April 18, 1997

President Bill Clinton
The White House
Washington DC 20500

Dear Mr. President:

Alan Greenspan and the Federal Reserve raised interest rates last month. To make a long story short, he said he did it mainly because of a fear of labor market shortages and increased hourly wages sometime in the future. Really? I work for a good, sound company and was given a 2.5% raise last September and I am expecting little more this year. I have been with the company for 14 years.

When I talk to people at other companies, I hear the same thing, very small raises and in the future don't anticipate anymore. Granted, there are some fields, like software engineering where you can basically write your own ticket, but these are the very small exception. Remember, there are 120,000,000 workers in this country and the jobs range from minimum wage on up.

Maybe Greenspan spends too much time with high level individuals who are receiving those so-called threatening raises. For example, CEOs. Business Week reported in their April, 21 issue that the average pay raise for a CEO in 1996 was 39%, compared to 3.2% for the white-collar worker, and 3.0% for the factory employee. If Greenspan is hanging out with a lot of CEOs, I can understand why he believes what he believes.

This brings me to why I am writing to you. I don't feel that the average American is privy to exactly how much CEOs get paid. I think there should be more about this reported on TV and other media sources. Most of the time when it is reported it's in the business sections and most Americans don't go there too often. I also believe that when the media does bring up the issue of CEO pay they are too protective when they interview a CEO. When Business Week interviewed a couple of CEOs about their salaries (one made over $100 million in one year), they let the CEOs control the interview. You would expect this since those same CEOs advertise in Business Week which pays the writers of Business Week their salaries.

From my point of view here's an example of a much better interview. As the CEO I'm using Roger a very typical CEO when you include small cap and mid cap stock CEOs.

• Richard: Roger you made $1.5 million in total compensation last year. That's about 40 times what the average worker makes. Do you think you are worth it?

• Roger: Of course [he laughs a little]. The compensation board knows that it must pay huge salaries to attract top people.

• Richard: That's interesting Roger. We pay the speaker of the house in Washington only $170,000. That's a pretty important position and it only costs the American people $170,000. We pay Judges a few hundred thousand dollars to make decisions about life and death. In the past we paid generals average salaries to protect our freedom. We pay school superintendents a few hundred thousand dollars to run schools to teach our children. Most doctors only make a few hundred thousand. Your salary is more than the combined salary of all the teachers at some schools. Are these positions any less important than yours?

• Roger: Well, No. I guess they are more dedicated to their work.

• Richard: Why is it that the compensation board of companies feel it's necessary to pay huge salaries to CEOs, but other jobs that are even more important in our society, we get away with paying them very small fractions of your salary?

• Roger: I guess it's like the market makers on NASDAQ, they know they can get away with having large spreads so they do it.

• Richard: Wonder the country wised up about CEO's salaries and put a cap on them. What would you think about that?

• Roger: First I think that would kill the entrepreneur spirit that lives in America. Second you have to remember that almost all the CEOs in America are wealthy. We have saved millions of dollars and we probably would all retire.

• Richard: You are right when you say that most CEOs now are very wealthy and they can do just about anything they want to, but as far as killing the entrepreneur spirit, I doubt it. There would still be lots of Americans wanting to build businesses even if they knew they could only make so much as a CEO. Remember, I'm not suggesting that CEOs could still not reap the rewards of common stock investing. Bill Gates is the richest man in the country and it's not because of what he makes as a CEO. Just today Gates made over $2.5 billion in his common stock holdings in Microsoft. Also, history has shown that humans are motivated mainly by self interest. Throughout American history the government has intervened to stop the natural greed of man/woman. J.D. Rockefeller in the last century started eating up little companies that gave him competition and he would have continued without government intervention. CEOs, like Rockefeller, will most likely continue to rip off Americans unless there is government intervention. And, like in the case of Rockefeller, it won't kill the entrepreneur spirit in America. Most of the entrepreneur spirit in America comes from small companies anyway.

