“CRIMES AGAINST HUMILITY”

In June of 2001, the giant ice sculpture that urinated premium vodka became a lurid symbol of 21st century executive excess.

This huge frozen effigy, incongruously modeled on the classical Michelangelo sculpture of the Biblical David, served as the dominant decoration in a laughably lavish birthday bash for the new wife of Dennis Kozlowski, hard-charging CEO of giant health care and electronics conglomerate Tyco. Kozlowski had first met his adored soul-mate Karen Mayo while she worked as a waitress in Ron’s Beach House, a high-end watering hole near corporate headquarters in Exeter, New Hampshire. They began keeping company while inconveniently married to others, but managed to shed spouses (and inhibitions) in time for their romantic nuptials on Antigua. A month later, the Tyco Titan planned a much splashier celebration at an exclusive private club on the Italian island of Sardinia to mark the 40th birthday of his blonde and surgically improved life-partner.

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The party details included scores of leggy fashion models dressed as Roman “slave-girls” in skimpy tunics along with loin-cloth-clad body-builders portraying gladiators. A company employee spelled out the arrangements in advance in an obscene memo that later became infamous: “Guests arrive at the club starting at 7.15 p.m. The van pulls up to the main entrance. Two gladiators are standing next to the door, one opens the door, the other helps the guests. We have a lion or horse with a chariot for the shock value. The guests proceed through the two rooms. We have gladiators standing guard every couple feet and they are lining the way. The guests come into the pool area, the band is playing, they are dressed in elegant chic. Big ice sculpture of David, lots of shellfish and caviar at his feet. A waiter is pouring Stoli vodka into his back so it comes out his penis into a crystal glass.”

Meanwhile, “waiters are passing cocktails in chalices. They are dressed in linen togas with fig wreath on head. A full bar with fabulous linens. The pool has floating candles and flowers. We have rented fig trees with tiny lights everywhere to fill some space.” The climax came with “Elvis” on a big screen wishing Karen happy birthday before “a huge cake is brought out with the waiters in togas singing and holding the cake up for all to see. Elvis kicks it in full throttle.”

The last two details sound downright alarming, but not so frightening, perhaps, as the tab for the bacchanal: some $2 million dollars in various fees for the evening’s entertainment with a cool million paid in corporate funds. Because numerous shareholders attended the peerlessly tacky proceedings, Kozlowski and associates chose to classify it as a shareholder meeting. In a camcorder video captured on site, the fig-wreathed host proudly declared that the party would “bring out” a “Tyco core competency – the ability to party hard!”

The specifics of the birthday blow-out eventually became media obsessions, together with costly chatchkas chosen by a decorator and billed to the company in order to spruce up a corporate Manhattan apartment the Kozlowskis almost never used. The press inevitably focused on a $6,000 shower curtain in the maid’s bathroom, a $15,000 umbrella stand, and a $17,000 traveling toilette box whose contributions to the firm’s productivity or profitability remained difficult to explain.

The fun and funding both came to an end on June 17, 2005 (almost exactly four years after the shindig in Sardinia) with the conviction of Dennis Kozlowski for misappropriation of Tyco’s funds. In his second trial, prosecutors won a total of 22 counts of grand larceny for $150 million in authorized bonuses and fraud against corporate shareholders for an amount in excess of $400 million. The one time captain of industry now captains a dreary six-foot-by-ten-foot cell in the Mid-State Correctional Facility in Marcy, New York, where he’s serving a minimum sentence of eight years, four months. To the amazement of virtually no one, his wife Karen sued for divorce less than a year after his sentence began; the marriage that had been celebrated with a Roman orgy “for the ages” actually endured barely five years. When asked in a jailhouse interview why his glamorous wife had left him, a chastened Kozlowski simply stated, “because I’m no longer a rich, powerful CEO….If I was a poor production laborer, or struggling as a reporter for a newspaper, I don’t think Karen would have had any interest in me whatsoever. I was an easy guy for a woman to fall in love with at that time when I was at the top of my game. But I did not want to admit that. My first wife told me that was what was going on and she was right.”

