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The coming depression blog | April 24, 2014

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The Hypocrisy of the 1%

The AFL-CIO has launched its annual PayWatch data, revealing that the ratio of the average S&P 500 CEO pay package to that of the typical worker has once again risen; it’s now an eye-popping 380-to-1. This ratio was just 42-to-1 in 1980.

The average annual CEO pay of companies in the index was $12.94 million in 2011, rising by 13.9% and following a 22.8% increase in CEO pay in 2010.

While chief executive pay has become more lucrative, regular Joes’ and Josephines’ incomes haven’t seen similar results. Last year, average worker wages grew by a paltry 2.8% to an average $34,053.

The AFL-CIO was wise to point out that many American investors haven’t necessarily experienced a great windfall either. The S&P index ended 2011 flat.

Living the dream is a fiscal nightmare
I know a lot of investors — not to mention one-percenters — likely dismiss the AFL-CIO’s complaints out of hand or, let’s face it, even become immediately apoplectic. I’ll grant that many union demands don’t always reflect a sustainable view of economics or fiscal responsibility for the organizations they target. Pensions and benefits into infinity, guaranteed pay levels regardless of performance, and making it difficult if not nearly impossible to fire employees for underperformance (or because a company or entity is in legitimate or even dire financial trouble) are all pretty untenable for long-haul financial health.

Still, most people who ignore or dislike the AFL-CIO’s points about worker rights and economic discrepancies fail to acknowledge that for the most part, American CEO pay plans often follow similarly economically disconnected philosophies.

These packages frequently feature handsome pay that’s often not linked to real long-term performance measures, lifetime pensions and benefits, and exceedingly rare firings even for cause. And that’s a big part of the reason why that outrageous CEO-pay-to-worker-pay ratio keeps right on skyrocketing.

United One-Percenters of America
Before General Motors’ (NYSE: GM ) bailout, then-CEO Rick Wagoner was raking in plenty of dough, so management’s financial expectations of their own salaries could certainly be held up to the same scrutiny as union demands for workers.

Wagoner even received a pay raise in 2008 even though the company had been losing money since 2005. After his ousting, Wagoner was entitled to $8.2 million over the five years starting with his retirement on Aug. 1, 2009. He was also entitled to an annual payment of $74,030 for his lifetime, as well as benefits like a life insurance policy.

Believe it or not, though, this deal had a lower financial value than what Wagoner would have been entitled to if the bailout hadn’t happened. Poor guy.

Many people idolize General Electric’s (NYSE: GE ) Jack Welch, but that man’s retirement benefits package goes down on the books as one of the most mind-blowing ever. Ironically, a divorce settlement blew the lid off the outrageous goodbye handouts.

Welch’s perquisites were valued at $2.5 million per year, and he received goodies such as the use of the company’s $80,000-per-month Manhattan apartment, primo seats for sporting events like New York Knicks, Red Sox, and Yankees games, security services, and even restaurant reimbursement. Given the fact that Welch’s golden parachute was valued at an insane $420 million, such luxuries seem, well, ridiculous.

Home Depot’s (NYSE: HD ) performance under former CEO Bob Nardelli’s tenure quite frankly stunk. He left the company in 2007 due to the conflict between him and the company’s board and shareholders over his compensation, which had reached $131 million in 2006 even as the stock floundered. Still, he left Home Depot with a severance package worth $100 million, including a $35 million pension.

Citigroup: Not too big to fail
Citigroup’s (NYSE: C ) recent say-on-pay defeat is a good sign that shareholders are fed up with pay that doesn’t measure up to performance, and they’re finally willing to start voting against such outrageous packages.

Meanwhile, let’s not forget that in a free market, corporate managers and boards are free to make the right decisions.

In 2007, Whole Foods Market’s (Nasdaq: WFM ) John Mackey announced he would relinquish pay, stating, “I no longer want to work for money.” He went on to say, “The tremendous success of Whole Foods Market has provided me with far more money than I ever dreamed I’d have and far more than is necessary for either my financial security or personal happiness. … I am now 53 years old and I have reached a place in my life where I no longer want to work for money, but simply for the joy of the work itself and to better answer the call to service that I feel so clearly in my own heart.”

Even prior to that decision, Mackey’s compensation was reasonable in a world where many CEOs made millions every year. Whole Foods Market currently has a pay cap on executive compensation; executives can’t exceed 19 times the average worker’s total pay at the grocer.

Bottom line: Let’s rock the vote
Unionization isn’t necessary when corporate managements challenge themselves to do the right thing, not just for themselves but for their employees, business success, and other stakeholders. The kind of “shared fate” espoused by folks like Mackey shouldn’t be the exception, but rather the rule.

Sadly, most American corporate managements and boards simply haven’t proven themselves up to this kind of personal and philosophical challenge. Their own bank accounts seem to be the bottom line they’re most concerned about.

So when the AFL-CIO points out the current reality disconnect in CEO pay, reasonable people should listen. If we investors want to fight back against the utter hypocrisy of some members of the 1%, it’s time to vote against the pay packages that reward and reinforce the behavior.

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