The trial of former Enron executives Kenneth L. Lay and Jeffrey K. Skilling is the latest reminder that government oversight of unscrupulous executive behavior is unfortunately necessary. But only a relative handful of executives participate in illegal behavior.
We should be more concerned with the completely legal pillaging of corporate coffers that thousands of CEOs and other corporate officers engage in daily. Illegally cooking the corporate books is a rarity. Grossly excessive executive compensation is anything but rare.
From the annual Forbes magazine report on CEO compensation, we learn that Terry S. Semel of Yahoo! landed the top spot in 2005, earning $230.6 million. John Hammergren of McKesson Corp., part of the health care industry, ranks last in the top 100, taking home a relatively meager $13.4 million.
A list of 100 very large numbers can numb the mind and obscure the true enormity of the problem. To illustrate how grossly excessive is CEO compensation, I'll pick on Richard D. Fairbank, CEO of Capital One Financial, who is No. 10 on the Forbes list.
You've probably heard or read Capital One's commercial slogan: "What's in your wallet"? Well, I don't know what's in your wallet, but I know what's in Mr. Fairbank's, thanks to Forbes. And I'm sure you've never owned a wallet like his. His compensation in 2005 was $56.7 million, and it totaled $226.3 million over the past five years.
If we assume that Mr. Fairbank paid his fair share of federal, state and local taxes, his disposable income was about $31.2 million last year, and $124.5 million over the past five years. Contrast that with a median U.S. household income of about $45,000, according to the Census Bureau. If the discrepancy doesn't immediately alarm you, perhaps a little real-world perspective will help to highlight the massive difference.
Every American household has three primary expenses: food, shelter and transportation. At $45,000 a year, a household has disposable income sufficient to purchase food but must acquire shelter and transportation on credit. For most Americans, it will take 30 years to buy a home and five years to buy a car.
Contrast that with the purchasing power of our representative CEO. How many homes or cars could Mr. Fairbank purchase with the $31.2 million he "earned" last year?
According to the National Association of Realtors, the median existing home price is slightly more than $200,000. Even if we reserve an excessive amount for food, Mr. Fairbank can buy 155 average American homes. If Mr. Fairbank prefers to spend his money on transportation, assuming the average automobile costs around $20,000, he could buy 1,550 automobiles. That's purchase, free and clear. No mortgage, no car payments. And that's only one year of compensation. The $124.5 million he accepted over the past five years translates into 620 homes or 6,200 automobiles.
Nobody needs that kind of wealth, and no public company can justify the transfer of corporate assets of this value to one individual. Every dollar that goes into a CEO's wallet is money that could have gone to employees, shareholders or investment in the business.
How is this legal robbery of corporate assets accomplished? Simple. The fox is guarding the henhouse. Boards of directors determine CEO compensation, and boards are almost always composed of CEOs or former CEOs of other businesses. Every time a board votes to increase a CEO's compensation, the CEO compensation bar is raised for every CEO. Board members return to their day jobs as CEOs and wait for their own boards to recognize that it's time for another raise for their CEO.
This self-serving escalation of executive compensation is nothing less than a shameful conspiracy of greed.
The recent Securities and Exchange Commission proposal to require additional disclosure of executive compensation in annual reports and proxy statements will do little or nothing to curb the pillaging. The only people who read the fine print in such documents are wealthy investors who are willing to go along with this conspiracy.
I'm not sure what ought to be done about it, but it might be a good start to require every CEO and board in the country to hold an annual meeting of all employees of the company. The only topic of discussion would be CEO compensation. It could be a very brief meeting. Have the CEO and each member of the board stand up and state clearly how many homes or cars could be purchased with his or her compensation of the past year.
Maybe a little bit of shame could go a long way toward curbing this shameful conspiracy of greed.
Bruce Wilson, who retired as the overpaid chief information officer of Universal Studios, is the author of "Disarming the Culture War: How the Silent Majority Can Break the Stalemate." His e-mail is email@example.com