Executive Excess 2004

15 November 2005

  John Cavanagh

Executive Excess 2004
CEO Pay Soars at Companies that send Jobs Overseas
Sarah Anderson, John Cavanagh, Chris Hartman, Scott Klinger, and Stacey Chan
Institute for Policy Studies/United for a Fair Economy, 31 August 2004

This report is available in PDF

CEOs at companies that outsource the most US jobs are rewarded with bigger paychecks. Average CEO compensation at the 50 firms outsourcing the most service jobs increased by 46 percent in 2003, compared to a 9 percent average increase for all CEOs at the 365 large companies surveyed by Business Week. Top outsourcers earned an average of $10.4 million in 2003, 28 percent more than the average CEO compensation of $8.1 million. From 2001 to 2003, the top 50 outsourcing CEOs earned $2.2 billion while sending an estimated 200,000 jobs overseas.

Political contributions also appear to pay off. CEOs of the 69 companies that sponsored this summer's Democratic and Republican National Conventions saw their pay jump 52 percent in 2003, far outpacing the 9 percent raise for the average large company CEO. Similarly, the 38 CEOs who have personally raised at least $100,000 for either the Bush or Kerry presidential campaigns earned an average of $15.2 million in 2003, 88 percent more than the average large company CEO.

One sign of the political clout of corporate leaders is the current effort in Congress to block new rules that would require corporations to report all stock option grants as expenses in their financial statements. Current accounting rules have encouraged lavish options grants to executives. The report calculates that corporations have claimed an estimated $3.9 billion in tax deductions related to stock options exercised by 350 leading CEOs since 1997.

After two years of narrowing, the CEO-to-worker wage gap is rising again. The CEO pay to worker pay ratio reached 301:1 in 2003, up from 282:1 in 2002. If the minimum wage had increased as quickly as CEO pay since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.

One rationale for high CEO pay is that CEOs bear tremendous risks and responsibilities for their companies, yet the report found that CEOs are far more financially secure than those risking their lives in war. Average CEO pay is 56 times more than the pay for a US Army general with 20 years experience ($144,932) and 634 times more than the pay for a starting US soldier ($12,776).

The good news is that public pressure is beginning to have an impact. More investors than ever have demanded greater accountability from CEOs at shareholder meetings. Richard Grasso, CEO of the New York Stock Exchange, was forced to resign due to public outrage over his $140 million pay package. A number of companies and CEOs, including seven detailed in the report, have voluntarily supported fairer pay plans. The report also includes recommendations on how tax and corporate governance regulations could be reformed to help narrow the pay gap.

"Executive Excess 2004" profiles the CEO pay practices and political contributions for the 15 companies that outsourced the most US service jobs: United Technologies, Citigroup, Oracle, Bank of America, Cognizant Technology Solutions, Morgan Stanley, Intuit, SBC Communications, Conseco, JP Morgan Chase, Sprint, Bank of New York, Time Warner, General Electric, and American Express.

Bank of America, for example, cut nearly 5,000 US jobs while outsourcing up to 1,100 jobs to India in 2003. In July 2004, the firm announced that it planned to cut another 12,500 US jobs in the next two years. Meanwhile, CEO Kenneth Lewis received $37.9 million in compensation in 2003, nearly 110 percent more than in 2002. Bank of America's PAC has made $576,319 in contributions in the 2003-2004 election cycle.

The outsourcing of service jobs to low-wage countries has further widened the pay gap between workers and their bosses. Currently, the pay gap between US CEOs and American call center workers is 400:1, while the gap between US CEOs and Indian call center workers is 3,348:1.


Contents

  • Key Findings
  • Introduction
    1. Rewarding CEOs for Outsourcing Jobs
      • A Closer Look at Top Service Outsourcers
    2. (Political)Partying Pays
    3. The Spiraling Cost of Blocking Options Expensing
    4. CEO Pay vs.Worker and Military Pay
      • CEO Pay Since 1990
  • Conclusion: Actions for Change

Introduction

A climate of anxiety has enveloped the country over the past year. Workers are increasingly anxious about their job security and the rising cost of basics like health insurance, housing, college, and gasoline. Many military families are facing particularly difficult financial strains at home as they grapple with the dire risks to their loved ones far away. And through it all, too many corporate executives remain removed from such cares and worries. As they demand cost-cutting on the factory floor and in the back offices, costs in their own executive suites continue to soar. And as the Iraq conflict rages on, many corporate leaders are personally profiting from the suffering through war-related contracts.

We are also struck in this Presidential election year by the continued heavy corporate involvement in funding campaigns and the apparent inability of the political system to address issues like job outsourcing and the non-expensing of stock options. For many companies, "political profits" play as important a role in business success as investments in new products or enhanced customer service. Profits enhanced by investments in the political process seem to have a greater chance of finding their way into the pockets of CEOs.

At the same time, we have seen some positive signs over the past year that corporate leaders are not untouchable. Deepening public anger over excessive executive pay has prompted shareholders, workers, and even some corporate and Wall Street leaders to demand change. For example:

  • New York Stock Exchange CEO Richard Grasso was forced to resign following disclosure of his $140 million pay package. The Exchange has filed suit against Grasso, seeking a return of some of his excessive pay.
  • Long-time pay giant Michael Eisner, CEO of the Walt Disney Company, received a vote of "no confidence" from 45 percent of Disney shareholders. The rebuke forced Eisner to give up his role as Disney's chairman, although he remains CEO.
  • For the second year in a row, shareholder proposals on executive compensation dominated corporate annual meetings, with more than 300 resolutions filed by concerned shareholders.
  • Whole Foods Market set a positive example by limiting CEO John Mackey's salary to no more than 14 times the pay of the average frontline employee. In addition, all employees can qualify for stock options, and the company says that 94 percent of options go to nonexecutive staff.

