Wednesday, January 28, 2009

Will We Have A Maximum Wage Initiative?

Coming to a workplace near you…..
The Maximum Wage

On May 25, 2007, President George W. Bush, signed into law a bill that permitted the rise of the Federal Minimum Wage. This was historic because the minimum wage had not been increased in over 10 years. The AFL-CIO argued that the minimum wage earner had not had a raise for 10 years. Common sense would dispute that reasoning as no one would work for the same rate for 10 years at any job. The bill was hotly debated by our representatives and Mr. Bush signed this legislation partly because it included funding for the War on Terror in Iraq. The minimum wage was increased in .70¢ increases over three years. Currently the Federal Minimum Wage is $6.55 with another increase in July of this year to $7.25. We can debate the economic impact of the minimum wage some other time.

I bring this up because of all of the hoopla recently over executive compensation at corporations around the country. My thoughts are that if the Federal Government can set a lawfully mandated minimum wage then what is preventing it from setting a lawfully mandated maximum wage. Our economic life has been turned upside down over the past several months with a $700B bailout of our financial markets (and more to come), requests by the automotive industry for bailout money and now states and local municipalities readying to lobby Congress for their bailout.

The primary reason anyone is raising any ire on executive compensation is because of the amount of money the CEO’s received as their companies began to fail. When we hear that General Motors CEO, G. Richard Wagoner, Jr. received compensation of $10M, there is some sense of disgust. No one looks at the fact that Mr. Wagoner did not set his compensation, his bonuses nor his equity positions in General Motors. They were all determined by an executive compensation committee, approved by a board of directors and negotiated by Mr. Wagoner’s representative prior to taking the job. His actual salary is $1.6M along with $1.8M in bonuses and non-equity compensation making his total cash compensation at $3.4M. I am sure that in his bonus calculations there are certain levers that must be met to achieve different parts of that bonus. These were either negotiated or decided by the compensation team to incent the leader to perform. Bank of America’s Kenneth D. Lewis received $1.5M base salary, $4.3M bonus and non-equity for total cash compensation of $5.8M. He does have an equity position (options and stock awards) worth $15.6M. However, as the stock market goes so does the value of his stock awards. Of the mentioned CEO’s they both are contracted and are entitled to their compensation by contract or the company could be in for a legal battle which it would certainly lose unless they could prove blatant mismanagement.

Yet the Congress, President and the American public demand that Executive compensation be “brought into line”. In line with what I ask? These people are asked to run these companies and to take the necessary risk to build wealth for their investors (you and me as stock holders via our mutual funds, 401K and pension funds). To run a comparison on salaries lets see if you can attribute these salaries to the correct person:

a.) $8M Total compensation. $5M base with $3M bonus
b.) $27.7M Total compensation. $2.5M base with $25.2M bonus.
c.) $15.0M Total compensation. $1.0M base $10.4M bonus/non equity $3.6M equity.
d.) $10.0M Total compensation. $8.5M base $1.5M bonus.
e.) $1 Total compensation
f.) $21.7M Total compensation. $2.0M base $7.0M bonus/non equity $11.3 equity
g.) $14.0M Total compensation. $1.9M base $12.1M bonus.
h.) $23.4M Total compensation
i.) $28.0M Total compensatio


Answers to above:
a.) Tom Brady, Quarterback New England Patriots
b.) Ben Roethlisberger, Quarterback Pittsburg Steelers
c.) Charles O. Prince, CEO Citi Group, Inc.
d.) Eli Manning, Quarterback New York Giants
e.) Steve Jobs, CEO Apple (only $1 in compensation)
f.) Alan Mulally, CEO Ford Motor Company
g.) Randy Moss, Wide Receiver New England Patriots
h.) Jason Giambi, Designated Hitter New York Yankees
i.) Alex Rodriguez, Third Baseman New York Yankees

The reason that I have included the compensation of the professional athletes here is because I am not hearing a congressional outcry on their pay. Their compensation is negotiated by agents, agreed to by a team owner and may include bonuses (some guaranteed) and levers to achieve those bonuses. Some levers could be making the All-Star team or Pro-Bowl, becoming the rookie of the year or even leading the league in rushing yards or scoring. You see the market determines their pay and they get to keep it whether their team wins a championship or not. The Yankees have one of the highest payrolls in the professional sports but has not won a championship in eight years. Yet they pay two players over $51M and these guys get to keep it all. And all of these millionaire players are represented by a player union to ensure that they continue to get maximum pay. Yeah, I know that MLB, NFL, NBA or NHL have not asked for a bailout....yet! So why can’t CEO’s get their compensation negotiated and agreed to in advance. The difference is that if the board decides a CEO is not performing they let him go “pursue other interests”. Well it may also be that many of these same companies are asking the Imperial Federal Government for taxpayer relief to save their beleaguered asses. Are these executives paid more than their employees? Hell yeah they are. If the guy putting the wheels on the Chevy Tahoe could run the company, then promote him and pay him as well but he can’t and he does not have the fortitude nor the skill to lead a multi-national corporation. You pay for success or you wind up with mediocrity. Will salaries going forward be looked at more closely? You bet. With Congressional oversight executive pay will be challenged at every stage and many of America’s proud corporations will disappear with mediocre leadership. You get what you pay for.

Some will argue that if these men and women were so smart then why are their companies failing? Well, other than the U.S. Military, what part of Government is efficient yet we want these people to regulate salaries of the successful. Yes, it pains me to see a failed C-Level executive leave a company that he/she has failed to make into a success and go lead another company. Remember that he is not hiring himself. The new company saw something in this executive to want to have him to lead their company. That is the same for a professional quarterback. The Greenbay Packers have not been to the Super Bowl since 1998 yet they stuck with Bret Favre until 2008 where he was finally traded to the New York Jets and the Jets did not make the playoffs this year. So did the Jets hire a failure at quarterback? Was Bret Favre a failure? Do not give me 22 players on a football field argument. The same goes for a corporation.

So if we allow the Congress of the United States of America to set a minimum wage then what is preventing them from setting a maximum wage? Not a thing. And if you think that they will settle on executive salaries then you are dead wrong. In order to move to a more socialist society then wages have to be fair. And to be fair, your job and your salary may be set to a maximum so that you do not out earn those who are less educated, less motivated or less fortunate than yourself. Remember it is all about Fairness and Spreading the Wealth.

That’s my word but not the final word. Post your thoughts.

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