Back in the 1980s, when Drexel Burnham was a junk bond powerhouse, there was a story about a bond trader who was furious after receiving his measly $6 million year-end bonus. Screaming obscenities at his boss, he threw the check on the floor and jumped up and down on it.
Somehow, today's stories of executive greed remind me of that image. To save capitalism, it's time for the government to step to the plate and make an attempt to stop the hemorrhaging of our stockholders' money.
The corporate directors of our nation's public companies remind me of a failed state in the third world. By my calculation, Pfizer just paid its fired CEO roughly 1.5 percent of what it GROSSED on its sale of Viagra for a year.
Since this company was a widely-held stock of most so-called "core funds" in 401(k) plans, this was another egregious example of how portions of the people's money (more than $3 trillion) are being squandered.
Fortunately, Congress is on the warpath. When CEOs and top executives now make 500 times the salary of the average worker, the system is clearly broken.
One corrective measure that hasn't worked was the law that made executive pay more than $1 million a year nondeductible by the corporation. Big deal. Many large corporations don't pay income taxes.
They have depreciation and other Byzantine techniques for offsetting income. Or worse yet, they move overseas like Tyco.
For those corporations in a 50 percent state and federal combined marginal tax bracket, an $11 million executive salary actually costs $21,000 because the company has to pay the extra $10 million with after-tax dollars.
This means that it uses up $20 million of profit to pay the $10 million that was not deductible. If, instead, we made the business decision to spend that extra $20 million on more salespeople or new capital equipment, the entire expense would have been a deductible value-building investment that theoretically would have boosted our stock. Paying taxes is such a waste except when it is the price of paying a dividend.
Dividends are also after-tax payments, but at least they are payments going to stockholders who deserve them and the increased stock prices a rise in dividends can trigger.
To their credit, CEOs decided collectively that they should cut back on income paid to them today and just postpone their compensation until after they had left the company. Then it would be all tax deductible to their corporations and a basis for being paid more.
They remain a general creditor of their company as long as the money is owed to them. There are risks, of course, as any former Arthur Andersen partner can tell us, but at least the onerous corporate tax on the excess millions over $1 million are waived under current law.
Congress is proposing laws that would limit this deferred compensation practice. The proposal, as it stands now, is to tax an entire deferred compensation account when the annual investment earnings reach the lesser of $1 million or the five-year average of the employee's annual salary.
This would effectively stop the abuse. It's a great start. The key architects of future executive compensation legislation are Barney Frank and Max Baucus. Let's wish them well in their efforts to protect our interests.
Meanwhile, to paraphrase Ben Stein in a Jan. 28 New York Times column, "the success of capitalism depends upon trust ... and evidence of excessive greed is destroying that trust." When the public has a reason to suspect they are being ripped off, the system can begin to unravel.
Who knows? This could explain, at least in part, why we are seeing a huge shift of investment assets to foreign funds that invest in companies paying reasonable compensation.
Stein laments the fact that there is nobody in Washington to help us, but I'm seeing evidence to the contrary. Big business is said to be howling, and that's probably a good sign. Write to Barney. Write to Max