Leo Hindery Responds to Rep. Alan Grayson Request on Exec Compensation

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hindery and bohrman.jpgLeo Hindery and CNN Washington DC Bureau Chief David Bohrman at New America Foundation Dinner; photo credit; Sam Sherraden
Matt Stoller from Representative Alan Grayson‘s (D-FL-08) office put out a public request for comments about executive compensation related legislation that Congress will soon be considering.
I asked InterMedia Partners Managing Director Leo Hindery to respond as this is a subject he has spoken about frequently. Hindery is the former CEO of AT&T Broadband Networks and former CEO of the Yankee Entertainment Sports Network. He also Chairs the US Economy Initiative at the New America Foundation.
Leo Hindery writes:

Steve: This is a very important piece and I appreciate the reference.
President Obama was absolutely right a couple of weeks ago when he demanded that the compensation of the executives, managers and traders at the failed financial institutions that received bail-out cash be scrutinized by a new “oversight council”. He was right because these are the people who saddled the rest of us with a staggering $2.8 billion or more of trading and credit losses, and yet wanted to be paid as if everything was just swell.
But he and especially his advisers were wrong not to impose specific limits on executive compensation, rather than (mostly) just guidelines. They were especially wrong not to enact permanent limits that apply to all regulated financial institutions and all public companies.
The evidence is clear that excessive executive and management compensation lies at the root of all corporate crimes and misbehavior, of most of corporate America’s inattention to creating and preserving high-quality domestic jobs and fair overall employee compensation, and of almost all of the recent massive trading and credit losses.
In his speech, Obama also said that government’s “role is not to disparage wealth, but to expand its reach”. He absolutely should have added that its role is also to “ensure wealth’s fair and equitable distribution”.
For the 35 years following the end of the second world war, CEOs generally viewed responsible and fair business behavior as a critical component of the American dream. And during all those years, and in fact during most of the past century, corporate leaders in the US earned 20 to 30 times as much as their average employees. Even today, the ratio of chief executive pay to average employee earnings in all other main developed countries has remained near this level. The ratio is still only about 22 times in Britain, 20 times in Canada and 11 times in Japan.
Beginning in the 1990s, however, many US executives, with the complicity of their boards, began to treat management as a separate constituency, often the primary one. Suddenly, fair executive compensation was abandoned in hundreds of corporations and financial institutions.
In America now, the average public company chief executive earns an almost unbelievable 400 times what his average employee makes, and his officers and senior managers aren’t far behind in their own compensation. And now we know that executives and senior managers in the financial services industry drink just as heartily from the same frothy trough.
Obama and Congress need to enact three changes in executive and management compensation practices, not just hope, as one of his senior advisors recently said, that some (not even all) corporations will voluntarily “assess risk induced by [their] compensation practices”.
First, Congress needs immediately to grant public shareholders the right to call shareholders’ meetings, to vote out the current board and to pass binding (not simply advisory) votes on executive compensation.
Second, Congress should establish, for all public companies, a ceiling on individual executive compensation as a reasonable multiple of average employee compensation – say, 35 times – and then penalize through tax policies those companies that elect to pay anyone in excess of this multiple.
Third, Congress should empower the Treasury to oversee the compensation practices of any entity that is regulated, whether or not it currently relies on government guarantees. This should apply to employees at the individual trader level, too.
— Leo HIndery

These are Leo Hindery’s own views. Interestingly, he wrote a book some years ago titled It Takes a CEO: It’s Time to Lead with Integrity in which he also discusses the executive compensation challenge facing the country.
— Steve Clemons

Comments

14 comments on “Leo Hindery Responds to Rep. Alan Grayson Request on Exec Compensation

  1. Megan says:

    The latter has always seemed inefficient and needlessly bureaucratic to me. Why not go right to the root of the problem: the wage policies themselves? The real issue, it seems to me, is that firms are robbing their employees and shoveling too much money toward the top of the pay scale

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  2. WigWag says:

    By the way, if Mr. Hindrey is interested in executive compensation in the financial industry, he can talk to those executives directly. Certainly he knows the CEO of Goldman Sachs, Lloyd Blankfein and he must also know the previous Goldman Sachs CEO, Hank Paulson. When Hindrey ran the YES Network, unless I’m mistaken, Goldman Sachs was the second largest investor in the network after the Steinbrenner family.
    Goldman Sachs eventually sold most of its stake in YES for a very handsome profit.
    Hindrey’s interest in this subject is certainly laudable. It’s great that he’s trying to encourage a public debate about executive compensation. I hope he’s also trying to engage his former Goldman Sachs bosses about this important matter.