• Roger: To be honest and up front it probably wouldn't kill the spirit, but you have to remember the CEOs control America more than any other group and our control includes politicians as well as the financial news media. We won't let it happen [government intervention in capping CEO's pay]. You know all the news about soft money, $300,000 here, and $1/2 million there. That's nothing to us.

• Richard: You are right about that. I went to San Francisco last weekend and walked the city. In two hours I saw three different homeless people urinating on the streets. I know Feinstein's headquarters are there and the Senator doesn't seem to mine that San Francisco is overrun with homeless people and right down the street in the Financial District CEOs are being paid $millions. If you go south a few miles to the Silicon Valley there are tons more. It's very sad that the politicians let this go on.

  A FEW MOMENTS OF SILENCE . . .

• Richard: Roger let's talk about the glass ceiling and Jesse Jackson. Jackson says there are lots of women and minorities just waiting to break through the glass ceiling with their spirits, ideas, and leadership. Charles W. Sweet president of A.T. Kearney Executive Search in this weeks issue of Business Week (April 21, 1997) says, "It's [paying enormous CEO's salaries] simply the cost of finding brains." Do you think that as you move up the ladder at a company that it's an advantage to be white and a male because of the prejudices that exist, but once you become a CEO it's because you are the one with the most brains and the one that worked the hardest?

• Roger: As a CEO that's what I want you to believe.

• Richard: Moving right along Roger. The financial news media is really talking up "pay for performance." In fact in this weeks issue of Business Week (April 21, 1997) they suggest that is what it [the enormous salaries] is all about. CEOs are only making lots of money because their stocks are performing great. What's your opinion on that issue?

• Roger: Hey, I made a $500,000 bonus last year and my company's stock lost 50% of its value. I had to layoff 10 more employees to cover my bonus. Think about it. I have the $500,000 right now even though my company's stock lost 50%. The average American will have to wait 12 years to see this much money (that's just my bonus for one year too) and they won't even see the last $40,000 until 2009. Most of the media that talk about CEO's salaries don't point out the time value of money. You can't buy time and that's no problem for me. I get the $500,000 right now which really makes it worth a whole lot more. And you want to know what I think about "pay for performance?" It's great!

• Richard: I hear they [the compensation board] even reset your strike price for your "pay for performance" [ha, ha] options from $50 to $30?

• Roger: Yes, that's right. I start making money on my options at $30 [company stock price] even though the shareholders who lost 50% of their investment don't start making any money until the stock gets back up above $50. Like I said this "pay for performance" is great.

• Richard: I have talked about Business Week's current article about CEO pay (April 21, 1997), in the article Business Week talks mostly about those CEOs who's company stock appreciated, not depreciated like yours. From the article, "Like Coss [CEO and chairman of Green Tree Financial Corp.] , most well-paid execs point to stock gains as proof that their pay is richly deserved." Roger, your company has over 3,000 employees. If your company did do well and in turn the stock went up, would you feel it was mostly because of your efforts as far as being the CEO or would you think it was because all the employees contributed?

• Roger: I think that is obvious Richard. All the employees contribute to a company's success. However, in the real world, the CEO through monetary compensation, gets about 90% of the credit. That's just the way it is.

• Richard: I have noticed that as a company grows directors and executive officers own less and less of a company's common stock. In fact in your company, current directors and executive officers as a group only own 3.0% of the common stock outstanding and you own less than 1%. Why is this?

• Roger: Being a holder of common stock means taking risk. Once a company reaches a certain market cap it becomes much more advantageous to be a CEO and get paid through salary, bonus, and stock options then to be a common stockholder. Like I said I can lose money being a common stockholder, it's only a win, win situation for me as a CEO and getting paid a salary, bonus, and stock options.

