1406 True News 44 - Executive Pay Ripoffs?
444% increases? What on earth happened to executive pay?
June 30, 2009 - Freedomain Radio - Stefan Molyneux
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| Hi everybody, it's Stefano Molini from Free Domain Radio. | |
| I hope you're doing very well. This is True News number 44. | |
| Current events clarified this day, June the 30th, 2009. | |
| CEO pay. | |
| An examination of the smoking money gun. | |
| Canadian content, for those of you who are like, dude, you live in Canada. | |
| How about some Canadian content, eh? | |
| I, of course, strive to please all listeners. | |
| So, in the past 12 years, top CEOs in Canada have seen a salary increase, total compensation package increase, of 444%. | |
| How does that compare to you? | |
| The top ten earners earned a collected total of $60.7 million in 1995. | |
| By 2007, that number had jumped to $330 million. | |
| For example, Paul Desmarais, CEO of Powercore, made more than $5 million in 1995. | |
| By 2007, his take-home pay, catching more than $29 million. | |
| Between 2003 and 2007, CEO pay in the U.S. rose by 45%. | |
| Why, oh why, could this occur? | |
| In 1970, CEO pay was 28 times that of the average worker, in 2005, 465 times. | |
| Hmm, we say, WTF could be going on here. | |
| CEOs pay as a multiple of the average workers pay. | |
| This is a nice little graph that we can see from 1960 to 05. | |
| There has just been a massive multiple. | |
| Of course, it dipped during the recession of the early 2000s, but a massive spike. | |
| So what could be going on? Well, the first place that I would look is say, well, maybe their performance has increased so staggeringly, and it's certain anecdotal stuff that I looked into does not seem to be the case. | |
| When Michael Sabia left as CEO of BCE, his plan to sell the company to private investors had tanked, and the stock was mostly where it was when he took the job six years earlier. | |
| Yet he still walked away with a $21 million package. | |
| Robert Prichard is leaving Torstar with almost $10 million, even though the company's stock has been cut by two thirds under his leadership. | |
| Hydro One CEO Tom Parkinson received almost $5 million on his exit, even though he left under a scandal following a scathing report on the company's billing practices by Ontario's Auditor General. | |
| Ontario is a special kingdom up here in the Middle Earth of Canada, for those American listeners. | |
| Executives on Ottawa's Public Sector Pension Investment Board who have lost billions of dollars of federal government workers' pension money declared that they might award themselves huge bonuses. | |
| Why? Well, I guess they consume oxygen. | |
| So, the myth. When something like this occurs, something staggeringly huge in terms of executive compensation occurs, where you get multiple, multiple, multiple increases, the first place I would look is a government program designed to reduce CEO's salary. | |
| That is the very first place. | |
| Whenever you see massive increases in something, look first to a government program designed to decrease it. | |
| Ninety-nine times out of a hundred, bobs your ankle. | |
| So, what is the myth? Well, there is a sad human tendency to ascribe to voluntarism that which directly results from violence. | |
| Whether it's a human tendency, I don't think so, but it certainly does seem to be pretty prevalent in this state-educated and state media-infested society. | |
| This helps us avoid the unpleasant truths about the violent basis of our statist culture. | |
| Thus the rise in executive pay. | |
| It's so inevitable, isn't it? | |
| Oh, it's greed. | |
| The wildebeest of greed are thundering across the plains of the economy, trampling the Indian children of the stockbrokers and the poor workers. | |
| And it's just greed and it's the free market. | |
| As if greed did not exist 20 years ago before this stuff all began, as if greed did not exist 50 years ago. | |
| As I've said before, and I'm sure I'll say again, ascribing problems in the free market to greed, specific problems, new problems, is like ascribing a plane crash to gravity, as if there wasn't gravity before the plane crashed or the last time it flew. | |
| What has changed? It's always the regulatory violent environment. | |
| What is the reality? Well, look, I'm going to make the case here. | |
| I've made it before. I'll make it again with specific evidence. | |
| The initiation of violence always achieves the opposite of its intended effect. | |
| A lesson we are tragically slow as a species to learn. | |
| We will continue to see things get worse until we figure this one out. | |
| The explosions in executive pay can be traced to two regulatory changes introduced almost 15 years ago with the stated goal of reducing executive pay and protecting investors. | |
| Look at that. The theory is proven correct. | |
| Let's have a look at them. Public fiat pay. | |
| Well, what happened? In the mid-1990s, government began cranking out money like my baby cranks out effluent, let's say. | |
| As a result of the explosive growth in fiat currency, stock prices began to balloon. | |
| You can have a look at my video. I'll link it below the supercharged stock market for more on this. | |
| This illusion of economic growth created upward pressure for executive pay. | |