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  3. WigWag says:

    One way that executive compensation reform might be accomplished is by having Board compensation committees focus on rewarding executives for balancing risk taking and risk management. It is very difficult to do this with a twelve month planning horizon. In many industries, especially the financial industry, a significant proportion of compensation (usually well in excess of 50 percent) is paid in the form of a bonus supposedly based on performance.
    How about providing bonuses to executives every two years or, even better, every three years? This would incentivize highly paid executives to focus on long term performance instead of short term success. It would allow Board compensation committees to consider performance over a period of years when arriving at compensation levels not merely performance over a period of months.
    A perfect example of all of this is Lloyd Blankfein the CEO of Goldman Sachs. In the last quarter, Goldman’s performance has been stellar and its profits enormous. Of course, the same Executive team that will undoubtedly take credit for this extraordinary performance over the past quarter (and expect to be compensated highly for it) is the same team that nearly presided over the collapse of America’s most venerable investment bank just a few short months ago. It’s the same management team that exposed Goldman to huge losses in AIG CDOs, had to beg Warren Buffet for a cash infusion on almost usurious terms and had to take tens of billions from the Fed in order to survive.
    Compensate Blankfein and the Goldman management team for the past quarter’s performance and it looks pretty good for them; compensate them for the past 18 months of performance and it looks pretty bad for them.

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  4. Zathras says:

    Spectacularly high levels of executive compensation are a symptom of the American economy’s embrace of the highest possible short-term profit as the essential objective. The proposals made here seek to treat that symptom by an expansion of state power, specifically the federal government’s power to dictate to publicly held corporations how they must pay their employees.
    Certainly the government could do this. The question is what ailment this remedy is intended to cure. Mr. Hindery appears to believe that the ailment is a peculiar moral failing among the small class of people who become corporate leaders. These people, evidently, cease to be “hard-working Americans” (a classification that ordinarily applies to approximately 100% of the population) and become little better than white-collar criminals as soon as they enter their executive suites. If the diagnosis is sound, the prescription may be as well.
    It is more likely, though, that Mr. Hindery’s analysis is superficial. Corporate executives did not suddenly start to treat management as a core constituency in the 1990s; they responded instead to an environment that rewarded rapidly rising stock valuations more than steadily growing profits. Corporate management could deliver higher stock prices. Workers outside management could not. Under those conditions, it made sense to adjust the compensation of corporate executives accordingly.
    The prospect of higher short-term returns from the rising value of stock did not just attract corporate leadership. Instead, corporate stockholders demanded the pursuit of higher stock valuations — stockholders that included state governments and ordinary citizens throughout the country demanded it. Despite the upheavals that began in the financial markets last year and have spread to the entire American economy, they still do.
    Instead of expanding the power of the state into an area it hasn’t occupied up to now, it might make more sense to rediscover regulation of financial markets and the application of anti-trust law. If compensation of executives is thought objectionable, marginal tax rates can always be adjusted, as they often have been in the past. More that any of this, though, the American public might be persuaded to look on investment in stocks as the prudent, cautious long-term investment strategy it had been for decades rather than the easy-money machine it seemed to be for much of the 1990s and the early years of this decade.
    Hindery appears to view the situations as one calling for the identification and punishment of villains who betrayed the eternal values of the great and long-suffering American people. I see his villains merely as individuals able to do the things most Americans sought to do in the last twenty years — to get rich, seriously rich, and to do it quickly.

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  5. SansS says:

    The topic shouldn’t be compensation, it should be selection. There just aren’t enough good managers out there.
    The current echelon of executives have been poorly trained because they’ve been educated as MBAs rather than managers.
    I recommend a closer look at Henry Mintzberg’s writings and interviews. He nailed this a long ago as 1992 in the HBR.

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  6. DavidT says:

    Interesting thoughts from Mr. Hindery though I would have liked to hear him make a reference or two to his own experience and practices as a corporate leader. I agree with him that the ratio of ceo pay to average worker is obscene. What I am at a loss to understand is what credibility he has on this issue given the remarkable sums of money he earned in his corporate adventures. But maybe I just missed something in his response.

