America's Top Executives Can't Lose -- Even When Everyone Else Loses Big
Billionaire Mark Cuban, the owner of the Dallas Mavericks basketball team, knows jackpots. He hit his big one in 1999 when he swapped the dot.com he had founded for over $5 billion in Yahoo stock. Earlier this month, in a Dallas Morning News column, Cuban graciously shared some of his jackpot know-how -- and, in the process, gave cubicle America an unusual glimpse into how corporate life operates inside top executive suites.
Our contemporary CEOs, Cuban related, can't lose, mainly because they take the bulk of their pay in stock, either as options to buy company stock at some future date or as outright grants of company shares. Year after year, ever more shares pour into executive pockets. If the price of these shares should rise, even slightly, CEOs can do spectacularly well.
And if the share price stalls? CEOs still can do spectacularly well. Corporate boards, Cuban points out, regularly reissue or reprice executive stock awards that have lost any appreciable part of their value.
But CEOs don't have to wait for boards to reprice their options. Top executives have the power, on their own, to artistically inflate a stagnant share price. They can take one simple step that demands not one iota of talent or managerial creativity. They simply cut what their company is spending to do business. That fattens their corporate quarterly bottom line, and that makes Wall Street happy.
This cash cost-cutting, adds Cuban, does have a downside for employees who get paid in cash -- and that's "everyone who works" for the company except "the top few in management" who get most of their pay in stock. Cutting cash outlays automatically places all average employees "at risk -- of losing their jobs, benefits, raises, you name it."
The end result: "a huge disconnect," says Cuban, "between the CEO and shareholders doing well and those who work for the company doing well."
An interesting analysis. But Cuban is only telling half the story. Yes, employees certainly do suffer when CEOs start scrambling to inflate their company share price -- and guarantee themselves a personal windfall. But the ranks of sufferers go beyond employees in these situations. Consumers suffer, too.
Take Citigroup, the banking giant that has been generating king-size executive jackpots ever since the 1998 merger that fused Citicorp and the Travelers Group together under one Citi roof. Citigroup's current chairman emeritus, Sandy Weill, now ranks 271st on the Forbes list of America's 400 richest. In 2000 alone, Weill pocketed $214.6 million.
Weill retired, as Citi CEO, in 2003. His successor, Charles Prince, left last November, vacating his chief executive suite with a $10 million bonus, $28 million in unvested stock and options, and $1.5 million in annual perks.
Citi's current CEO, Vikram Pandit, didn't come cheap. To get Pandit to join the Citigroup executive team, the bank last year bought the hedge fund that Pandit had founded in 2006 -- for $800 million.
What have Citigroup's top executives been doing to earn all these mega rewards? Weill and Prince steered Citi into the subprime mortgage meltdown, the most reckless blunder in modern financial industry history. Current CEO Pandit, news reports noted last week, has so far "presided over nearly $15 billion" in losses.
So what's Pandit's strategy for setting things right? For starters, he's following the standard CEO cash-cutting playbook, just as Mark Cuban has described. He's lopping off employees right and left. Citigroup last year announced 17,000 firings. In January, Pandit added 4,200 more employees to the must-go list. Last month, he added another 8,700.
But Pandit has a "strategic vision" that goes far beyond layoffs. He's now busy trying to undo the acquisitions and mergers that made Sandy Weill a billionaire -- and turned Citigroup, as Reuters has observed, into a "sprawling mess." And he's squeezing consumers.
No originality here. Other banking giants are squeezing, too, "jacking up fees and rates and tightening rules on all sorts of consumer loans -- from credit cards to auto loans -- to cushion their losses," says USA Today, from subprime loans gone bad.
Citi and the nation's other top lenders last year collected $18.1 billion in credit card penalty fees alone, 69 percent more in penalties than they collected in 2003. Many penalized consumers, public interest groups fear, will this year be paying credit card interest at 32 percent, this at a time when the Federal Reserve is reducing the cost of what banks pay to get their capital.
Banks like Citi have made penalizing an art form. One neat trick: Banks change their monthly credit card payment due dates. Consumers who pay by automatic electronic fund transfer then find themselves "guilty" of late payment.
One Indiana man, for instance, told ConsumerAffairs.com that he had set up his accounts to pay his Citibank credit card bill on the 24th of every month. But Citi "moved my due date to cause me to be late and give them the ability to charge a late fee."
That consumer's monthly bill went from $211 to $495.
Last September, Citi CEO Pandit purchased a ten-room Manhattan apartment, complete with 20 windows facing Central Park and eight walk-in closets, for $17.9 million. He probably isn't worrying about making any monthly payments.