| Stock prices rising. Executives go to the board and say, look, I'm making the stock price rise. | |
| I'm a genius. Gimme, gimme, gimme. | |
| Very few understood that the CEOs were in fact handing out fiat currency, that they were effectively handing out counterfeit currency to stockholders and employees. | |
| Takes a while for this to hit. | |
| Regulators then, of course, based on the fact that CEO pay was going through the roof, passed legislation for public disclosure of executive pay. | |
| This allowed executives to bargain for higher salaries. | |
| If you know what your competitor is making, you can ask for more. | |
| That is a basic fact of negotiation. | |
| This is what's so retarded about statism. | |
| You know, pass these laws and then think everyone's just going to go, oh, okay, I'll just do that. | |
| No, they do their counter moves, right? | |
| U.S. regulators also removed the tax-exempt status of executive pay over one million dollars. | |
| So it used to be you made over a million dollars. | |
| You didn't get taxed on the excess of a million. | |
| They took that away. What happens? | |
| Well, inevitably, people don't just say, oh, okay, I'll pay the new tax, right? | |
| What they do is they say, okay, well, don't pay me more than a million. | |
| Give me stock options instead, because those are not taxed in the same way. | |
| So by massively raising the taxes on CEO salaries, governments forced compensation packages to move towards stock options. | |
| Duh! Modern packages generally include base pay stock options, restricted shares, annual bonuses, special bonuses, golden handshakes, golden parachutes, golden showers, I'm sure, if they were demanded, and accelerated supplemental pensions. | |
| So what happens when you start paying CEOs not cold cash salary but bonuses based on the short-term movement of stocks? | |
| Well, you create an incentive for them to aim for short-term valuation of stocks and increase that value. | |
| They get a huge amount of money, so they get a taste for excess risk. | |
| Well, why? Because executive bonuses under this new model, forced by government regulation, executive bonuses go up when the stock price goes up, but they're not penalized when they go down. | |
| It's called asymmetrical risk. | |
| It's like if you go to a casino and every time you win a hand, you get all the profits, and every time you lose a hand, someone else pays. | |
| Well, you're going to just end up risking more and more and more. | |
| Salary is a longer-term incentive than stock options. | |
| So if you give executive stock options, you're going to have them focus on manipulating the stock rather than building real value in the long run. | |
| I have experienced this absolutely and tragically personally. | |
| I know all about this from a first-hand standpoint. | |
| It just corrupts and messes up management completely. | |
| What else has been going on? | |
| So there's a very large tax loophole, a so-called stock option accounting double standard, which, I mean, according to the IPS, cost taxpayers US $10 billion. | |
| I wouldn't quite put it that way. | |
| But what is this? | |
| The rule says that companies can account for stock option expenses on their financial sheets when they grant the options, but then they claim the tax deduction when the CEO cashes out the options, often years later when the worth is usually increased. | |
| The result is that tax deductions are much higher than the original expenses. | |
| I'm sorry that's a little complicated, but basically what they mean is that if I give you a million dollars in stock options, I get that as an expense. | |
| So it's taken off, right? | |
| It's an overhead, taken off my tax base. | |
| And then I can put out tax deductions when you finally cash those in years later when they're worth two or three million dollars. | |
| So you get tax deductions much higher than the original expenses, which is not the case with salary. | |
| So this, again, the tax regulatory violent structure moves people towards this kind of incentive plan. | |
| Another major loophole is the unlimited tax deductibility of executive pay, which allows companies to deduct executive pay from their income taxes as a business expense so long as the pay is, quote, reasonable. | |
| That's actually in the legislation. | |
| Or in the regulation, the IRS has failed to define reasonable, which is a statement you can take on many levels, and a 93 attempt by Clinton to cap these deductions at U.S. a million dollars failed. | |
| So if they pay unlimited tax deductibility of executive pay, including options and so on, it just means it costs the board less to pay the executive. | |
| Therefore, the executive can bargain for more. | |
| Well, there's also many other types of corporate welfare, which help inflate corporate profits, thereby increasing performance based executive pay. | |
| You get a nice bailout, you get a tax break, you lobby the government through your connections to, say, put a tariff liability or import ban on foreign competition. | |
| Your company is going to do a lot better in the short run. | |
| There are tax distortions that encourage companies to use too much tax-deductible debt rather than double taxed equity. | |
| So rather than saving, they will go into debt, thus leveraging themselves pretty nastily. | |
