fund,’ says David Walker, a former head of the Government Accountability Office, ‘is that it’s not funded and you can’t trust it.’ A short-term fix may be found: Congress has already passed ten of these, shifting money from elsewhere to make up for a persistent shortfall in revenue from fuel taxes, which have been held constant since 1993. But such hand-to-mouth financing makes planning difficult and encourages city, state and local governments to put off repairs for as long as possible.

“Something similar is unfolding at the state and local level, where three quarters of all spending on infrastructure occurs. States cut their budgets by 3.8% in 2009 and 5.7% in 2010—and have not made up the lost ground. Meanwhile bills for repairs are coming due. Much of what was built after the war was only designed to last for 50 years and now needs replacing. That includes almost half the country’s bridges.

“Signs of the shortfall are everywhere. Airports are funded by passenger fees and another trust fund. Neither has kept up with the increase in air traffic. The last big new airport was opened almost 20 years ago, in Denver. Everything about America’s major airports is too small, starting with the gates for parking planes. Last year Boeing began offering aircraft with folding wing-tips because so many are damaged while trying to squeeze in. At the busiest international airports, clearing customs can take hours. At New York’s JFK the average wait is about 30 minutes, but some poor souls wait four hours.” The Economist, June 24, 2014. Anyone stuck in a traffic jam or jostled over pothole infested roads and highways knows how bad our infrastructure is. Or the dilapidated school and government buildings that are the picture postcards of modern decay.

And then there are countries that actually believe in their future, willing to invest in the necessary building blocks (education, research and infrastructure) for their future with mountains of cash. Like China. As I recently blogged, on my last trip to China earlier this year, I traveled to Beijing, Hangzhou and Shanghai (with tons of driving in and around these cities)… with a focus on finding a pothole. Just one. I failed. Did I mention the bullet train I took from Beijing to Hangzhou? Fast. Luxurious. Amazing.

“China spends more on infrastructure each year than North America and Western Europe combined. That’s according to a new study published [in early June] by global management consulting firm McKinsey & Company. The fact that China is investing so much in roads, rails, ports—and everything else that keeps society up and running—hints at big trends that could shape the global economy in the coming decades.

“‘Infrastructure investment has actually gone down in half the G20 economies,’ says Jan Mischke, senior fellow at McKinsey Global Institute, who worked on the report. The culprit was the global recession in 2009. But it hasn’t stopped China.

“Between 1992 and 2013, China spent 8.6% of its GDP on building roads, railways, airports, seaports, and other development projects that are key to keep people and goods on the move, and keeping the economy strong. That same spending figure was just 2.5% for Western Europe, and 2.5% for the US and Canada put together…

“Europe’s and North America’s infrastructure is getting old, fast. It needs more money to be replaced, made better, and made safer. More investing also means greater environmental sustainability, more jobs, and innovation that fuels new technologies.

“Last year, for example, the US Department of Transportation study revealed that more than 61,000 bridges in the country are ‘structurally deficient’; in 2014, US Vice President Joe Biden described New York’s LaGuardia Airport as ‘third world.’ In 2013, the UK government announced a £100 billion [$1.47B] infrastructure plan, saying that the UK had ‘for centuries been pioneers in infrastructure,’ but in recent decades, ‘let this proud record slip.’

“[The McKinsey] study asserts that, based on the current trajectory of investment, the world will be left with major infrastructural gaps: The world will need to invest $3.3 trillion a year for the next 15 years to keep pace with economic growth forecasts.” BBC.com, June 20th. What are we doing with our infrastructure? Not much, barely a fraction of the estimated $3.6 trillion (through 2020) that the American Society of Civil Engineers says is required to bring our infrastructure up to “passable.” Well less than half the $356 billion/year Congress currently allocates for that purpose. 

We cannot expect to remain a great nation – sorry Donald – without believing enough in ourselves to become competitive with those hungry powers around us with greater ambitions and solid commitments to do what needs to be done to get there. 

I’m Peter Dekom, and we either invest in our future now or continue to watch our standard of living continue to fritter away.

Paper Trail or Peppered Entrails?

As much as Julian Assange’s 2010/11 Wikileaks and Edward Snowden’s 2013 dissemination of confidential NSA materials may have devastated the diplomatic and intelligence world, the April mass release of the Panama Papers hack has only just begun to incite governmental tax and financial regulators to a much bigger response. The deluge sent “11.5 million leaked documents [to the press] that detail financial and attorney–client information for more than 214,488 offshore entities. The leaked documents were created by Panamanian law firm and corporate service provider Mossack Fonseca; some date back to the 1970s.

“The leaked documents illustrate how wealthy individuals, including public officials, are able to keep personal financial information private. While offshore business entities are often not illegal, reporters found that some of the Mossack Fonseca shell corporations were used for illegal purposes, including fraud, kleptocracy, tax evasion, and evading international sanctions.” Wikipedia. See also my April 5th blog, Mossack Fonseca – The Panama Papers, and my April 17th piece, The Society Killers: Corruption and Tax Evasion. 

“About a year ago, a self-described whistle-blower using the name John Doe contacted Bastian Obermayer, a reporter for the newspaper Süddeutsche Zeitung in Munich, and eventually passed to him a far greater volume of material from the Panamanian law firm Mossack Fonseca: The trove totaled 2.6 terabytes, more than 1,000 times the size of the Manning files. New York Times, May 29th. The map above illustrates in which countries politicians, public officials or close associates have been implicated in the recent leak.

