Three weeks before Christmas in 2008, Philippe Dauman and Thomas E. Dooley, two top executives at Viacom Inc., wrote a “Dear Colleagues” letter to the employees of the media conglomerate informing them that the company was downsizing its workforce by 7 percent.
That represented 850 jobs, 850 human beings, who would be looking for work in the midst of the worst job market in 25 years. The layoffs were not performance based. Indeed, the men who wrote that Dec. 4, 2008, memo -- “Phil” and “Tom” is how they signed their names -- insisted that the departing employees should be proud of their contributions to the company that no longer needed them.
In an accompanying press release, Viacom also said that it hoped that the staff reductions, coupled with pay freezes for senior executives, would save some $200 million in 2009. It happened that way, too: That year’s financials showed the company’s revenues were nearly as high as in 2008, but with less overhead.
Apparently pleased with their own cost-cutting efforts, Dooley, Dauman (pictured), and Viacom Chairman Sumner Redstone paid themselves $165 million in salary, bonuses and stock options for the first nine months of the 2010 fiscal year. That figure is not a typo. Nor is it an isolated example.
For the past generation, executive compensation has been rising at an astounding rate in the United States. In the early 1980s, the supposed “decade of greed,” the typical CEO made 42 times as much money per year as the average worker at his company. By the beginning of the Great Recession, this ratio had risen to approximately 500-1. Because so much of executive compensation is paid in stock options, that figure has since declined to around 350-1, but it’s still the highest in the world -- by far -- and it’s rising again.
“This is a phenomenon of the United States,” says economics professor William Lazonick, director of the Center for Industrial Competitiveness at the University of Massachusetts, Lowell. “And it’s a much bigger part of our nation’s unemployment story than people want to admit.”
Since December 2007, American workers have been caught in a vice. Large corporations have been shedding jobs at a prodigious rate while small businesses struggle to survive -- and start-ups are lagging. The upshot is a persistent unemployment rate of 9 percent. That number represents 14 million Americans actively looking for work who can’t find it, 45 percent of whom have been unemployed for more than six months. A closer look at the numbers furnished by the Bureau of Labor Statistics shows the full extent of the problem is even bleaker. Another 2.5 million Americans want a job, but are so discouraged they have quit looking. And 9.3 million people are “under-employed” -- they are working part time but want to be working full time.
The explanations being peddled to the American people for this crisis are many, and varied.
The 2012 Republican presidential candidates have blamed government red tape and regulations -- and constant battles over the tax rates -- for a creating economic “uncertainty” that is causing employers to shy away from new investment and new hiring.
“The future for taxes has been left up in the air,” says Mitt Romney. “And uncertainty is not a friend of investment, growth and job creation.” Another frequent target is the Patient Protection and Affordable Care Act signed into law by President Obama in 2009.
“Obamacare is killing jobs,” Michele Bachmann says simply. She speaks for almost the entire Republican Party. A Chamber of Commerce-backed study seemed to back up this assertion: One-third of business owners surveyed cited concern about the health care mandate as either the primary or secondary reason they are not expanding their firms by hiring new employees.
It’s not only conservatives making this claim. In wording so bland it was almost Orwellian, the non-partisan Congressional Budget Office asserted in a report last year that the new law will result in a reduction in “the amount of labor used in the economy.”
And before he died, liberal icon Steve Jobs warned Obama that he’d be a one-term president if he didn’t become more business-friendly. According to a new biography of the Apple founder, Jobs complained to Obama how much harder it was to open a factory in the United States than China because of high costs and onerous government requirements.
Yet not everyone is buying these explanations. Responding to Mitt Romney’s 59-point plan to kick-start the economy if he is elected president, former Secretary of Labor Robert Reich wrote recently: “Remember, corporations are now showing record profits. They’re sitting on $2 trillion of cash. Why it is Romney believes they need more money and lower costs in order to create jobs is one of the wonders of the universe.”
Reich’s pithy point suggests another possible explanation for the stagnant job market: Corporate greed -- or, to be more specific, greed on the part of those who run large corporations.
