A New American Capitalism
(Greed and Excessive Executive Compensation)
An essay by Leon Rousso, CFP
2009

American Capitalism is an amazing phenomenon. It allows anyone in America to not only have a dream, but also with the courage to execute that dream a chance to become a success; however, he or she defines it.

Material wealth, to most of us, is usually only one part of that vision. The majority of us desire to be good citizens, maintain a respectable standard of living and enjoy the fruits of our labor.

Most Americans define success as good health, happiness and friendships and further down the list is wealth.

Although greed is a normal emotion for survival, most of us will not place our greed before our values.

Excessive greed is a sickness, no different from illegal drug use or too much alcohol, which our society has created laws to control.

Take all the opportunity we have, mix in extreme greed and add the public’s complacency and you end up with what we have today.

A distrusting citizenry, a corrupt or at a minimum winner take all corporate environment, politicians on the take and prisons filled with more inmates per capita than any other country in the world.

Over the last 30 years, this has created a lack of confidence within the general population that we have never experienced before.

To maintain this amazing experiment called America the time has come to regulate one area where extreme greed is exploited routinely.

If anything proves my point, it is the unbelievable compensation paid to a majority of our publicly traded Fortune 1000 executives.

CEO’s and other senior executives are treated like rock stars even when their companies are failing.

A famous radio/talk show host has said that for American Capitalism to succeed our government must do only two things well.

1. Protect us from harm
2. Make sure all our rules of fair play are followed and enforced.

Capitalism only works when we play fair and our system is completely malfunctioning when it comes to fair play.

Our government is here to be the referees. Our American values demand justice and fairness. Beyond natural or universal law, God, Karma or a Higher Power, whatever you might call it, our government is the ultimate arbiter of these values and when rules are not enforced we eventually will have complete distrust and at worse, eventual chaos.

This article is only about fair and reasonable compensation although there are many other areas where rules need to be enforced. Without it, we are doomed to fail.

As John Bogle, the founder of Vanguard Group writes in his book “Enough”,
money will never buy you happiness unless you know when “Enough is Enough”

John Bogle, Bill Gates, William Buffet and other company founders and executives like them play by the rules. They play hard but fair and have become wealthy and happy human beings because of it, not in spite of it. They run companies where employees are respected and not taken advantage of.

Just like in poker, we are all dealt cards from an unmarked deck. We play the game the best we can and often even a bad hand can win because of skill, brains and guts.

If somebody cheats, he is banned from the game in disgrace.

Capitalism encourages the best in human creativity. It allows us to achieve the best of what the world produces. Freedom begets success but we as a nation must believe the system is fair to continue our success.

If you lie to a child, enough they loose complete faith in others. We are on the brink of losing complete faith in our leaders for the same reason.

This article speaks to a system that has allowed individuals to be paid unfathomable amounts of money for acting as temporary stewards of businesses founded by visionaries.

These stewards in most cases did not contribute one drop of blood, sweat or tears or their own money to create the companies they now lead.

For a few years, sometimes only weeks, they become the captain of someone else’s vision and hard work. They squeeze unbelievable amounts of money out of these corporations, at the expense of employees and the public whether they produce a profit or not under their leadership.

Often they terminate 100’s or 1000’s of employees to cut expenses, but their excessive salaries and other compensation (salaries, bonus, stock options, deferred comp and political favoritism to name only a few) continue.

With integrity, honesty, fairness and a genuine respect for their employees Americans can regain their deep faith in the country we once had.

Unfortunately, we cannot regulate values but we can regulate extreme greed.

Please, do not get me wrong, I am not talking about socialism, which many think we are heading for; I am talking about American Capitalism refereed

What we are experiencing today is a complete meltdown of our institutions, which is a direct result of what I have been talking about. Do not be mislead. Excessive greed is at the bottom of this entire mess.

The laws of our land and the values we expound demand an equal playing field.

Unfortunately, for the average American this playing field has become so dirty it is almost impossible to play fair and still win.

Laws are created to protect us and maintain an ethical and lawful playing field for every citizen, but where are the referees?

Today, Americans see repeatedly in the news and in their workplace that this sacred concept is not being respected.

One of the most obvious and disgraceful examples is Extreme Executive Compensation.

No person, even in America has a right to earn the kind of money many of these executives (or so-called leaders) earn on the backs of their employees.

Every employee should share in his or her companies combined success. They already share in their failures.

I know many of you will say that a person has the right to earn as big a salary as he/she can in America. I am here to argue that point and if you give me a chance, I might just convince you.

A friend once told me in his country (an eastern European communist block country) that a barking dog may bark but the train still goes by. Most of us simply feel like barking dogs. I will not submit to this reasoning. We do have the power to change our world.

Do not tell this story to Rosa Parks and all the other courageous individuals who did make changes happen.

Before I go into my theory on controlling executive compensation, I want to first clarify one thing.

In my opinion, capitalism is designed to reward people for taking risks. You have heard the very old saying “No Risk No Reward”. This sacred truth must never be changed.

Risk must continue to be rewarded for America to continue as a leader of the world.

If I invent the best mousetrap in the world and millions of people buy it I am rewarded by the value of the company I create. I took the risk and I should get the reward.

I should not be rewarded however at the expense of my workers helping me build, sell, distribute and service those traps.