During Kozlowski’s headline-making trials, the press treated his melodramatic rise and fall as emblematic of the intemperate and corrupt corporate culture of an entire era. The simultaneous and spectacular collapse of fraudulent, high-flying companies like Enron and WorldCom made it easy to associate Kozlowski with those horrendously damaging scandals, even though Tyco easily survived his alleged “looting” of the company. Ken Lay and Bernie Ebbers, the celebrated CEOs who received their own lengthy prison terms for masterminding the Enron and WorldCom scams, devastated literally tens of thousands of employees and shareholders, while fellow jailbird Kozlowski committed mostly “crimes against humility” (as wags commented at the time) but dealt only glancing blows to the company he served. Within a year of Kozlowski’s resignation in 2002, Tyco had returned to robust growth and profitability and today continues to provide jobs for 120,000 employees around the world. The product of a working-class Polish-American home in the gritty Central Ward of Newark, New Jersey, Kozlowski worked his way to the top by toiling for Tyco for 27 years and his decade as chairman and CEO saw the aggressive acquisition of numerous enterprises, prodigious growth in revenue, and the reliable out-performance of Wall Street expectations.

LUDICROUSLY OVERPAID PARASITES

Nevertheless, publicity for executive indulgence (even without flamboyant touches like vodka-spewing ice sculptures) always serves to reinforce the notion that corporate chieftains constitute a class of selfish, shallow, preposterously pampered and ludicrously overpaid parasites.

The public fury over multi-million dollar executive compensation packages recently reached such feverish and bilious intensity that even conservative politicians began suggesting that some of those greedy business leaders actually deserve to die. In March 2009, Senator Charles Grassley of Iowa (ranking Republican on the Finance Committee) noted that the American International Group (AIG) had received some $180 billion in a series of government bailouts, but still found $165 million to pay out in bonuses to some of its top officials. In an interview with an Iowa radio station, the Senator suggested that the conspicuously well-compensated AIG brass should “follow the Japanese example and come before the American people and take that deep bow and say, I’m sorry, and then do one of two things: resign or go commit suicide.”

With no real enthusiasm for either retirement or hara-kiri, the leaders of AIG declined the chance to follow his advice while tactfully describing the Grassley remarks as “very disappointing.” Those remarks, after all, looked moderate and constructive when compared to the flat out advocacy of the death penalty for corporate greed from English professor Kurt Hochenauer of the University of Central Oklahoma in his rousing call to arms, “Let Wall Street Die”: “Let their deaths be merciless. No taxpayer bailout…should go to rescue the growing cesspool of filthy-rich, elite financial managers whose unchecked greed and false sense of entitlement has given this country its worst financial crisis since the Great Depression.”

Meanwhile, the raging hysteria over Wall Street bonuses in the midst of economic crisis only confirmed the conviction that the most influential and admired principals of the business community had abandoned all sense of decency and decorum. Shortly after the initial round of government bailouts, the annual Gallup Poll on “Honesty and Ethics of Professions” (November, 2008) showed only 1% who rated the “honesty and ethical standards” of “business executives” as “very high” while 37% graded them as “very low” or “low.” Even such frequently suspect categories as “lawyers,” “journalists” and “bankers” scored notably better than “business executives” – not to mention widely admired professions such as “nurses,” “clergy,” “medical doctors” and “policemen.” Even before the financial meltdown, with the economy growing and the federal deficit declining, overwhelming majorities of Americans believed that top corporate honchos received far more compensation than they deserved. Some 80% of respondents polled by Bloomberg and the Los Angeles Times in 2006 agreed that “CEOs are overpaid.” This proposition commanded huge majorities of every component of the population – regardless of income or political affiliation.

During periods of economic hardship, corporate leaders inevitably inspire rage and resentment because they seem so powerfully isolated from the suffering that afflicts the rest of us; during years of growth and prosperity they draw comparable hostility for their “disproportionate” or showy share of national success. When the economy goes down, it’s easy – and almost irresistible – to blame business leaders. When indicators turn upward, on the other hand, those executives rarely get credit. Conventional wisdom associates economic recovery and boom times with natural cycles or the plans and programs of some popular politician. We assume that progress occurs in spite of the greed and selfishness of corporate bosses, with no real connection to their pursuit of profit.

For instance, in February of 1996, at the very core of what we now remember as the “Clinton Boom,” Newsweek ran an ominous cover story on “Corporate Killers.” The featured images showed prominent business bosses like Robert Allen of AT&T and Louis Gerstner of IBM in altered photographs designed to resemble criminal mug shots. The accusation against these “Hit Men” involved massive layoffs: “Call it ‘in your face capitalism.’ You lose your job, your ex-employer’s stock price rises, and the CEO gets a fat raise. Something is just plain wrong when stock prices keep rising on Wall Street while Main Street is littered with the bodies of workers discarded by the big companies.”

