That's Why They're Richer Than You

Proxy season's approaching: It's that time of year when executive pay comes under particular scrutiny. Watch out for CEO pay apologists, analysts, and financial media pundits making some specious arguments to defend outrageous compensation.

For example, they may say that recent corporate results and economic activity are improving and therefore, chief executives and other high-powered individuals' compensation pay should get a nice boost.

Don't buy it, shareholders. Plenty of difficulties are still cropping up right before our very eyes, whether it's through unemployed friends, the bite of the payroll tax hike, or high prices at the gas pump or grocery store. Consider the leaked email that revealed a Wal-Mart executive freaking out about recent sales trends: "Where are all the customers? And where's their money?" That's not heartening news for Wal-Mart shareholders or anyone else.

Factors like these indicate that in the real world, the economy really hasn't gotten that much better for many people, and could still get a lot worse, despite a long-toothed market rally. Today, many chief executives' pay should be scrutinized even more, particularly because the real economy will likely start manifesting itself in real corporate results soon.

"Richer than you" doesn't mean smarter than you, investors
JPMorgan Chase (NYSE: JPM  ) -- long considered one of the most well-run financial giants under CEO Jamie Dimon until recently -- announced that it will eliminate 17,000 positions in attempts to cut $1 billion in costs by 2014.

Last month, we learned that Dimon took a pay cut in the wake of blemishing moments like the London Whale trading debacle. (The compensation "cut" still left him with compensation worth $11.5 million. Cue up the nano-violins.) Real long-term shareholders should always question layoff news. Job cuts may boost corporate profits in the short term, but they are a negative indicator for a fragile economy and, often, for long-term corporate health at the companies that lower the ax.

Meanwhile, during the company's annual meeting, analyst Mike Mayo asked why JPMorgan hasn't chosen to have more cash on hand like rival UBS (NYSE: UBS  ) , which has decided to aim for a 13% capital ratio compared to JPMorgan's 10%. Dimon's way of getting the last word in the conversation was to quip, "That's why I'm richer than you." I'm sure employees facing layoffs find that hilarious.

In other pay cut news, General Motors  (NYSE: GM  ) CEO Dan Akerson voluntarily agreed to forgo a pay raise for the second year running. Akerson's decision followed rumors that he was getting a raise from the approximately $9 million salary he makes now.

The U.S. Treasury still retains a 19% stake in the bailed-out auto company. Until the Treasury's dumped the stake, pay comes under scrutiny. Still, GM is trying to OK raises for 18 other executives excluding Akerson. In the past, Akerson has used the market-based salary argument for balking at Treasury's pay restrictions, given how much Ford (NYSE: F  ) executives like CEO Alan Mulally rake in. Of course, the galling part of this story is that Ford never had to take a bailout.

We can tie all this together with a neat bow given the recent news that the U.S. Treasury allowed bailed-out executives to get away with murder in the pay department. TARP watchdog head Christy Romero recently told the House of Representatives' oversight committee that executive compensation at bailed-out companies like AIG (NYSE: AIG  ) , GM, and Ally Financial is still too high after the financial crisis. That, of course, made AIG's recent pondering of suing the government over the bailout even more galling.

Romero's best quote accuses the executives of failing to "view themselves through the lenses of companies substantially owned by the government."

Big questions about oversize pay
When we're considering companies' compensation policies before making our say-on-pay votes, let's really think about several questions, all of which do require exercising a long-term attention span that, granted, many short-term traders lack.

  • Has the company really done that well under its leader's stewardship over the last several years?
  • Did recent "outperformance" come at the expense of people's jobs (or for no reason at all, given the market's recent mania)?
  • Does its board of directors, particularly the compensation committee, rubber-stamp outrageous CEO pay over and over again?

Boards and managements need to take accountability for things that are not going right. Signs that things aren't going right even if "profitability" has been increasing include slashed workforces,  costs cut to the bone, reduced R&D, shoddy customer service, floundering sales, and so forth.

These are elements many investors and traders have been ignoring while they've been bidding up subpar stocks higher and higher during rally modes. Meanwhile, speaking of rallies, stock price doesn't equal performance most of the time, particularly in the near term. Operations are a far better gauge of things that are going right.

Boards and managements need to remember that, in this day and age, more and more shareholders are watching them -- and their paychecks. If they're richer than you because they haven't been properly held accountable, and lack the humility to hold themselves accountable, remember that you've got your proxy ballot to voice your outrage and vote against compensation policies.

More advice from The Motley Fool
With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or whether finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether JPMorgan is a buy today, I invite you to read our premium research report on the company today. Click here now for instant access!

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (5) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2013, at 7:06 PM, OZRAAF18 wrote:

    COSTO has no customer service grace in resolving membership policy.

  • Report this Comment On February 28, 2013, at 7:29 PM, EMDyer wrote:

    I'm surprised that McKesson CEO John Hammergren wasn't mentioned here due to his extreme pay.

  • Report this Comment On March 01, 2013, at 2:06 AM, dgmennie wrote:

    "CEO pay apologists, analysts, and financial media pundits.....may say that recent corporate results and economic activity are improving and therefore, chief executives and other high-powered individuals' compensation pay should get a nice boost."

    We've all heard these kinds of theories many times before. The only problem is these overcompensated individuals actually have little or no control over the economy as a whole, or the economic results that directly affect a corportate bottom line. If they are nominally "running the show" when times are good, they want a big reward. When things turn sour, they want a golden parachute. Many of these high-paid execs serve on corporate boards that set management pay for others in the club, essentially the privliged all scratch each others back. Yet whenever the prospects of an increased minimum wage or better health insurance for employees gain political favor, they roar in opposition!

    Probably our entire economy would improve immediately if : (1) the definition of employment was changed such that only those making a living wage (say $30,000 or more) would be counted as working, putting the real unemployment stats at perhaps 30%. This would help generate the political awareness/strength needed nationwide to better distribute the huge annual income generated by corporate America, to those actually doing the work, (2) loopholes in the tax system would be eliminated that permit certain businesses that have millions/billions in annual profits to pay little or no Federal taxes (such as Facebook), (3) a fair minimum wage would be established that takes into account some 30+ years of inflation and other erosions. This wouild mean a wage in today's dollars of perhaps $15/hour just to keep low earners on par with what they once made in the late 1960s, not a piddling $9/hour or the prevailing "poverty" minimum of around $7.50/hour.

    The fact that big companies saved from extinction by TARP funds are still getting away with overpaying their CEOs and other executives is simply ridiculous. What bit of political black magic makes welfare for millionares OK, but a living wage with benefits for average people something to be treated with discust by a socio-economic system that would crumble tomorrow if these modestly-paid folks just stayed home?

  • Report this Comment On March 01, 2013, at 10:10 AM, ezragreen wrote:

    "the definition of employment was changed such that only those making a living wage (say $30,000 or more) would be counted as working, putting the real unemployment stats at perhaps 30%"

    the above quote is interesting to think about. Is it possible to find the data points for this?

  • Report this Comment On March 01, 2013, at 12:45 PM, buggsbary wrote:

    years ago I went into Costco for a membership. after going in there 3 times they continued to ask for more proof of my business. I showed business license, business card, even incorporation material. I gave up and have never returned.

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