It was international news when Bank of America proposed -- and this week backed away from -- a $5 monthly fee on debit cards. But it created only a ripple in the financial press when Kenneth D. Lewis, the ousted Bank of America chief executive officer, took pension benefits estimated at $53 million with him when he left in 2009. Earlier this year, Brian Moynihan, Lewis’ replacement at CEO, and three other executives were awarded about $33 million in stock. (One of those executives, Thomas Montag, who came to Bank of America in the merger with Merrill Lynch, was paid $29.9 million in total compensation in 2009.)
Shortly after the stock bonuses were paid in 2011, the financial giant began effecting layoffs: 2,500 at first; then an announced 3,500 in the third quarter of the year. Then, in September, the bank announced that it had plans to shed some 30,000 jobs -- 10 percent of its worldwide workforce.
“Mind you this is the financial giant that paid its global banking and markets president nearly $30 million dollars last year -- and this year turned around and announced it's going to fire 30,000 workers!” thundered AFL-CIO President Richard Trumka recently. “My question is, just when is enough, enough?”
There’s an even more disturbing question than that, and it’s this: Are these huge compensation packages themselves one of the reasons corporations are shedding jobs -- and not hiring new workers?
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For three decades, good jobs have been disappearing in this country, part of a sweeping historic trend that would have occurred, at least in part, regardless of executive pay levels.
In the 1980s manufacturing jobs, many of them unionized, in a host of mature industries -- steel mills, textile plants, logging, auto manufacturing -- began departing the U.S. in droves. These jobs were casualties of mechanization, modernization, increases in productivity, and the phenomenon of globalization. It was cheaper to hire workers in other countries.
In the 1990s, this trend moved up the food chain to college graduates and middle management, even those with highly technical skills. Professor Lazonick has charted this phenomenon through a single company, IBM, which turned 100 years old this year.
The firm that would become “Big Blue” had been a presence in American technology since it won the contract for the 1900 U.S. Census. From the time Thomas Watson took over in 1914 and stressed customer service and company loyalty -- in return for generous sales commissions -- IBM became a place where employees could, and did, spend a career. When they retired, an unstinting pension awaited the loyal IBM man.
That model lasted until the 1990s. IBM was a far-flung global operation that, as 1989 drew to a close, employed some 383,000 people worldwide. Five years later, that number had been drastically cut to about 220,000. Portable pensions were the order of the day, brought in 1993 to Big Blue by former RJR Nabisco executive Louis V. Gerstner Jr. The model of lifelong loyalty, not mention lifelong employment, was suddenly passé.
So was the concept of reasonable CEO pay. For 1995, Gerstner was awarded a total compensation package worth nearly $18 million. “Lord knows what they would have paid him if he had had a good year,” Graef Crystal, a consultant on executive compensation, told the New York Times. “You would have needed an astronomer to see it.”
One of the first analysts to start asking uncomfortable questions was someone named Bob McIntyre, and the question he was asking why it seemed that all the firms paying the most astronomical salaries were also the ones laying off the most workers. McIntyre, running a small progressive think tank called Citizens for Tax Justice, produced a list of the top job-shedding firms in the country, and a chart showing their total layoffs from 1993-1995, along with their profits -- and the CEO’s salary for the year 1995.
The firm that fired the most workers was also the one with the highest profits: It was AT&T. Bank of America, ranked second in both profits and layoffs, had the dubious honor of paying the highest amount to its CEO -- $11.9 million in 1995 alone. Between them, McIntyre’s “Layoff Ten” were responsible for 134,450 layoffs while raking in pre-tax profits of $60.7 billion. The average CEO’s compensation package among the “Layoff Ten” came in at $5.2 million a year.
It wasn’t supposed to be this way. Railing against the “corrupt do-nothing values of the 1980s,” Bill Clinton had vowed during his 1992 campaign to rein in “excessive executive pay” by capping at $1 million the salaries companies could write off as a business expense, spreading bonuses around to all employees, and tying big bonuses to performance.
Three weeks after being inaugurated, in remarks to business leaders in the East Room of the White House, Clinton discussed this issue. “I talked a lot in the campaign about . . . the enormously increased rate of executive compensation in the last 12 years as compared with the compensation of workers,” he said. “I want to make a proposal that deals with the fact that the tax code should no longer subsidize excessive pay of chief executives and other high executives, ‘excessive’ defined as unrelated to the productivity of the enterprise.”
