Pay caps, whining execs nothing new
Watching people desperately trying to hang on to their little all following a disaster is an experience, as Aristotle would have appreciated, certain to excite pity and terror in the human breast.
If only we didn’t have to spend so much time these days watching bankers and corporate executives do it.
Every day seems to present yet another example of the disjunction between the financial community’s sense of entitlement and the real world occupied by everybody else.
The other day, the inspector general for the government’s financial bailout program, known as TARP, revealed that Chrysler’s lending arm requested $750 million in new money but was turned down because its top 25 executives wouldn’t all agree to the compensation limits TARP requires.
That’s after the government had already given Chrysler Financial $1.5 billion. (Chrysler says, for its part, that it decided it didn’t need the additional money after all. Nothing to do with the pay caps, it says. But of the original $1.5 billion, so far it has repaid only $3.5 million.)
Meanwhile, a passel of Wall Street professionals unburdened themselves to New York magazine about the punitive cuts in pay and bonuses they’re suffering -- imposed, to their minds, by jealous people less talented and successful than they.
Portfolio magazine just published a lament purportedly by the anonymous wife of a bailed-out CEO. “I haven’t even looked at spring clothes,” she writes. “Needless to say, we fly commercial. Using the company plane is now out of bounds.” (She blames Alan Greenspan and Barney Frank for the crummy state of her husband’s banking business.) It’s hard to know who the audience is for this article, assuming it’s not satire. Commiserating fellow “TARP wives”? Greenspan and Frank? By the way, how come she was on the company plane in the first place?
The real issue raised by this attitude isn’t so much how wealth is distributed in the U.S. as it is how much pay people deserve.
Financial professionals love to claim that their pay packages reflect their superb brainpower and competitiveness. Maybe. But a more important factor may be their location at the exact spot where cash changes hands -- a money-making principle understood equally by bond traders, the owners of boutiques at Caesars Palace and hot dog vendors with carts at the corner of Broad and Wall.
For several decades, the professional financial and corporate class has been able to base its pay on its own self-esteem. Consider the corrupt process by which public companies compensate their top executives. These officials sit on each other’s boards, passing judgment on each other’s pay packages. Even when there’s no direct quid pro quo, they certainly share a common mind-set.
When the salary and bonus for Fred or Jane come to the board, what goes through the mind of the average outside director? “Hmm, they’re almost as good as I am, so, $10 million each? Sure, why not?”
This log rolling has been almost impossible to break up, partially because government efforts in that direction have been confined to toothlessly outlawing tax deductions for “excessive” compensation -- “excessive” defined about as rigorously as my Labrador defines “edible.”
The government seldom has had the leverage to go further, say by placing a hard ceiling on pay. The one time it does have indisputable leverage, if it chooses to exploit it, is when it’s providing business with survival capital. That’s exactly what the government is doing today for banks and financial companies.
The last time business leaders came hat-in-hand to the Treasury while maintaining that no change was necessary in their status was during the 1930s. It’s instructive to examine how the government managed their self-delusion then.
In May 1933, while the railroad industry had its palm out for $336 million in loans from the Reconstruction Finance Corp., the government’s chief bailout disburser, RFC Director Jesse H. Jones, fixed a maximum salary of $60,000 for any executive of a railroad with a government loan. (In today’s money, that would provide $980,000 in purchasing power.)
Jones arrived at this figure after conferring with President Roosevelt. According to his memoirs, FDR believed that $25,000 should be the top salary of any railroad executive. The best-paid were then pulling down $150,000, or $2.5 million today. (It’s telling that many modern executives, including those running crippled companies into the ground, would consider an annual salary of $2.5 million to be insulting.)
A business executive himself, Jones knew that “most men who had been accustomed to drawing $100,000 a year salary usually lived it up, and to cut them to $25,000 would be too severe, particularly since nearly everybody was in debt.” Instead, he mandated that any salary between $100,000 and $150,000 be cut by 60%, with smaller reductions down the compensation scale.
The compensation cap met with some resistance. The Pennsylvania Rail Road, which was on the hook to the RFC for $27 million, at first refused to comply. But after the RFC threatened to take the matter to court, Penn’s president, W.W. Atterbury (a $150,000-a-year man), knuckled under. For the most part, Jones wrote, business leaders had had such “bad dreams about our carving knife” that his announced limit brought “smiles of obvious relief.”
Those must have been more sensible times. Today’s executives treat pay caps as an unpardonable intrusion into managerial discretion, threaten to walk and complain about having to fly commercial.
“It wasn’t long ago that America celebrated successful companies and the people who run them,” writes Portfolio’s Mrs. TARP.
But it isn’t that our esteem for success has disappeared, it’s that we’ve discovered that many “celebrated” companies were built on a foundation of rot. If their leaders and managers still think they should be paid and admired as though none of this was their fault, no wonder they’re unhappy.
--
Michael Hiltzik’s column appears Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com, read his previous columns on his home page, and follow @latimeshiltzik on Twitter.