The size of the financial impact of the Panama Papers, clearly just one law firm’s work in an ocean of corruption enablers, was significant enough to move the G7 leaders (United States, Japan, United Kingdom, Germany, France, Italy and Canada) meeting in Tokyo to prioritize a coordinated assault against these secret bank accounts, tax havens and those who use and foment them.

“The French bank BNP Paribas said it would shut its Cayman Islands branch. In Pakistan, a cricketer turned politician who had attacked the prime minister over his family’s offshore accounts admitted that he, too, had used a shell company…

“Within days [of the widespread release of the Panama Papers], Iceland’s prime minister, whose offshore company was revealed by the papers, had stepped down. So had a Spanish government minister, an Armenian justice official and a member of the ethics committee of FIFA, the world soccer association. President Vladimir V. Putin of Russia, whose friends had moved $2 billion through offshore companies, denounced the disclosures as an American plot to smear his country.

“A Mexican cartel suspect was arrested in Uruguay at an address disclosed in the documents. Sierra Leone began to investigate mining contracts. The Swiss police raided the European soccer headquarters. The art market was rocked by revelations of subterfuge in the sale of valuable paintings. The list went on.

“In the United States, the revelations of hidden wealth have resonated amid growing public concern about economic inequality; the word yacht appears in the documents 19,380 times. President Obama has deplored how the rich and some companies are ‘gaming the system,’ as he said the documents showed, and has proposed multiple reforms.” NY Times.

But this isn’t about corruption and lack of transparency in Panama. Mossack Fonseca was just one door into a very large and corrupt network of concealment. “In fact, some experts believe the ‘Panama’ label is misleading, obscuring the central role of several states, including Delaware, Wyoming and Nevada, in registering companies with hidden ownership. Mossack Fonseca probably represents just 5 or 10 percent of the industry creating anonymous companies, [Gabriel Zucman, an economist at the University of California, Berkeley] said, so the disclosures have left the vast majority hidden.

“And no matter where shell companies may be registered, he said, much of the wealth they own is invested in the United States, in real estate, stocks and bonds. ‘The U.S. could find out who the true owners are,’ Zucman said….But the United States may illustrate the difficulty of moving from splashy revelations to serious change. States with a stake in the lucrative corporate registration business are likely to resist serious changes, and Congress appears unlikely to act anytime soon on comprehensive reform bills.

Take a look at some of the names of limited liability companies, per the June 2nd Miami New Times, that own chi chi condos and other hot Mimai real estate and ask yourself if these are just cute or un-transparent owners simply thumbing their noses at the rest of us. “Up All Night South Beach LLC, which owns a unit in the Setai, and Lifes a Bch Ball LLC, the owner of a penthouse at the Murano Grand… [Rich Bitch LLC] A unit in the nearby 40-story Axis at Brickell Village is owned by Happy Festivus Corp. Walk Funny LLC is the proud owner of a place in Fortune House. Angry Birds Miami Inc. is listed as an owner at Icon Brickell.” Are these off-shore companies or just legal structures fully legally compliant?

“But why own an apartment under a corporation in the first place? There are plenty of viable financial and business reasons someone might do so, especially if he's buying the unit as an investment rather as a primary residence… But LLCs also add an extra level of privacy for VIPs. Otherwise, anyone could plug your name into a property database and find your address. However, that wasn't a concern for every celebrity condo owner in Miami. A perusal of property listings reveals boldfaced names such as Ivana Trump, Larry Gagosian, Jeremy Shockey, Lennox Lewis, Rajon Rondo, and Jonathan Vilma. 

“Of course, in other cases, these LLCs may be shell companies set up to obscure the fact that units were bought with tainted money or as ways to hide money from the taxman. How many fit that bill? No one knows, but the Panama Papers leak suggests the answer is a lot. In fact, the U.S. Treasury's Financial Crimes Enforcement Network wants to find out. The department hit the Miami real-estate market with a special order earlier this year that will require insurance companies to report the name of any buyer who makes an all-cash purchase of any home worth more than $1 million...

“As the Panama Papers have revealed, it's far from unusual for an anonymous shell company to be listed as the owner of Miami's most luxurious condo properties. In some newer buildings, more than 80 percent of the units are owned by corporations. Many of them are limited liability companies set up specifically to buy real estate, and most have generic names that follow templates such as ‘Building Unit 1234 LLC’ or ‘ABC Investments LLC.’”  Miami New Times. The Feds are also looking at similar purchases in New York City.

“‘The offshore system is incredibly resilient, with a ton of smart lawyers and accountants to find new ways to hide money,’ said Marina Walker Guevara, the deputy director of the international journalists’ consortium.” NY Times. Loopholes and “legal” tax avoidance schemes, lucrative enough in their own light, were not enough to some of those mega-rich perpetrators. Perhaps we will see some embarrassing revelations about international politicians the U.S. put in power or whose palms were greased by C.I.A. operatives.

But democracies turns to rot when corruption seeps into every nook and cranny of power elites. Economies distort, poverty increases, anger rises, and destabilization runs riot as corruption rises. It’s something everyone one of us must fight for… and elect politicians ready, willing and able ruthlessly to crush corrupt secret finances – willing to shun corruption themselves.

I’m Peter Dekom, and if corruption were purged from the planet, there’s a very good change poverty would all but vaporize and society would function as most of us think it should.