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  7. Linda says:

    Thanks also to WigWag for catching the typo of biilions instead of trillions and to everyone above for such interesting comments.
    We all realize that not much of real consequence will happen about executive compensation for reasons already stated above.
    I believe that one of the reasons this never quite gets handled is that we grossly underpay the CEO of our country, the President–a job that probably deserves a reasonable salary of about $10 million a year.
    We haven’t had a Democratic President for 3/4 of a century who ever earned that much by working his way to wealth. FDR and JFK were trust fund kids who chose public service. For all the others, the Presidency was/is the highest salary they ever received.
    As others above had explained eloquently, there are a lot of propaganda/PR/ framing tricks used to get the American public to buy in to the idea that these execs are worth and have earned these salaries. Perhaps comparing them to the President’s would help counter that.

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  8. TonyForesta says:

    True that Matt Stoller, and ten thousand thousand thanks for the ‘correction’ WigWag.
    My math by the way is much larger in that the total derivatives PONZI schemes, – I mean criminal enterprizes – I mean innovative financial products (toxic assets) exposure is more like 68 TRILLION DOLLARS!!!
    Laws are implemented to constrain, curb, or eliminate ABUSES. The entire US financial oligarchy is responsible grotesque crimes and radical abuses. Those who are responsible for conjuring and bruting these PONZI schemes, and criminal enterprizes MUST be constrained, curbed, and hopefully eliminated.
    Forget about ‘scrutinizing’ executive compensation in those oligarchs singularly and exclusively responsible causing the greatest economic calamity since the “depression” – why are these fiends, shaitans, snakeoilsalesmen, swindlers, and thieves not in jail?!!!!

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  9. Dan Kervick says:

    “Second, Congress should establish, for all public companies, a ceiling on individual executive compensation as a reasonable multiple of average employee compensation – say, 35 times – and then penalize through tax policies those companies that elect to pay anyone in excess of this multiple.”
    There we go!
    And there might be other ways of establishing additional egalitarian wage policy best practices, and enforcing them through the tax code, or incentivizing them by reserving public investment allocations for firms that adhere to them.
    But I tend to support these kinds of approaches in preference to letting people set whatever salaries they want, and then taxing those salaries away through higher marginal tax rates. The latter has always seemed inefficient and needlessly bureaucratic to me. Why not go right to the root of the problem: the wage policies themselves? The real issue, it seems to me, is that firms are robbing their employees and shoveling too much money toward the top of the pay scale. So why not just *force* them to pay their employees more and their execs less? That beats taxing away the high salary and throwing it into the general fund, where it is likely to be pissed away on things that never get back to the robbed workers themselves.
    It’s also an easier political sell. Telling people we are going to set limits on the salaries of the execs at their firm and force the company to plow those savings back into worker salaries and benefits is much more attractive than telling them we are going to tax away much of their execs’ salaries and put the money into government programs and transfer payments that they might never use or get.
    As for Matt Stoller’s question, isn’t there some formula that could be devised that fixes a base salary as a certain sliding percentage of a company’s net worth as determined by their annual balance sheet? If the board rejects the proposed CEO salary, the executive receives the base salary until another proposal is brought forward.
    I have to say that it warms my heart tremendously that these kinds of proposals are being seriously discussed. I remember just four or five years ago proposing 20 to 1 or 30 to 1 rules in blog posts, and even on liberal blogs I got the old skunk-at-the-garden-party response, as though I had just recommended renaming West Point the Karl Marx People’s Military Academy. To make these changes happen politically, people are going need to be prepared to counter various standard arguments:
    1. Top corporate CEO’s are like elite, irreplaceable brain surgeons, and if they are not paid a king’s ransom in America, they will take their spectacular talents off to India or somewhere else, leaving our corporations in the hands of blithering incompetents.
    2. Moses, Jesus and Milton Friedman have revealed sacred tablets according to which we are divinely commanded to set salaries by unregulated private bargaining rather than community policy. Letting the whole body of the people regulate how firms compensate their employees is a perversion of nature, and a violation of the inalienable Right of Private Property.
    3. An understanding of the amazing subtlety and hidden perfection of the laws of supply and demand and private enterprise demonstrate that if we tinker with the going market rates for executive compensation everything will go straight to hell, and we will end up as serfs in Eastern European bread lines, filling our shabby bowls with collectivist gruel.