Aside from fudging the obvious if inconvenient fact that laid-off employees don’t generally “litter” their home towns by dying on the sidewalk, the Newsweek piece (by Allen Sloan) utterly ignores the context of the job losses it describes. As my friend Daniel Lapin points out in his hugely insightful book “Thou Shall Prosper,” the cover story about corporate mass murder came at the conclusion of one of the most notable periods of job growth in American economic history. “Between 1991 and 1995, the number of Americans newly employed had grown by 7.2 million,” Lapin writes. “In other words, while some companies were shedding workers, other companies were hiring workers; and far more people were being newly hired than fired. Newsweek stated that a total of 137,000 workers had lost their jobs in the companies highlighted in the story and held the story’s Corporate Killers responsible for the loss. Yet Newsweek failed to mention that the U.S. economy during that period was adding 137,000 jobs every three weeks!”

The idea that guilty businessmen (and, every once in a while, guilty businesswomen) cause all the world’s problems has become so widely-accepted that it’s infected even many of those who choose to make their lives in corporate America. Marianne Jennings, a professor of legal and ethical studies at the College of Business at Arizona State University, noted in the Wall Street Journal (May 3, 1999) that “many of my students are deeply offended by high levels of executive pay, deplore stock options, and believe that a company’s gay-rights position is a litmus test for morality….They believe that business spawned the homeless. They take it for granted that businesses cheat and are oddly resigned to it.”

“344 to 1”

According to embittered critics of the market system, the most glaring evidence of that cheating and corruption comes from the swelling pay disparity between workers and bosses. In a strident 2007 “Green Festival” speech cheerfully titled “The Road to Corporate Fascism,” four-time presidential candidate Ralph Nader declared: “The Corporate System is inherently defective, no matter how it grows, no matter where it grows. It will not just damage the environment and cheat consumers, and provide hazardous work places, etcetera, but it will cycle the gains back into the top 5, 4, 3, 2, 1 percent. When I was growing up in a factory town in Connecticut, the heads of these factories, not one of them was making more than seven times the worker wage in their factory. And I’m talking about the top guys, not the managers. Now, it’s the Fortune 500 CEO’s are making 400 to 500 times more than the average worker. The head of Wal-Mart made $11,000 an hour and hundreds of thousands of his workers were making 6, 7, 8 dollars an hour. You can see the gap growing, growing. There isn’t even a word to describe it. Calling it a ’gap’ is not enough.”

There’s no evidence at all that cutting the compensation of Wal-Mart CEO Mike Duke would magically raise the wages of his 2,100,000 employees, but levelers like Ralph Nader pay far more attention to the privileges of those at the top of the corporate ladder than they do to the welfare and advancement of those at the bottom. According to the Census Bureau, median household income went up from $41,613 in 1982 (in inflation adjusted dollars) to $59,233 in 2007—a hefty increase of more than 20% and providing a significant addition of $8,620. At the same time, the earnings of the typical CEO as compared to an average U.S. worker went up from 30-to-1 (it was never the nostalgically remembered 7-to-1 recalled by Ralph Nader) all the way to 344-to-1, according to the liberal advocacy group United for a Fair Economy in a much-discussed 2007 study.

The LA Times reported that the ratio of CEO compensation to the average worker’s salary had risen even higher-- to an all-time peak of 525-to-1-- in 2000, thanks to lucrative options and a soaring stock market. Most recently, the trend has brought executive pay packages closer to the salaries of typical workers, not increased the disparity. This shrinking of the infamous pay gap actually corresponds with Forbes Magazine figures in April 2009 showing a sharp drop in chief executive compensation at the 500 biggest US companies – down 15% in 2007, and another 11% in 2008, for the first two-year, back-to-back pay hit since 2001 and 2002, even at a time when remuneration for average workers went up. (The Department of Labor reported that the national average weekly income rose 2.5% from $598 in 2007 to $613 in 2008). This doesn’t mean that beleaguered CEOs deserve the pity of the public, or that improvements for working class employees someone poached their proceeds, or that school children need to take up collections of dimes and quarters to reduce their suffering; with average pay packages of $11.4 million in 2008 (according to Forbes), these big bosses could endure even more substantive reductions in the years ahead without serious threat to their luxurious living standards.