• Richard: Again, Roger, what you say makes all the sense in the world. To finish up I would like to talk about severance pay. Many Americans during their working lives are concerned about layoffs. They [the working class] have families and being laid off can mean severe hardship. If I'm laid off my company will give me 25% of my base salary for one year. Let's take a comparative situation for a CEO. I have been on my job for 14 years and my company will give me 25%. Mattel, the toy company, on the other hand will give its newly named CEO five times their last year salary. That's right 500%, compared to my 25%, and they are newly appointed and I have been on my job for 14 years. On top of that they will receive an "average bonus" whatever that means, plus become vested in an executive retirement plan at the ripe old age of 50, and have a $3 million loan forgiven. It seems like you CEOs have it made again when it comes to severance pay.

  (Update, April 30, 2000:

  "Mattel's Barad gets $40 million severance

  Last Update: 7:52 PM ET Apr 30, 2000

  EL SEGUNDO, Calif. (AP) -- The toy company that makes Barbie may be struggling financially, but its former boss isn't. She just received a nearly $40 million severance package.

  Former Mattel Inc. chief executive Jill Barad was given $26.4 million in cash -- five times her base salary plus maximum bonuses, the company disclosed Friday. Barad resigned in February after Mattel reported a steep fourth-quarter loss, capping a string of disappointments.

  Mattel also agreed to waive the balance of a $3 million home loan, forgive another $4.2 million loan and pay $3.3 million in state and federal assessments on those transactions, the company said in its annual proxy statement to the federal Securities and Exchange Commission.

  Barad, 46, also will receive $709,000 a year for life in retirement benefits.

  Mattel spokesman Glenn Bozarth said Sunday the company was not commenting on the package.

  However, big companies defend such packages as necessary to attract top-talent to high-risk CEO jobs."

  My only question to "big companies" is, "What are the "high risks" you're talking about? It seems from the severance package Barad got, there was no risk at all. Just remember America, you're the ones who are paying for Barad's severance package.)

• Roger: Richard, you have let the cat out of the bag. And since I am on a roll here there's still something you have missed. Since CEOs have made $millions and in turn saved $millions they are not really under any pressure at all. The average American is having a hard time saving anything after paying the rent or mortgage and putting food on the table. Many CEOs could work one or two years and actually retire after that. They would never have to worry about money again, and that's just after working a couple of years. It's like Apple's CEO, Apple has lost $millions this last quarter, but the CEO, he's got so much money he doesn't really care anyway. If Apple claims bankruptcy, the CEO will just walk away, wondering how he's going to spend all the money that he's made being a CEO. Oh, by the way, how much do you want to kill this interview?

ADDENDUM (April 14, 1998)

Here's something that, to me, shows us all how crazy the world is: Today, April 14, 1998 I read in the Stanford Report (April 8, 1998, "Cornel West calls for movement that addresses a 'variety of evils,'" page 1&3) that "20 percent of all American children, 42 percent of 'brown' children and 51 percent of black children live in poverty." In contrast, I also read today in Business Week (March 30, 1998, "When Bosses Get Rich From Selling The Company") about several golden parachutes (a lucrative contract given to a top executive when the executive's employment at the company ends due to a buyout or takeover, the contract may include generous severance pay, bonus, and stock options) awarded to five different CEOs. The awards ranged anywhere from a minimum of $3.5 million and 250,000 shares of stock, including 400,000 options to as much as $20 million in cash and stock, including 162,500 new options.

From the article in the Stanford Report, Cornel West remarks about the children in poverty, "Martin [King] cries out from his grave; 'Where's the outrage?'" "West said."

ADDENDUM (May 27, 1998)

Last month Business Week (April 20, 1998) ran their annual report on executive pay. Here are some quotes and personal remarks:

Business Week says, "But the proliferation of stock-option grants, combined with the rise of cushy retirement deals, sign-on bonuses, and ironclad severance packages for CEOs, have made a mockery out of many attempts to truly link pay to performace." For once, I agree with Business Week.

