As I See It: Fearless Leaders
April 24, 2006 Victor Rozek
Your name is Henry McKinnell and for the past six years you have been struggling on the job. By exacting corporate standards, where results are the measure of intentions, there is not much in your performance that demonstrates anything but a steadfast intention to get by on mediocrity. Secretly, you’re tired of all the pressure and weary of all the complaints. It would be nice just to walk away, to leave the mess for someone else to sort out, but retirement is so uncertain these days.
You close your office door, open your desk, pull out your retirement folder and do a few quick calculations. Yes, perhaps retirement is not so farfetched after all. Given your lifestyle, if you’re careful you can probably squeak by on $125,000.
But Henry McKinnell is no ordinary slacker, he is the CEO of Pfizer and under his sterling leadership Pfizer’s stock price tanked over for the last six years. By 2005, share value had dropped to slightly more than half of what it had been in 2000. Nonetheless, when McKinnell walks away from his job or, more likely, is asked to leave it, he will be the recipient of a $125,000 pension. If that number seems modest by corporate standards, it is because it does not reflect an annual rate. This is McKinnell’s weekly pension. The annual number tops out at $6.5 million.
After the numbers became public, the company issued a statement designed to reassure investors that the issue of overpaying for executive performance had not escaped the awareness of its sharp board of directors. And not only was the board aware but, by golly, it was doing something about it. And what was it doing? Why, it was “mov[ing] aggressively to change many significant aspects of compensation in the past 18 months.” Imagine that. The company had been “moving aggressively” for 18 long months! It must be exhausted. Even if we make allowances for the corporate-speak that is designed to sound manly, decisive, and vigorous, how aggressively could the board have been moving if it took 18 months to adjust one guy’s benefits? When the building is on fire they probably commission a study to determine whether public opinion favors vacating the premises.
The reported changes included setting limits on executive pensions, and refocusing 2006 performance-based share grants so that executive payouts are dictated solely by shareholder value. Wow, that has all the force of threatening to dock junior’s allowance. And junior, I’m sure, is not concerned; there are a hundred ways to pad long-term executive compensation. Boards of directors are notoriously stacked with fellow CEOs and top management types who are chosen with the tacit understanding that they will not rock the compensation yacht.
But the AFL-CIO is concerned. They leaked the pension numbers for the top 25 CEOs in the nation because they felt there was something less than fair about a system that is eager to destroy guaranteed pensions for employees while insulating the destroyers from risk.
Take IBM‘s own Sam Palmisano, for instance. Not long ago, IBM announced that it was doing away with traditional guaranteed pensions and moving toward a market roulette model. This is the model favored by Wall Street, which is able to privatize guaranteed profits while externalizing risk to the investors. Brokerage houses further protect themselves with wonky agreements that strip investors of their access to the courts and, in case of suspected fiscal-slight-of-hand, forces them into an arbitration system dominated by guess who? Wall Street professionals. IBM’s decision to jettison pensions was dandy for the company (it would save several billion dollars over the next five years), but somewhat less dandy for its employees whose futures now rest with the changing fortunes of the market and the seasonal integrity of money managers. But none of this need trouble the chairman. He sits at number five on the CEO pension list and can look forward to a guaranteed $4 million a year. That’s about $77,000 per week, the equivalent of two years salary for one of his entry level programmers.
Even at that, Palmisano has some catching up to do. Lee Raymond, retired chairman of ExxonMobil, walked away after 12 whole years on the job with a package valued at more than $430 million. Last year alone he collected $48.9 million, or about $133,000 per day. He received more before lunch than most of us earn in a year. It gives me a warm feeling every time I fill my car with $3.00 a gallon gas, knowing the chairman won’t have to supplement his retirement income as a Wal-Mart greeter.
If anyone doesn’t need a guaranteed pension it is America’s CEOs. In 2005, the CEOs of Standard & Poor’s top 500 companies received an average total compensation (which includes salary, bonuses, and the estimated value of stock options) of $11.75 million, or just over $225,000 per week. With that kind of money, one would think they could afford to put a few pennies aside for the future.
Given the offshoring of middle class jobs, the downward pressure on wages, and the destruction of the pension system, the trend in executive compensation is difficult to justify as anything other than self-serving economic narcissism. And the money flowing to executives has been increasing at a freakish rate. In 1980, the average chief executive made 42 times more than the average worker. Ten years later, CEOs were making 85 times more. By 2004, executive compensation soared to 431 times the salary of the average worker. If you ever wake up feeling connected to your fellow man, thinking that we are all in this together. . . think again.
It is interesting to note that the CEOs in Germany and Japan somehow manage to muddle through on a 20-to-1 compensation ratio without doing visible damage to their respective civilizations.
Adding insult to injury, a dozen corporations headed by the men on the pension list are members of the Business Roundtable. The Roundtable is, in large part, a lobbying organization that raised $20 million to promote changes to the Social Security system, the net result of which will make many of their members richer and Social Security less secure. IBM is a member of the Business Roundtable, and Henry McKinnell, the $125,000 per week future pensioner, is the Roundtable’s chairman.
Originally, Social Security was envisioned as one prong of a three pronged approach to retirement; the other two being personal savings and pensions. Well, for the first time since the Great Depression, Americans now have a negative savings rate (we are living off credit), and our pension system is being systematically dismantled. Still, the CEOs of the Business Roundtable are not content to merely downsize their own employees retirement, they want to privatize Social Security as well, thus adding more uncertainty to a pension system already in disarray. It appears that certainty is only for the privileged few. The pension plans for the twelve executives who belong to the Business Roundtable total over $38.2 million a year. With the exception of stock price fluctuations, those monies, I’m willing to bet, are guaranteed.
We’re all frogs in the pot of water, the heat is being turned up, and no one is noticing. (For those not familiar with the reference, a frog dropped into boiling water will jump out. A frog placed in cold water will remain while the water is gradually heated until it finally boils to death.)
It is extraordinarily shameful, I think, for a handful of guys making 431 times the average worker’s salary to whittle away at their employee’s modest pensions while simultaneously grasping for monies in a program designed to be inviolate. There used to be a joke in California that defined an environmentalist as anyone who already had a cabin in Lake Tahoe. Indeed, it seems like “already having mine” is the on-ramp to the most egregious hypocrisy; like Congress preaching about the evils of socialized medicine while enjoying a full range of federally-funded medical care.
Perhaps the finest definition of a leader I’ve ever encountered is a person who strives to create the kind of world to which others want to belong. CEOs are an elite class of leaders in whom rests enormous power. But what is their corresponding responsibility, and just what kind of world are they creating? And who, outside of a few driven by greed or envy or fear, will want to belong to it?