Tussle Over Executive Salaries

Pressure is Forcing Changes

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By Father John Flynn, LC

ROME, SEPT. 20, 2009 (Zenit.org).- One of the consequences of the ongoing economic crisis is a harder look at the compensation given to company leaders. The multi-million dollar packages have long been criticized, but in times of economic growth many were content to reward success.

Recession, however, has led many to question the often huge payouts to CEOs of failed companies and has led to questions about the logic of how executive compensation is determined.

Financial Times columnist Michael Skapinker commented that ill-feeling about high pay is widespread in both the U.S. and Europe. In his Sept. 16 article he related how recently Gordon Brown, the UK prime minister, President Nicolas Sarkozy of France and Angela Merkel, Germany’s chancellor, signed a letter calling for the reigning in of bankers’ bonuses.

Skapinker has no problem with paying well those who run companies, but senior executives have greatly reduced their risk, he pointed out. A combination of lucrative pensions and generous severance packages means that even if they are fired they will never have to work again. By contrast, the employees who are laid off lose everything, pensions included.

His remarks came just after the Guardian newspaper published the results of a survey of the pay of more than 1,300 company directors for 2008.

A series of articles published Sept. 14 revealed that their salaries increased on an average of 10% last year, despite the fact that companies lost almost a third of their value on the stock exchange.

Bonus payouts were lower, but their basic salary increased at more than three times the average pay rise of 3.1% for ordinary workers in the private sector.

Rich rewards

The rewards were even higher for those at the top. The 10 most highly paid executives earned a combined 170 million pounds last year – up from 140 million pounds in 2007, according to the Guardian.

Meanwhile, it turns out that in the United States nearly five thousand bankers and traders were paid more than $1 million in bonuses in 2008. According to a July 31 report by the New York Times this came at a time when profits at the biggest banks plummeted, and many of them accepted tens of billions of dollars of taxpayer money.

The figures were released by the New York attorney general, Andrew M. Cuomo. They showed that 738 bankers and traders at Citigroup took home bonuses of $1 million or more in 2008 even though the bank posted a $27.7 billion loss. At Citigroup bonuses totalling $5.33 billion were paid, while at the same time the company received $45 billion in bailout funds from the government to avoid collapsing.

At Merrill Lynch 11 executives were paid more than $10 million last year, with Andrea Orcel, a top investment banker, earning $33.8 million. This was in a year when the company’s net loss reached $27 billion, the Wall Street Journal reported March 4.
The phenomenon of rewarding failure is not limited to the United States. Deutsche Post AG paid a pension of 20 million euros to Klaus Zumwinkel, the former CEO convicted of tax evasion, the Associated Press reported, March 15.

In France there were protests over a severance package worth more than $4 million paid to Thierry Morin, who according to an article in the March 25 edition of the Washington Post, was edged out of the company because of poor results.

Thorin received the multi-million dollar payout after the compnay lost more than $250 million last year. It also laid off about 1,600 employees in France and received nearly $25 million in government aid.

And in the U.K. there was outrage over a former bank chief, Fred Goodwin, who will receive an annual pension for the rest of his life of 693,000 pounds, reported Reuters, March 12.

Goodwin, left the Royal Bank of Scotland in October last year after the company announced a record loss of 24.1 billion pounds, the largest in British corporate history.

Signs of change

While the banking and finance sector might be holding on to past patterns of behavior there are, however, signs of change in other areas. Overall in the United States executive compensation fell in 2008, according to a survey published by the New York Times, April 5.

Data for the pay of 200 chief executives at 198 public companies showed that median total compensation was down 9.4% in 2008, to $8.4 million. The decline was mainly due to a slide in bonuses.

French bank, Société Générale, also changed course, due to protests about its plans to give discounted stock options to four directors, reported the Financial Times, March 23. French president Nicolas Sarkozy had called the idea of the options a “scandal” that the directors could receive such incentives after accepting funds from the state’s financial aid program.

Added to this was the admission by Goldman Sachs CEO Lloyd Blankfein, who said Wall Street compensation needs to be overhauled, reported the Associated Press, Apr. 7.

Among his suggestions was the idea of having an individual’s performance evaluated over time to avoid excessive risk taking and only paying junior employees mostly in cash. The percentage of pay awarded as company stock should increase significantly along with an employee’s total compensation, he added.

He also proposed that senior officials should be required to keep the bulk of the stock they receive until they retire.

Companies are also coming under increased pressure at their annual meetings over the issue of executive salaries. The June 1 edition of the Financial Times related how Guy Jubb,  the head of corporate governance at Standard Life Investments, protested at the remuneration levels of Royal Dutch Shell.

Jubb and others were critical of the board’s decision to pay 4.2 million euros in bonuses to five senior directors even though the group had failed to meet set targets.

The vote against the remuneration report was non-binding but signalled an almost unprecedented level of dissatisfaction, according to the Financial Times. The vote against the report “set a new high-water mark for annual meetings in a year marked by battles about pay across Europe and an increase in No votes,” said the article.

Common good

It’s easier to point to the problem of excessive executive salaries than it is to provide a solution. While it’s tempting to introduce laws to restrict pay often such measures don’t work. In the end a more lasting solution is to change how people look upon the economy.

Pope Benedict XVI had some advice on this in his recent encyclical Caritas in Veritate.

“Economic activity cannot solve all social problems through the simple application of commercial logic,” he maintained (par. 36). Instead our activity needs to be directed towards achieving the common good.

Grave imbalances result when economic activity is just viewed as a means to create wealth, he added. When those directing the economy and finance are motivated by purely selfish ends harmful actions result, he warned.

But it’s not the market that is at fault, the Pope clarified, rather it is the our “darkened reason.”

“The economic sphere is neither ethically neutral, nor inherently inhuman and opposed to society,” he continued. “It is part and parcel of human activity and precisely because it is human, it must be structured and governed in an ethical manner,” Imbuing a concern for the common good and solidarity among those leading companies would go a long way to ending the distortions caused by soaring salaries.

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