Business Week says, "Indeed, the average boss collected an options-fueled package worth $7.8 million for 1997, pulling down a 35% raise over 1996's $5.8 million. But for many CEOs, those gains bore little relation to how will their companies-or investors-did." "In the pay-for-performance sweepstakes, the 'performance' half of the equation increasingly fell by the wayside." "Throw in all the extra goodies, and CEOs continue to rake it in. Indeed, although the 35% increase in CEO pay was less than 1996's 54% leap, that's still more than 13 times the average 2.6% raise earned by blue-collar workers and over nine times the 3.8% boost white-collar workers pocketed, according to the Bureau of Labor Statistics' Employment Cost Index. For the year, the average boss earned 326 times what a factory worker did." Just the facts.

Business Week says, "...most CEOs weren't shy about taking credit along with the check. The high payouts, they say, were well deserved: Profit rose 5%, and the Standard & Poors 500-stock index ran up a scorching 31% gain." That 5% rise in profits was produced by all the employees, not just the CEOs. Also, a 5% rise in profits is not what ran up the S&P 500 index last year. What ran up the S&P 500 last year was the average American on the street. Americans are so worried about Social Security not being there in the future, and given the fact that many companies including the large ones, don't want to be in the retirement business, Americans are taking what retirement money they do have, and sticking it into stocks via mutual funds. That's what's driving the markets, not CEOs.

Business Week says, "Options repricing-exchanging options for new options at a lower price after the stock falls-is one area in which activism is rising. The State of Wisconsin Investment Board (SWIB) has made repricing its focus this year, trying to get 22 companies to allow shareholder approval of any such plan." "The attack on repricing may represent a tactical shift by investors. Rather than decrying the swelling level of pay in general, critics are focusing on more specific issues. The AFL-CIO is turning the spotlight on how close ties between execs and directors can lead to excessive pay, for example." "And on Mar. 31, the Council of Institutional Investors, a group representing more than 100 pension funds with assets of more than $1 trillion, called for companies to 'index' option grants, or make their value contingent on outperforming the market or a peer group." I support efforts such as these made by the State of Wisconsin Investment Board, the AFL-CIO, and the Council of Institutional Investors, please contact me at: marketinsider@yahoo.com if you need my support or vote regarding the excesses of executive pay.

Business Week says, "'The one thing that provides comfort," says Peter T. Chingos, national practice director at KPMG Peat Marwick for compensation, 'is that the lion's share is coming from options. If the stock doesn't appreciate, {executives} can end up with a lot of wallpaper.'" Can you believe how ridiculous this statement is, first of all Business Week already stated in this article that pay for performance doesn't mean a thing, that even when a company's stock drops, executives are still making out. And even if options didn't exist at all, the average CEO is still making over 10 times what the average American makes. That may be wallpaper to Mr. Chingos, but to the rest of us, it's still a heck of a lot of money.

Business Week says, "If repricing can't even be stopped at a company that has already been the target of shareholder fury, what will happen if hundreds of companies see their share price drop? 'From everything I'm hearing,' says W.O. Bell, chief of management policy for the Florida State Board of Administration, 'it's safe to say repricing would rise exponentially if markets go down.' These days, things rising exponentially just seems normal for those in the corner office." What I'm going to do with this story is to just keep adding to it, documenting executive pay. I can't wait to see what happens (to executive pay) when overall stock performance slows?

Another thing I want to do with this story is that everytime I update it with more information, I want to contrast executive pay with another statistic: "Suffer the Little Children More and more U.S. children lack health insurance. In 1996, 1 in 7 had no coverage. Strikingly, four-fifths of all uninsured children are in families above the poverty level." (Business Week, June 1, 1998, pg. 8) Executives made a 54% leap in pay in 1996 and a 35% leap in 1997, but more kids go without health insurance in 1996 then in 1987. Who can figure.

Here's another tid bit of info: back in the beginning of this century J.D. Rockerfeller was the wealthiest person at the time. In todays dollars, Rockerfeller's billion dollars of net worth would be about $13 billion. When Microsoft's stock was approaching $100 a share a few weeks back, Gates' net worth was over $60 billion, over four times Rockerfeller's highest net worth. You would think Gates would start giving some of that money away to charity, and I'm not talking about a few $million. You would think he would give away $30-40 billion, when is enough, enough?