| And the reason they do that is because it's a tax deduction, interest payments, right? | |
| There are countless legal obstacles to corporate takeovers in management competition. | |
| So if somebody's being overpaid, normally a corporate raider would look at the executive board and say, well, these guys are way overpaid. | |
| I'm going to put in cheaper guys and save money, and I'm going to raise equity to be able to achieve that. | |
| But especially after what happened in the 80s with the so-called junk bond scandal, this has been, you know, the CEOs go to the government for all these legal loopholes and barriers to entry. | |
| Which then creates an artificial monopoly, thus, of course, increasing executive pay. | |
| Corporate legal privileges, limited liability, the risk accrues to the shareholders, not to the personal incomes of the executives. | |
| And I've done a video on this. | |
| You can look for it if you like. CEOs are often hired more on the basis of political connections than managerial performance because you can get a lot more money from political connections than you can from doing the hard work of building value for customers in a free market. | |
| And this, of course, means that they're incompetent around the companies in the long run, but they can get a lot of money from Washington or Ottawa in the short run. | |
| For 34 years, beginning with the U.S.A., beginning of the Federal Williams Act of 68, the rules of corporate governance have progressively favored corporate managers relative to shareholders, substantially reducing the potential for hostile takeovers. | |
| These are government guidelines and regulations for how corporate governance works. | |
| And of course, corporate managers have much bigger pull than your average shareholder in Washington. | |
| So the rules all end up skewed to their favor. | |
| This creates huge problems in terms of corporate performance. | |
| There's an extensive study that's been done. | |
| Again, I'll put all the links to the right. | |
| The top decile of the compared shareholder friendly firms, in other words, firms whose corporate governance guidelines favored shareholder activism rather than managerial power, The shareholder-friendly firms at 8.5% higher returns per year than the top 10% of the management-friendly firms. | |
| So they create this fortress of legality and state protection wherein they just grant themselves all your money and you end up losing out. | |
| This is not the free market, people. | |
| The result, executives took more and more risks because they get paid in the short-run bump in their stock prices. | |
| Executive income is tied to very short-term performance goals, almost always at the extent of long-term stability and growth, a significant factor. | |
| This has all been a significant factor in the economic meltdown that has now destroyed Either the reality or the illusion, depending on your take, over $30 trillion worldwide. | |
| This is people losing their homes, people losing their jobs, people losing their kids' education, people losing their ability to retire and having a jacket out at Starbucks for another five years. | |
| It's absolutely tragic. | |
| So the next time some bloviating blowhard walks up to you and tells you that free market greed destroyed the economy and suggests government regulation is the solution, you might want to say, peace does not destroy the world. | |
| Voluntary free market interactions do not destroy the world. | |
| Only statist violence has the terrible power to nuke 30 trillion dollars of human and fixed capital. | |
| The moral, the moral as always, is that when you allow your anger and resentment to be stoked by politicians, you end up paying. | |
| And your enemies end up flourishing. | |
| You want to know what the government is? | |
| The government is a gun that shoots money at your opponents and blows up in your face. | |
| That's every single time the government says, we're going to go get your enemies. | |
| Do we have your go-ahead to get your enemies? | |
| And you go, yeah! You have my go-ahead to get your enemies. | |
| Your enemies end up profiting and you end up with the short end of the stick in an unlikely place. | |
| Your enemies will reap billions and your livelihood will evaporate. | |
| Every time you rally around this gun to get what you want to, to express your resentments against those you consider your enemies, you end up paying, your enemies end up getting rewarded. | |
| So put down this gun. | |
| Every time the government points and says, oh, we've got to go and get these bad guys, whether it's corporate executives or Al Qaeda or whatever. | |
| Just say, not in my name. | |
| Not in my name do you use this violence because I know that Al-Qaeda will profit and corporate executives will profit and I and my children and my relatives will suffer because that's the way that statism works, always. | |
| Thank you so much for watching. I look forward to your donations. | |
| For more on the philosophy of personal and political liberty, please visit www.freedomainradio.com. | |
| Free podcast books, videos, and articles on how to achieve philosophical freedom in your own lives. | |
| I look forward to seeing you in Philadelphia, July the 4th and 5th, 2009. | |
| And thank you so much for watching. |
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