Nevertheless, the unheralded but significant decline in executive compensation (in both absolute terms and as a multiple of the salaries of average employees) exposes one of the most irresponsible fictions about contemporary American business, giving the lie to the destructive notion that typical corporate heads bring home ever more outrageous pay packages even while the public at large (not to mention stockholders and employees) suffers the ravages of severe recession. While a few highly publicized leaders of troubled firms --- Stanley O’Neal of Merrill Lynch, Charles O. Prince of Citigroup, John J. Mack of Morgan Stanley – have walked away with gigantic rewards or settlements despite the wretched performance of their companies, researchers have begun to discern a more reasonable trend in executive compensation. Financial Week reported a major study by Equilar (the executive compensation research firm) showing the median value of performance-based bonuses for CEOs in large public firms went down in 2007 (even before the economic meltdown) from $949,249 to $772,717, a dramatic decrease of 18.6%.

More recently, Madhukar Angur, Professor of Marketing at the Flint campus of the University of Michigan, examined executive compensation at top U.S. corporations and found little evidence of systemic plunder of big companies by greedy CEOs. As he wrote in Investor’s Business Daily (March 23, 2009): “Recent research, however, suggests that this abuse of corporate finances may not be as prevalent as it seems. Indeed, over 40% of the 94 U.S. corporations I have studied had CEO compensation generally based on proportionate increase or decrease in company’s net worth or paid less to CEOs despite an increase in company net worth.” Professor Angur saw this surprising tendency to cut CEO pay even when they led thriving companies as a healthy sign of an economic system swinging back to balance and shareholder control. “Given that nearly a third of the top Fortune 100 companies paid less compensation to their CEOs despite an increase in the companies’ net worth, that suggests that the threatening economy has kick-started corporate governance and other self-regulatory systems in a significant number of U.S. companies. If this trend continues, the nation will see more companies tying CEO compensation to corporate performance. The end results might be more sustainable business and renewed public trust.”

“YOU DO GET WHAT YOU PAY FOR”

Critics of corporate power and CEO privilege will naturally scoff at such minor adjustments. To them, it hardly matters if the ratio of executive compensation to worker salary declines from 525-to-1 to 344-to-1 in the most recent decade: annual pay packages that top $10 million for top corporate brass still look irrational, indulgent and obscene, especially in the midst of economic hard times. The question isn’t whether the payment to big bosses will continue to soar or gradually settle back down to earth. For the general public, the biggest mystery involves how corporate board members and concerned stockholders could have ever let the compensation packages rise so high in the first place.

One savvy and respected observer from the left side of the political spectrum takes the courageous position that the breathtaking increase in CEO compensation actually makes perfect sense, given deeper changes in the American marketplace. “There’s an economic case for the stratospheric level of CEO pay which suggests shareholders- even if they had full say – would not reduce it,” writes Robert Reich, the outspoken Labor Secretary under Bill Clinton and now a professor of public policy at the University of California at Berkeley. In the Wall Street Journal (September 14, 2007) he predicted that these shareholders were “likely to let CEO pay continue to soar. That’s because of a fundamental shift in the structure of the economy over the last four decades, from oligopolistic capitalistic to super-competitive capitalism. CEO pay has risen astronomically over the interval, but so have investor returns.”

Reich perceptively compares the corporate heads of today with those who ran major companies in the 1950’s and 60’s, when even the most powerful business leader “was mostly a bureaucrat in charge of a large, high-volume production system whose rules were standardized and whose competitors were docile. It was the era of stable oligopolies, big unions, predictable markets and lackluster share performance. The CEO of a modern company is in a different situation. Oligopolies are mostly gone and entry barriers are low. Rivals are impinging all the time – threatening to lure away consumers all too willing to be lured away, and threatening to hijack investors eager to jump ship at the slightest hint of an upturn in a rival’s share price.”

He compares the shift to the much-discussed changes in the movie business. Fifty years ago, eight big studios utterly dominated the United States market, shutting out all would-be competitors and comfortably dividing the available audience among them. These secure, well-established companies became household names, signing the biggest stars to long-term, exclusive contracts and thereby limiting their competition. As Reich notes: “Clark Gable earned $100,000 a picture in the 1940’s, roughly $800,000 in present dollars. But that was when Hollywood was dominated by big-studio oligopolies. Today, Tom Hanks makes closer to $20 million per film. Movie studios – now competing intensely not only with one another but with every other form of entertainment – willingly pay these sums because they’re still small compared to the money these stars bring in and profits they generate. Today’s big companies are paying their CEOs mammoth sums for much the same reason.”

