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March 21, 2005



The first three paragraphs below comprise my historical perspective, formed thirty years ago, on how and why executive compensation has spiraled out of reality. This is followed by the argument that executives and their minions have their pay "grossed up" to cover the prevailing tax burden which means the Republican roll back of billions of dollars in taxes for corporate titans was logically absurd.

The subject of CEO compensation, (and concomitant thereto executive ethics) has been a subject of interest to me for thirty plus years. When I was a young fast track officer with Bankers Trust Co., Manhattan and London, I concluded that the old way to the executive floor which was Yale or the like and prep school and 'society' background was dying out. Wickedly bright, hardworking and manipulative types that eschewed the old boundaries of business and social etiquette became ascendant. I have never been surprised that the new breed of top dogs and their accomplices, the "Board," basically steal from the shareholders. Something akin to 'noblesse oblige' or restraint of greed began to disappear lo so long ago.

A personal memory comes to mind. Circa 1985, B.F., a straight arrow school acquaintance, related to me his confusion. He had expected to toil as a bank officer for a lifetime and consider himself successful if he managed to put his three children through college and retire with a living pension. As I sat in front of him he said that due to burgeoning salaries and bonuses he then had the entire capital for three Ivy League educations, “liquid.”

Another contributing factor, in my opinion, is that the shareholders of record for the Fortune 500 or 1,000 used to contain a significant block of original founding shareholders or their heirs with 1% to 7% of the shares, who in no way would countenance a CEO and his gang taking two to fifty two million dollars off the top. Also, most shareholding back then was funneled through bank trust accounts, read trustees, who likewise with the founders' heirs would not tolerate 'theft.' Today, founder's stock is diminimus and the mutual fund advisors are either part of the gang, making millions for any level of performance, or do not have the moxie to exert influence. Recently it has been written that pension funds are seeking influence which is hopeful as well as a sign that the aforwritten is valid.

Gross pay. A mid level executive earns a perk, a car for example. For simplicity sake we'll say that the first fifty per cent of the car's value is not taxable by the receiving individual. The remaining fifty per cent is akin to a luxury and is taxable income. He is given the car and a raise to cover the taxable income and then the raise is 'grossed up' to cover his tax expense on the raise itself. A new hire even, an MBA or law grad, entering Manhattan will be paid above and beyond, dare I say it, a Red State wage to net sufficient income to cover all taxes and high cost living conditions, a grossing up.

Similarly, much of the membership in today's executive elite, given that there is no real deterrent to naming their own pay, in essence write their own compensation package. What they damn well expect after taxes can be the starting point of their pay if they so choose. This amount, with the help of some pretty pricey hired hands, can then be 'grossed up' to meet expectations..

One may conclude that there is ample evidence that controls on executive pay have simply been lost. There is no countervailing force and shareholders for the present have no option but to accept that the elite write their own ticket. Nicholas Kristoff quotes a study by Bebchuk/Harvard and Grinstein/Cornell that the pay devoted to the top five executives at public companies has risen from six per cent of their profits to ten per cent in the last ten years alone. Now that is gross.

But, when the richest among us, those who can increase their pay to cover prevailing taxes, have their six, seven and eight figure net incomes ratcheted upwards by an unnecessary tax cut, that is twice gross. Stinky really.
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