The Myth of the Disgraced CEO. By Joshua Green, American Prospect (Feb 14, 2002)

"One of the more frustrating Republican talking points is the politically advantageous assertion that Enron's collapse, far from being a scandal, actually vindicates the free-market system. "That companies like Enron go bankrupt," National Review lectured recently, "is a sign that markets work." Treasury Secretary Paul O'Neill hailed its collapse as "the genius of capitalism." And as Ken Lay sat glumly before Congress recently, while news spread that six Enron directors would resign, it probably sounded like a reasonable point. After all, who would let Lay or Enron's directors run their business? You wouldn't trust Wendy Gramm to balance your checkbook, would you? They're finished, done, kaput, right?

Wrong. The fallacy of the markets-punish-poor-performance argument is its implication that corporate executives are punished, too. But that's rarely the case. A look back at earlier "Enrons" -- other companies driven into disastrous bankruptcies -- reveals that even the most spectacular failures rarely claim those at the top. As corporate watchdog Nell Minow puts it, "[failing] CEOs never die, they just join boards of directors." And not surprisingly, many reprise their poor performance.

Take Edward S. Finkelstein. The notorious former chairman of Macy's and poster boy for '80s corporate excess took the company private in an ill-fated 1986 leveraged buyout. In 1992, shortly after Macy's was forced to file for Chapter 11, Finkelstein jumped ship. This hardly killed his career. He became chairman and CEO of the Cherry & Webb chain of women's clothing stores in 1997. And guess what? The company filed for bankruptcy three years later.

Nor did the Macy's bankruptcy hinder its board of directors. Robert G. Schwartz approved the leveraged buyout -- and he went on to become chairman and CEO of MetLife.

The United-Baldwin Corp. was another high-profile disaster. In January of 1985, after it declared bankruptcy, board member Philip E. Beekman resigned along with the rest of the board of directors, citing "continuing controversy about their role" in the troubled company. Today, Beekman is chairman of the audit committee for the financially troubled Sunbeam Corp., and a director of multiple public firms. Or how about Pan Am's onetime CEO, Thomas G. Plaskett? He survived the airline's bankruptcy to become chairman of the board of the Dallas-based energy company, Probex.

The issue of why this problem lingers has simmered for quite some time. Several years ago, Albert J. Dunlap, then chairman and CEO of Scott Paper Co., told The Wall Street Journal: "I don't think CEOs who fail in running their companies should be on other boards. If you can't run your own company, by what reason should you be on another company's board?"

In order to alert companies and shareholders to the track record of failed directors who may not wish to disclose their past, the Securities and Exchange Commission created a rule that "tags" directors of companies that declare bankruptcy on their watch. For five years, such directors are legally obligated to disclose their status to any new board they join. According to Peter Gleason of the National Association of Corporate Directors, that's why so many directors jump ship just before a company files for bankruptcy -- a trend Gleason says was especially pronounced during the recent spate of dot-com bankruptcies.

A good example is George Shaheen, onetime CEO of the online grocery service, Webvan. After burning through $1.2 billion in capital, Shaheen resigned shortly before Webvan declared bankruptcy last July in one of the new economy's most dramatic failures. Yet in October, Shaheen joined the board of software company Closedloop Solutions and remains a director of business software giant Siebel Systems.

Spurred by recent events, the AFL-CIO has been among the most vocal opponents of this type of board-hopping. (The "market at work" argument is particularly toothless when mismanaged companies go bankrupt and cost millions in worker pension funds.) And the sentiment is suddenly in fashion, prompted in no small part by an example from Enron's own board of directors. In addition to sitting on Enron's board, Norman P. Blake Jr. is the CEO of the technology-services company Comdisco, which declared bankruptcy last July. And if Comdisco goes under, Blake can fall back on his other job as a board member of Owens Corning. At least he can for the moment -- Owens Corning filed for bankruptcy protection two years ago."