Despite these developments, however, it is clear that executive pay is still out of control. Even in the post-Enron world, corporate boards are far too clubby and corporate lobbyists continue to hold far too much influence over our political system. Greater public pressure and political action will be needed to narrow the gap between executives and the legions of employees who also play an important role in creating shareholder value.


Key Findings

Outsourcing service jobs to other countries pays off for CEOs

Top executives at the 50 largest outsourcers of service jobs made an average of $10.4 million in 2003, 46 percent more than they as a group received the previous year and 28 percent more than the average large-company CEO. These 50 CEOs seem to be personally benefiting from a trend that has already cost hundreds of thousands of US jobs and is projected to cost millions more over the next decade.

Outsourcing to developing countries has widened the chasm between US CEOs and their workers. India has claimed the greatest number of outsourced service jobs, particularly for call centers and software programming work. The average pay of the leading outsourcing CEOs is 3,300 times the pay of an average Indian call center employee and 1,300 times more than the pay of an average Indian computer programmer.

Despite a growing public outcry, Congress has not done anything to stem the tide of jobs lost to outsourcing, and the Bush Administration has called the trend a "good thing." This inaction may be connected to the political contributions of the top 50 outsourcing companies, who have so far given a combined $10.4 million in Political Action Committee (PAC) contributions to federal candidates during the 2004 election cycle. The higher-than-average CEO pay at the top 50 outsourcing companies is just one example of "political profits" - rewards gained by working the system of political contributions and cronyism rather than by building a better mousetrap.

CEOs heavily involved in political contributions have higher-than-average pay.

Taking an active role in political fundraising seems to boost CEOs' fortunes. Currently, there are 38 CEOs who have each personally raised at least $100,000 in individual contributions from friends and business associates for one of the two major presidential candidates. These executives-slash-fundraisers averaged $15.2 million in total pay in 2003, 88 percent more than the average large-company CEO.

Sponsoring a convention doesn't hurt, either. CEOs of the 69 companies that sponsored this summer's political conventions averaged $9.2 million in total compensation in 2003, representing a hefty 52 percent raise over their average pay in 2002. By contrast, the average large-company CEO surveyed by Business Week received a raise of only 9 percent in 2003.

There is also correlation between corporate campaign contributions and high CEO pay. The top 41 corporate campaign contributors of the 2003-04 election cycle paid their CEOs an average of $17.4 million in 2003, more than twice as much as the salary received by the the average large-company CEO.

Corporate lobbyists are blocking common-sense treatment of stock options.

Under intense pressure from corporate lobbyists, members of Congress are attempting to block new rules that would require corporations to report all options grants as expenses in their financial statements. Meanwhile, corporations have claimed an estimated $3.9 billion in tax deductions related to stock options exercised by 350 leading CEOs since 1997 (the year accounting regulators first tried to require expensing). Similarly, the Securities and Exchange Commission's efforts to give shareholders greater access to nominating corporate directors has been ham-strung by corporate bullying, despite unprecedented public support.

The CEO - worker pay gap is growing.

After two years of narrowing, the gap between CEO pay and worker pay is growing again. With executive pay up 9 percent in 2003, the ratio between CEO pay and worker pay reached 301 to 1, up from 282 to 1 in 2002. If the minimum wage had increased as quickly as CEO pay has since 1990, it would
today be $15.76 per hour, rather than the current $5.15 per hour.

CEOs make much more than executives in a far riskier profession: the military.

The argument that exorbitant CEO pay is justified by the executives' high level of risk and responsibility doesn't hold much water when one considers the relative pittance earned by members of the US military in Iraq. For example, average CEO pay ($8.1 million, according to Business Week) is 56 times more than the pay for a US Army general with 20 years experience ($144,932.40) and 634 times more than the pay for a starting US soldier ($12,776.40).

The estimated annual compensation of the 919 soldiers killed in Iraq as of early August 2004 totaled $38 million combined. That's less than the combined pay of just five average American CEOs. And it's less than the amount received by each of a dozen single US executives covered in the annual Business Week survey. Among the top 12: George David, CEO of No. 6 defense contractor United Technologies. In 2003, as his company supplied Black Hawk helicopters to the Pentagon, David made $70 million.

Investors continue to awaken to the problem of bloated CEO pay.

For the second year in a row, shareholder proposals on executive pay dominated corporate annual meetings, with more than 300 proposals filed on subjects including stock options, gold-plated executive retirement plans, and reports on wage gaps between CEOs and average workers. News of New York Stock Exchange CEO Richard Grasso's $140 million pay package ignited public anger and forced his resignation. More than 45 percent of Disney shareholders supported a no-confidence vote against CEO Michael Eisner, who remains one of America's all-time highest-paid executives despite Disney's tepid performance under his leadership. These developments are signs of growing support for actions to rein in runaway CEO pay.

 

About the authors

John Cavanagh

John Cavanagh has been Director of IPS since 1998 and a founding fellow of TNI.  He worked as an international economist for the United Nations Conference on Trade and Development (1978-1981) and the World Health Organization (1981-1982). 

He is also the co-author of 10 books and numerous articles on the global economy, including Development Redefined: How the Market Met Its Match (2008, Paradigm Publishers), written with Robin Broad.John has a BA from Dartmouth College and a MA from Princeton University.