Secretary Reich cites the storied (and controversial) pay out to Lee R. Raymond, chairman of Exxon Mobil, who retired in 2005 with a compensation package totaling nearly $400 million, including stock, stock options and long-term compensation. “Too much?” Reich asks. “Not to Exxon’s investors, who enjoyed a 223% return over the interval, compared to the average 205% return received by shareholders of other oil companies, a premium of about $16 billion. Raymond took home just 4% of that $16 billion.”

In other words, under the circumstances, even a pay day of nearly half a billion dollars can represent a real bargain for exceptionally gifted (or lucky) CEOs. Professor Angur notes that “using company net worth as the basis of performance measures, Jack Welch, the former CEO of General Electric, is considered underpaid. Through his unique leadership style and business acumen Welch took the company’s worth from about $14 billion in 1981 to $500 billion just before retiring.”

As Robert Murphy noted at Townhall.com: “In our increasingly global economy, certain individuals are incredibly productive and can command incredibly high earnings as a result. Corporate executives really do perform valuable tasks, and it really does make a difference who is running the company. Once we concede that productive individuals will earn more than less productive ones, the fact that some make 364 times what others do is largely irrelevant. After all, a TV set might be 364 times more expensive than a gumball. Is that ‘unfair’ or does it merely reflect the forces of supply and demand?”

The operation of those forces naturally impels executive compensation to levels that disturb the public. In Forbes Magazine (February 19, 2009), Mark Hodak (who teaches corporate governance at New York University’s Leonard N. Stern School of Business) shared his own experience in negotiating major contracts for corporate leaders. “I would be perfectly happy living in a world where the typical CEO made no more than, say, 30 times the pay of the average worker,” he confessed. “I don’t think anyone needs more than that to be happy or secure, or deserves more than that as an expression of their value to humanity. I’m also a compensation consultant that shareholders hire to get the best executives at the lowest prices. I don’t pay more than I have to, but I often have to pay more than 30 times what the average worker makes. You do get what you pay for.”

Hodak sympathizes with the sense of outrage that afflicts lower-level employees at major companies with head honchos who earn millions. “I know it’s hard for someone making $50,000 a year to imagine that anyone can be worth 10 or a hundred times that. But they might be. How do I know? Because if I don’t pay them, someone else will. When an executive across the table tells me, ‘The guys down the street are offering $2 million a year,’ he’s not bluffing. The experienced buyer of managerial talent can see the difference between a $500,000 executive and $2 million executive as surely as a home buyer can tell the difference between a half-million-dollar home and a $2 million home.”

My former law school classmate Robert Reich— who has argued for forty years for activist government, higher tax rates and closer corporate regulation-- nonetheless recognizes that executive salaries reflect basic realities of supply and demand, rather than the back-scratching indulgence of some insider old-boy network. “The pool of proven talent is small because so few executives have been tested and succeeded,” he writes in the Wall Street Journal. “And the boards of major companies do not want to risk error. The cost of recruiting the wrong person can be very large – and readily apparent in the deteriorating value of a company’s share. Boards are willing to pay more and more for CEOs and other top executives because their rivals are paying more and more for them.”

As both a Berkeley academic and a former member of the Clinton cabinet, Reich has never been shy about deploying the power of some federal bureaucracy to achieve some worthy goal, but he shuns the idea of utilizing such a mechanism to limit compensation packages in the business world. Not even the most ambitious and audacious reformer would support the notion of forcing salaries and bonuses to match some concept of the intrinsic worth of work. As Rob Preston argues in InformationWeek (January 13, 2007): “If salaries were just about the importance or perils of the work, teachers and nurses and power plant technicians and soldiers would be pulling down the big bucks. That they’re not doesn’t mean they’re any less critical; it just means that employers could find more of them at the pay they now earn. Water is cheap because it’s abundant. Gold is expensive because it’s not. Which is the more critical commodity?”

Two weeks later, Preston continued his defense of the fundamental rationality of the employment market, when allowed to operate with minimal interference, and insisted that CEO compensation packages “are more often a function of the incontrovertible forces of supply and demand than of nepotism, negligence, incompetence, deception, fraud, or some other scheme….The fact remains that most of that compensation is dispensed in an open competitive market. If shareholders don’t like what the CEO or other top execs are pulling down, they can vote with their feet or apply direct pressure on the board of directors, as a Home Depot investor group did, leading to the recent ouster of CEO Robert Nardelli.” Continued...