News & Politics

Everything in Excess for Shady CEOs

A new report shows that the top execs of companies under investigation earned 70 percent more than the average CEOs who didn’t cook the books.
As the tsunami of corporate corruption and excess continues to sweep over the economy, a startling new study reveals that CEOs of companies under investigation for accounting irregularities made 70 percent more money than the average CEOs.

The report; "Executive Excess 2002: CEOs Cook the Books, Skewer the Rest of Us," produced by the Boston-based United for a Fair Economy and the D.C.-based Institute for Policy Studies, also clearly documents the overwhelmingly negative effects of the behavior of these CEOs and their companies on employees and shareholders.

All the CEOs of companies under investigation by the SEC, Department of Justice and other agencies (all with market value of more than $1 billion) earned an amazing average of $62 million annually compared with an average of $36 million for all the CEOs in the annual Business Week executive pay survey.

"What we wanted to do was to get past the anecdotes and compare the book-cookers with the average CEOS," Chris Hartman, one of the report’s co-authors, told CBS MarketWatch. "We didn’t have any idea what we would find, and we were surprised that the gap was as large as it was."

The report also documents that employees at the 23 firms scrutinized suffered a total of 162,000 layoffs since January 2001. And between January 2001 and July 21, 2002, the same companies lost $530 billion in share value, about 73 percent of their total value. While the CEOs are cushioned by the huge sums they made off with, the workers and shareholders are reeling from massive losses.

"Pay for performance, supposedly the guiding principle of executive compensation in the 1990s, now lies in tattered shreds. Rather than aligning the interest of executives and investors as promised, CEO pay packages -- bloated by stock options -- led to ever more aggressive accounting techniques, making many ... earnings statements works of fiction masquerading as fact," the reports states.

Report co-author Scott Klinger told the L.A. Times that the practice of padding top executives’ salaries with stock options is enticement for dishonest CEOs to inflate profits.

"The pressure to be ever more aggressive in accounting presentations and distort earnings to keep the stock price rising is largely related to the incentives set forward for executives," Klinger said. "The Enrons and the WorldComs were the most egregious examples of this, but we think the stock option piece [of compensation] has allowed executives to become very rich while destroying jobs, destroying sharehold value and weakening the companies."

One of the most egregious examples is the former CEO of Tyco, L. Dennis Kozlowski. According to the study, Kozlowski -- who has since resigned and is facing charges of tax evasion -- made $331 million between 1999 and 2001 and was given $135 million for luxury living. During that same time, Tyco laid off 18,400 workers.

Some of the other companies whose data was included in the report include AOL/Time-Warner, Xerox, Lucent Technologies, Kmart, Halliburton, Enron and Global Crossing.

Overall, CEO pay remains stubbbornly high. The report indicates that the CEO-worker pay gap is 411 to 1, nearly 10 times as high as it was in 1982 when the ratio was 42-1. In the meantime, worker pay has stagnated, with lower salaries in 2002 than in December of 2000. In one of those can-you-believe-this pieces of data, the report explains that if worker pay had grown as fast as CEO pay over the last decade, the average worker would have made $101,156 in 2001 instead of $25,467.

There is no question that reform is needed. Public opinion polls point to a growing intolerance among the public for corrupt business practices. Ruy Texeira writes in The American Prospect that a recent survey "shows just 15 percent of the public expressing ‘a great deal’ or ‘quite a lot’ of confidence in big business ... the lowest recorded level since pollsters began asking this question in 1986." Another poll said that a whopping 67 percent of the public believes that most corporate executives are dishonest. Says Texeira, "That helps explain why big business is increasingly viewed as the biggest threat to America’s future."

Among the remedies advocated in the report include expensing options, ending taxpayer subsidies for excessive pay, banning special perks and improving corporate accountability.

A PDF version of the report is available at http://www.FairEconomy.org.