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Executive pay: excessive or earned?

Publicly-held corporations and small businesses are very different animals.

I have very few individual stocks in my modest portfolio. Like most middle-class Americans, my limited investments are primarily in bonds, mutual funds and index funds. I have neither the desire nor the ability to analyze the financials and the management of an individual company and make intelligent stock-buying decisions.

My Enron, WorldCom and Tyco investments were obviously not good choices.

Running the numbers

I did receive an annual stockholders’ report recently that was interesting. I confess that I rarely read the 100-plus page stock reports. This stock is in a company that bills itself as a global financial company. I studied the report long enough to note some interesting facts.

The first thing that I noticed was that its performance was less than the S&P 500 index for 2004. The next area of interest was the executive compensation. This is an example of one executive’s compensation. Other executives had similar packages. The chairman received a million bucks in salary with $8.4 million in bonus, and $637,636 in “other” annual compensation.

In addition to this annual compensation, the long-term compensation included $6.8 million in restricted stock awards and options on an additional 562,003 shares of stock.

The value of 562,003 shares of this stock is in excess of $25 million. His estimated annual retirement income will be $731,930. He also had company loans exceeding a half-million dollars.

What about the board of directors?

The board members who rubber-stamp these ludicrous compensation packages are a combination of company executives and friends who receive pay ranging from $75,000 to a high of $1,597,000. The weak argument given by the board members is that it requires this level of compensation to attract top talent. I am not opposed to talented corporate executives making a lot of money, but their compensation should be tied directly to the benefits of the shareholders.

Executive bonus and stock options are usually tied to a series of easily met objectives that often have little to do with shareholders’ return. I seriously doubt that it takes $10 million to $50 million a year to attract talented executives. I know very talented executives who would — and in fact, do — work for less.

In Germany executive compensation of publicly-held companies averages about 25 times the average non-manager employee. In 1980, the United States executives earned 42 times the average worker. By 1997, their compensation had increased to 326 times the average worker.

In 2003 the CEO for Citigroup was 1,749 times greater than the average United States worker. Let’s put this into perspective. Assume that a small business owner paid his non-manager level workers $25,000 a year. As CEO of his business, he would be making $43,725,000 per year. I know some very successful small businessmen, but I don’t know of anyone who is compensating himself in excess of $43 million a year.

Unlike these CEOs, small businessmen have provided the capital and taken a lot of personal risk to be in business.

Alone and crying in the wilderness

The chances are great that the 401(k) plan for your business is in some type mutual fund or index fund. The exorbitant compensations given to CEOs are having a negative effect on the value of your 401(k) plans and your other stock investments.

Fortunately, there are some lone voices and a few vocal stockholders who are beginning to demand that executive compensation have some relationship to share holder return.

Warren Buffett, CEO of Berkshire Hathaway Inc., has been critical of executive compensation for a number of years. Take a look at his company’s stock record for the past few decades and you will see that his shareholders have benefited from his philosophy of management’s responsibility to shareholders.

Read those shareholders’ annual reports, send in those proxies and join the lone voices.

Those businesses are a very different animal that needs some control.

Archie King, LPC, is a human resources consultant who lives in Madison. His column appears from time to time in the Mississippi Business Journal. E-mail him at aking4@jam.rr.net.

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