Some of those provisions were put into Clinton’s omnibus budget bill that passed on a party-line vote and was signed into law on Aug. 10, 1993. That bill raised the tax rates on the top earners, while granting a break to the working poor. Clinton hailed it as legislation that would “revive our economy” and “renew our American Dream.” In the years since, Clinton’s budget has been widely adjudged a success, except in one area. When it came to capping corporate pay, it was a spectacular failure.
For starters, one unforeseen development was that the $1 million cap became the de facto floor: No self-respecting CEO wanted a salary below the level that the government had set as a cutoff point. So even without the tax deduction, corporations just blew through the $1 million barrier anyway.
More importantly, by the time the provisions got through the legislative process, they had been watered down. The law applied only to publicly traded corporations. Secondly, the law didn’t include bonuses paid in the form of stock or stock options, which had by that time already emerged as the preferred method for funneling unseemly raises to corporate executives.
Worst of all, with the IRS and the Securities and Exchange Commission now officially keeping an eye on pay, corporate boards began tying their executives’ bonuses to self-serving metrics, usually stock price and profitability -- but not to growth, innovation, plant construction, or new product lines. The result was Kafkaesque: The system had now evolved to its present point, in which corporate executives qualified for huge bonuses by raising profits -- absent growth -- through cost-cutting measures (i.e., laying off workers).
By 1996, the New York Times was running headlines like this: “Head of I.B.M. Has a Better Year Than I.B.M.” In time, this trend would coalesce with several others that did not bode well for employment, especially after the arrival of The Great Recession in 2007-2008.
One of them was the rapid acceleration of globalization, which translated into the off-shoring of millions of American jobs -- but not the repatriation of the profits. Another was stock buybacks, in which corporations used profits to purchase its own stock. Such moves can be done to stave off hostile takeovers, thereby preserving the company, or to show confidence in the firm. But in actual practice, it’s done mostly to keep the stock price high. Buybacks come at the price of stock dividends, but that’s a trade-off shareholders are willing to make. The hidden cost of buybacks is that it diverts money that was once used for the true engines of corporate growth: R&D, along with investments in new technologies, new plants, and new workers.
A third trend was the acceleration in industry consolidation, the new wrinkle being the hundreds of millions of dollars taken out of the pie by the executives who effected the mergers. Last year, for example, the pharmaceutical giant Schering-Plough was incorporated into Merck & Co. “We recently merged to create a stronger, more diverse and more truly global company,” Merck announced. “This not only benefits our company and our shareholders, but it also benefits the millions of people around the world who rely on our products and expect us to continue to deliver exceptional value.”
Perhaps that’s true, but the corporate-speak did not mention two other facts of life: Thousands of employees were immediately deemed redundant, and lost their jobs. Meanwhile, the top executives of the two companies were handed rewards that must have stunned the dismissed workers.
The top four Schering-Plough executives were paid $160 million in 2009 alone. And this wasn’t an aberration. Corporate filings show that the top eight executives at the two pharma firms (Richard T. Clark, Peter Kelley, Kenneth Frazier and Bruce Kuhlik at Merck, and Fred Hassan, Robert Bertolini, Carrie Cox and Thomas P. Koestler at Schering-Plough) were paid $369.5 million total in the three years before the merger.
When the merger was announced, the company said that 16,000 people would lose their jobs. Since then, it has announced rolling layoffs with regularity: In July 2010, it announced that 15,000 jobs would be eliminated. In August of this year, another 13,000 jobs were marked for cutting over the next three years. By one count, the merger has resulted in the loss of 30,000 jobs.
Defenders of these corporations point out that in downsizing a workforce, CEOs are trying to protect their companies, along with the remaining employees. This is undoubtedly true. But this explanation rings hollow for many workers put on the unemployment lines, because these companies are often profitable, have huge cash reserves, and are paying their top executives a fortune.
Moreover, studies done during this period of stagnant employment show a disquieting correlation between outsized executive pay and layoffs.
