September 18, 2003
Greed, Grasso and a Gilded Age
Poor Dick Grasso resigned last night. But he never seemed to really get it. Up until the very end he neglected the most salient facets of his biography: a humble beginning followed by an appreciation for public perceptions.
Ever since revelations surfaced about the New York Stock Exchange chairman's indefensible compensation -- $139.5 million in accrued benefits, on top of the $59.3 million in compensation over the past three years -- he seemed baffled by the big fuss. If Mr. Grasso had spent less time with the corporate fat cats, responsible for his sweetheart deals, and more with the Queens working class neighborhood where he grew up, he might have got it.
As compensation scandals go the Grasso debacle pales next to some. Dennis Kozlowski hauled in $71 million last year as CEO for Tyco, while allegedly using the corporate treasury as a personal piggybank -- and cutting jobs and losing shareholders' value. Rather than criminality, the Grasso caper is about avarice. But his compensation, secretly arranged, for the head of a quasi-public, quasi-regulatory institution, is illustrative of this gilded age of greed.
Mr. Grasso's confusion occurred when he looked at other CEOs who have made out like bandits -- and a few who are. In 1980 the average CEO of a major American company was paid 40 times more than the average worker; today it's about 400 times as much. If the average worker's pay had gone up as much over the past two decades, it would be more than $160,000 a year. Median pay for the CEOs of Fortune's 100 largest companies rose 14% to $13.2 million last year, while everything else -- jobs, stock value, profits -- was dropping.
The Bush administration is hell-bent on widening wealth disparities. The Bush tax cuts will increase after-tax income for millionaires by more than 5%, more than twice the percentage increase for middle-income taxpayers, while those in the bottom quintile will stagnate.
Localities all across America face budget squeezes, exacerbated by these tax cuts for the wealthy: firefighters and cops are being laid off, school days are being cut back, and poor kids are losing health-care coverage. Meanwhile many of the same corporations that so lavishly care for their chief executives are trimming employee health-care benefits and pensions for workers.
Take two small, and seemingly unrelated, matters in the context of the war in Iraq, a lesson of which was supposed to be the need for more energy independence. Yet in this year's tax cut, Congress, with the concurrence of the administration, quadrupled write-offs for owners of luxury SUVs to $100,000. Thus, over the next decade American taxpayers will lose $1.3 billion to subsidize more gas-guzzling Lincoln Navigators and Cadillac Escalades.
One person who probably can't afford those high-priced gas-guzzlers is Marine Staff Sgt. Bill Murwin. A grenade exploded inside his Humvee during the Iraq war. He had to spend four weeks at the Naval Medical Center in Bethesda, Md., where his left foot was amputated. The St. Petersburg Times reported last week he had to pay the government $8.10 per day for food while in the hospital -- to off-set per diem allowances military personnel get. To a corporate CEO $243 is chump change; to a Marine staff sergeant it's real money.
Staff sergeants don't have sweetheart collaborators determining their compensation. Mr. Grasso is now toast because the controversy embarrassed his directors; they should look in the mirror. The embattled Big Board executive, in defending himself, insisted that he never even talked to the board's compensation committee about his remunerations.
Again, he didn't get it, says Nell Minow. "The purpose of a compensation committee is to set real goals and negotiate pay," notes the investors' rights champion. "The compensation committee is not supposed to be a tooth fairy." The head of the stock exchange's compensation committee was Kenneth Langone of Home Depot, whose board Mr. Grasso sat on; many of the other Big Board directors were chosen by Mr. Grasso.
Compensation ought to be tied explicitly to performance, whether it's shareholder return or market share or another serious standard. (Mr. Grasso had an 8% guaranteed return, no matter what happened.) Often, Ms. Minow notes, these goals are phony -- "It's like pinball; everything you hit rings a bell." In 2001 Oracle's Larry Ellison raked in more than $781 million while shareholders' value plummeted.
Disney's Michael Eisner, who Nell Minow considers "the grand old man of abusive pay," has collected almost a billion dollars of compensation over the past decade from a sycophantic board that he has assembled; over the same period, Disney shareholders' rate of return has averaged considerably less than other major companies. Even abject failure is rewarded. In 2000, Mattel Inc. lost $431 million and fired CEO Jill Barad; she walked away with a $50 million exit package.
Revulsion over this corporate excess isn't simply some populist screed. The "acid test" of corporate reform is CEO compensation and accountability, says Warren Buffett, America's foremost investor. A board challenging CEO pay, warns the sage of Omaha, "is like belching at a dinner party." Bill McDonough, former head of the New York federal reserve and now running the SEC's new accounting and oversight board, says the current level of executive pay cannot be "justified economically . . . or morally."
Defenders of the current system arrogantly assume Americans have little problem with rewarding success, figuring someday they'll be on the right side of the widening income and wealth gap. This view is shared by George W. Bush, who dropped talk of corporate malfeasance and accountability since it disappeared from the headlines a year ago.
That may be a miscalculation. Most Americans are upwardly mobile and celebrate the riches of the truly successful and deserving, whether it's Michael Jordan, Kevin Costner, or Bill Gates. But in a time when sacrifices are being made by firefighters, schoolteachers and Marine staff sergeants, many of these same Americans resent the Dick Grassos.
Updated September 18, 2003
Dow Jones & Company, Inc. All Rights Reserved|
Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws.
For information about subscribing go to http://www.wsj.com