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  10. william czander says:

    Since 1919, the wage gap between the top one percent and the workforce basically remained stable. However, in the early 1980’s the gap between this richest one percent and the rest of the workforce significantly widened.
    The disparities between rich and middle and poor, ballooned accordingly. In 1979, the top 1 percent averaged 8 times more than middle-income families and 23 times more than the poorest 20 percent. By 2005, this top 1 percent grew to 21 times the income of middle-income families and 70 times the average income of the poorest 20 percent.
    In the past 25 years the definition of what is wealth has undergone a significant change. In 1982, the first year of the Forbes wealthiest 400 list, it took about $159 million in today’s dollars to make the list; in 2008, the minimum amount of wealth needed to make the list was $1.3 billion, (Arango & Creswell, 2008).
    This meant that during this quarter-century, the average income of the top layer more than tripled, rising 228 percent from $319,000 to $1.1 million. During the same period, the average income of the poorest fifth grew only 6 percent and the average income of the middle fifth grew 21 percent, less than one percent a year. In recent years this gap has been growing at a faster pace, for example from 2003 to 2005, the average household in the top one percent enjoyed an increase of $465,700 in annual income; while the average household in the bottom 20 percent saw an increase of only $200, and those in the middle fifth saw a rise of just $2,400.
    A Congressional Budget Office report (World Press.com, 2007) provided other metrics for gauging the staggering growth of economic inequality. The total 2005 income of the top three million Americans was equivalent to the total income of the bottom 166 million.

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  11. ... says:

    i like this suggestion from hindrey in particular… “He (obama) absolutely should have added that its role is also to “ensure wealth’s fair and equitable distribution”.”
    good luck with that one… i think it’s the antithesis of rogue capitalism which is what we have..
    and for a novel idea… does anyone else think oversight of the ‘federal ( lol ) reserve’ is also a good idea?? as it presently stands they are like the wizard of oz behind the curtain with no one willing to stop the predictable smoke and mirror show they regularly give the public… just trust us, lol… sure…

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  12. WigWag says:

    Mr. Hindrey’s suggestions are all good one.
    I think there are some other steps that could be taken. Congress could forbid corporations from deducting for tax purposes executive compensation where it exceeds 20 times the compensation paid to the lowest paid full time employee.
    Alternatively corporate income tax rates could be increased on public companies that compensate executives beyond certain reasonable levels.
    In the finance sector, even more stringent measures are called for. How about recognizing that executives like Bob Rubin and Hank Paulson are hopelessly conflicted and preclude them from serving in government for 5 years after they relinquish their private sector jobs? How about imposing penalties on banks that compensate their executives excessively? Perhaps FDIC insurance levels on deposits could be reduced for commercial banks that provide outrageous compensation levels. Perhaps an oversight role for the Federal Reserve could be contemplated.
    Of course none of the ideas I’ve suggested are politically feasible at the moment. Neither are any of Mr. Hindrey’s recommendations. During the Presidential campaign when Obama made an innocuous comment about sharing the wealth, McCain and the Republicans called him a socialist and the television networks and cable TV shows obsessed about Obama’s comments for a week. It’s how “Joe the Plumber” became famous.
    All of this brings up an additional point which is necessary to change the American political culture in a way to make reform feasible. Another outrageously compensated group are television “journalists.” As long as Keith Olbermann and Chris Matthews and Bill O’Reilly and Sean Hannity are paid salaries well into the seven figures don’t expect them to publicize or talk about limits on executive compensation. The same is true of more “respected” TV journalists like Katie Couric or Brian Williams.
    Steve Clemon’s friend, James Fallows, wrote a book on this subject in 1996 called “Breaking the News: How the Media Undermine American Democracy.”
    Fallows (whose 60th birthday as Steve should remember is one week from tomorrow; August 2nd) describes how paying television journalists like movie stars inhibits them from covering important issues like executive compensation.
    If we are to move in a positive direction on all of this we need more than legislation; we need Obama to use his rhetorical gifts to remind the country that Franklin Roosevelt and the policies of the New Deal moved us away from the Great Depression while the seeds of the current economic crisis were planted by Ronald Reagan.
    Read Paul Krugman’s book, “Conscience of a Liberal.” He provides data on income distribution and compensation levels pre and post Reagan. The data he provides is startling and depressing.

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  13. WigWag says:

    There is a typo in Mr. Hindrey’s remarks; he says,
    “He was right because these are the people who saddled the rest of us with a staggering $2.8 billion or more of trading and credit losses, and yet wanted to be paid as if everything was just swell.”
    I beleve he meant to say $2.8 trillion not “2.8 billion.” $2.8 billion would be a rounding error compared to what happened.

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  14. Matt Stoller says:

    First, Congress needs immediately to grant public shareholders the right to call shareholders’ meetings, to vote out the current board and to pass binding (not simply advisory) votes on executive compensation.
    What happens if the shareholders vote down the pay package? What are the executives paid if the pay package is voted down? Is there another follow-up shareholder meeting in ten days?

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