The most ambitious was done by the Institute for Policy Studies, a left-leaning think tank that combines a liberal political agenda with restrained and fact-based economic analysis. The main finding of its 2010 report, “CEO Pay and the Great Recession,” was that chief executives of the firms that have cut the most jobs during the current downturn are making significantly more money that their peers at other companies.
“There’s still the idea that when an executive slashes thousands of workers that they are making the tough decisions necessary to make their company mean and lean,” said Sarah Anderson, lead author of the study. “But when CEOs slash jobs they are often very richly rewarded.”
The IPS data showed that those atop 50 layoff-leading companies made an average of $12 million in salary in 2009, 42 percent more than the average CEO pay at other large companies. In 2010 and 2011, as stock prices rose again, along with corporate profits (but without bettering the employment picture), so did CEO salaries and bonuses.
In July, Equilar, a Silicon Valley-based executive compensation data firm, did a study for the New York Times. “Brace yourself,” the Times warned its readers. “The final figures show that the median pay for top executives at 200 big companies last year was $10.8 million. That works out to a 23 percent gain from 2009.”
Atop the list, of course, was Viacom chieftain Philippe Dauman, who was given $84.5 million last year, after inking a new contract that included a generous signing bonus in the form of stock options. But the pay of CBS’ corporate head, Leslie Moonves, was upped by one-third to $57 million in 2010, according to the Equilar study. At the same time, the network of Edward R. Murrow was tightening its belt in the news division, laying off 90 staffers in Washington, Los Angeles and London and shuttering its Moscow bureau. More layoffs are believed to be in the works.
This kind of thing has become routine among large corporations during the Obama presidency. The week he was inaugurated, IBM chief Samuel J. Palmisano (2010 pay: $31.7 million, a 30 percent increase over 2009) sent an email to the staff vowing that Big Blue wasn’t retrenching, and added, “We will invest in our people.”
The next day, however, 1,400 IBM employees in North America were told their jobs would be gone in a month. This action seems to have heralded an unfortunate trend: mass layoffs done stealthily. By March 2009, IBM had laid off nearly 10,000 workers without making a public announcement.
One criticism of the Occupy Wall Street rallies is that the list of demands range from the abstruse to the absurd. The truth is these marchers don’t pretend to know exactly how to fix this economy. But they have come to believe that corporate capitalism is a rigged game run by “the 1 percent” who are getting frightfully rich at the expense of everyone else -- and who can blame them?
So far, President Obama has only stuck his toe into this rhetorical pool, preferring to concentrate on raising taxes on “millionaires and billionaires” and focusing his aim on “corporate jets,” not corporate leaders. For his trouble, the president has been characterized as weak-kneed by some liberals and blamed by conservatives for launching “class warfare.”
But Obama’s focus on corporate jets was a good instinct. A recent report by a firm called GovernanceMetrics International reveals that extravagant use of corporate jets really is a pretty good barometer of a poorly run company. Profligate flying also corresponds, not surprisingly, to sky-high executive pay.
“If you’re looking for a red flag to provoke a wider look at a company's governance and accounting practices, unusually high corporate jet perks is usually a pretty good one,” the GMI report states.
As for class warfare, it’s worth asking who is more responsible for today’s state of affairs: The corporate honcho who pays himself tens of millions of dollars while putting workers on the street by the thousands -- or those who take to the street in protest.
Famed management guru Peter F. Drucker predicted it might come to this. In his 1973 book, “Management: Tasks, Responsibilities, Practices,” he wrote: “The fact is that in modern society there is no other leadership group but managers. If the managers of our major institutions, and especially of business, do not take responsibility for the common good, no one else can or will.”
It was during the Reagan years that Drucker began warning of the danger huge corporate salaries posed to an organization’s morale. His rule of thumb was that a CEO should not pay himself more than 20 times what the average workers were earning -- and that this was especially salient in a time of layoffs. And in an interview with Wired magazine some 15 years ago, he amplified on this point:
“What’s absolutely unforgivable is the financial benefit top management people get for laying off people,” Drucker said. There’s no excuse for it. No justification. No explanation. This is morally and socially unforgivable, and we'll pay a very nasty price.”