Friday, September 26, 2008

How much can a fat cat CEO earn?

The world is a very comical place. About 1 billion people still live on less than US$1 per day, according to the United Nations. Out of this, a total of 640 million of the world’s poor live within our region - the Asia Pacific.

International efforts to eradicate poverty (Millennium Development Goals) do not get much media attention. Well, not when there is much more critical news at hand, the death of America’s financial empire in the absence of a US$700 billion bail out.

At Wall Street, things are definitely tougher than the sub-Saharan desert and Melanesia where food, water and healthcare are scarce.

At Wall Street, the top guys at Lehman Bros, Goldman Sachs and Morgan Stanley are starving too as they lose millions of dollars in their personal wealth due to their stocks or options all having tanked.

Greed is good
Tough luck on these Gordon Gekkos (character from Hollywood’s 1987 “Wall Street” movie) who motto is “greed is good”. Watch these guys' wealth dim a little.

These are the losses tallied by executive compensation guru Graef Crystal (as at July 2008):
 James Cayne, the former CEO of Bear Stearns Co (since swallowed by JP Morgan Chase & Co) who sold most of his shareholding, lost $984 million (on paper) due to his Bear Stearns shares having plummeted. Crystal’s calculations show that Cayne lost $1.1 billion based on all the options, free-share grants and shares that he holds. Poor wee thing. Bear Stearns has sunk, like a Titanic.

 Richard Fuld of Lehman Brothers Holdings Inc, another poor guy now, is estimated to have lost $823 million in the stockmarket. Poor guy. Lehman has filed for bankruptcy.

 Lloyd Blankfein of Goldman Sachs Group Inc, well the value of his shares dropped $128 million, and his option paper loss was $51 million – his total “loss” was $179 million.

 John Mack of Morgan Stanley, estimated market loss was $120 million.

These poor men in Armani suits used to run the world’s financial markets like they owned the universe (remember Tom Wolfe’s book Masters of the Universe?). It is about time American shareholders put a stop to excessive compensation for CEOS.

I don’t envy these CEOs' wealth. I just find it ludicrous that one sixth of the world lives on less than US$2 per day - just as I find it ludicrous that there are men with $60 million in annual compensation.

I find it even more ludicrous that the pay for performance culture in American has been fed to us, and held up as the only model of reward system. What sort of reward systems are management consultants selling to our part of the world? A culture that sanctions the "greed is good" principle, just like these modern-day Gekkos?

Income disparity
In the report, "A Decade of Executive Excess" which was released a while ago by the Institute for Policy Studies and United For a Fair Economy (liberal study groups based in Washington, DC and Boston respectively), it says that during the 1990s, CEOs compensation (salaries, bonuses and stock options) rose 481 percent (after inflation 459 percent) while wages for the average American rose 28 percent during the same period. CEOs in the US earn 82 times more than the average workers.

Judging by recent salary trends, these excesses have not stopped.

Lloyd Blankfein, Goldman Sachs’ CEO, earned $67.9 million in 2007 – a record at Wall Street. Mr Blankfein, 53, will receive $26.8 million in cash plus $41.1 million in shares and options on top of a $600,000 base salary.

The payout is the largest ever for an executive at a Wall Street investment bank according to research by Bloomberg. Goldman Sachs announced record pre-tax profits of $17.6 billion for 2007.

Merrill Lynch paid its former head honcho E. Stanley O'Neal $46 million in total compensation in 2006. He had $700,00 in salary, $18.5 million in cash bonus, and stocks worth about $26.8 million. O’Neal also had use of the company’s private jet, and full-time car and drive. Not bad for someone who managed to cause the great Merrill empire to crumble. And oh, he also got compensated over $160 million when he departed (this was despite his trail of disasters).

His successor John Thain got himself a package that could end up being over $140 million if he could move Merrill’s share price back to it high. Wonder what happened to his job with Merrill being taken over?

Paul Krugman, as far back as 2002, wrote in the American Prospect, (I first read this in 2006) that the average American families are not benefiting from income rises and productivity growth in the US.

According to Krugman, the top 1 percent of the US wealthy are the real benefactors of America’s wealth and income growth. Although the median family income (from 1979-89) rose 11 percent, 70 percent of the rise in average family income went to the pockets of the top 1 percent (in this 1 percent universe, the average income for a 4-person family was $800,000 and above).

“There are no cats in America, and the streets are paved with cheese” – sings the mouse in An American Tail, anticipating his good fortunes in America. Well, you can get all the cheese you want, provided you are not too busy fighting off the fat cats.

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