There is a significant difference between building a fortune in equity and extracting as much money as possible in salary at the expense of others and being rewarded at the expense of many.

Fifty years ago, Walt Disney had a vision to create an entertainment company like no one had before him. He wanted to build parks where children and adults could spend a day enjoying a magical experience.

Many individuals and bankers thought he was crazy; the banks would not lend him the money to build. This is not an unusual story, as most entrepreneurs know from personal experience.

Because he believed in his dream and accepted the risk, he took a loan from his life insurance and the rest is history.

Walt Disney did not take an exorbitant salary, as his dream was unfolding.

He created wealth from building his dream brick by brick and employee by employee.

He died a rich and I would imagine a happy and content man from what I have read.

Twenty-five years ago, senior executives of public corporations made in compensation about 44 times the average worker at his company.

Today it is over 400 times and climbing with no end in sight.

Let us move ahead now 40 years. A man named Michael Eisner is CEO of Disney.

The question I ask you is does he deserve to make over $350,000,000 in one-year captaining Mr. Disney’s ship. Where is his risk? He was making at the time $x millions of dollars in salary and the board of directors graced him with stock options as so-called incentives to continue.

Wasn’t he already being paid an excessive salary to lead, manage and grow, not create the company?

The examples go on and on. Hewlett and Packard, Thomas Edison, Bill Gates, Ben and Jerry, to name just a few who took risks and built their companies.

Why isn’t a good or even great salary enough? What special powers or skills does anyone have to earn $350,000,000 to run an existing corporation?

What if we capped the HCE (highly compensated employees) salaries to a multiple of 44 times the average Non-HCE salary?

If the average salary for Non-HCE individuals in a public corporation were $40,000 then that would allow all HCE executives the opportunity to earn a maximum income of $1,760,000. Not bad for a years work if you ask me.

My concept would go further than this however. If the company is successful and the executives want to give themselves a raise they will need to get the Non-HCE class up to a higher average income or they wont be allowed a raise.

A rising tide is supposed to raise all ships, not just the captains.

If senior executives were categorized as HCE and all other employees were classified as Non-HCE using more stringent definitions of these classes then currently defined by ERISA that would be a good start.

In addition, what if we only allowed company stock to be purchased with real money (not funny money called options), maybe even at a small discount as allowed today, without the use of free options.

Obviously, we would need to impose some restrictions to avoid market timing, but at least the executive would purchase the stock with his own money.

If he believed what he was doing would lead to stock price increases then he could take the same risk we all take by investing in our public companies. He at least is at the helm and has more control then the average citizens in the daily decisions of running the company.

History tells us the odds are in our favor of making money in stock if you track the S & P 500 over the last 75 years. America is a country of entrepreneurs and business is our stock in trade. It is not a game to be played.

By purchasing shares with their own money, they now have there own sweat in the business they run. Keep in mind they are already being paid to lead the company. If they need stock as an additional incentive what are they being paid for then.

The stockholders are the ones taking the risk. They do not get a salary for owning shares.

Most companies plow much of their earnings back into the business with the objective of increasing the price of their stock. More risk but more reward for potential stockholders.

These stock holder/owners are true capitalists; executives and everyone else who works for the company are simply employees paid to do a job.

With public corporations, stockholders are the real owners and employees, including HCE’s technically work for them.

If the executive(s) believe, due to their leadership, they can raise the price of the stock then let them earn their fortune by stock appreciation at fair market value instead of simply exercising an option.

Please do not misunderstand me about capitalism. The person who invented and created the mousetrap company and built and distributed these traps started out as the owner and typically owned 100% of the company or maybe shared ownership with others in the beginning.

As he sells more traps, his stock becomes more valuable. If he is wise, he begins to sell part of the company in exchange for appreciated shares and that is where capitalism and entrepreneur ship is rewarded with real wealth.

Typically, these founders take very little if any compensation in the beginning. They use every penny of profits to continue building their enterprise.

As owners, they do what they think necessary to succeed, to maintain a positive cash flow and pay their employees enough to keep them with the company.

They have earned the right to become wealthy through their company’s stock.

Although there is extreme greed and unfairness in many closely help companies also, this article focuses only on our “Public Companies”.

Who referees what goes on regarding compensation? Currently many boards of directors are often asleep at the job.

I recognize that we are dealing with human nature, which is what makes this a very difficult concept.

We deal with human nature in many ways as a society. We have laws and we have organizations to enforce those laws.

If you run a red light and are caught, you will pay the same fine regardless of your status.

We all know that justice and fairness do not always coexist but it is the best system I know of to manage human nature.

We teach are children that good citizens follow laws and stay within their boundaries.

Why not have laws that create boundaries for compensation to keep fairness and justice alive in public corporations also.

Let us look at an example of what I am talking about.

Ford Motor, GM and Chrysler employ hundreds of thousands of hard working employees and yes, executives. None of these hundreds of thousands of employees or executives created these companies.

These companies are now on the verge of bankruptcy and their chief executives fly in on their company jets to Washington to beg for money. They don’t even plane-pool.

If that isn’t greed without integrity and respect for their employees, stockholders and the American taxpayers, what is?

Recently, at their initial hearing, no executive was willing to take one Nichol less in compensation when asked.

They were not willing to be treated like their employees. Why would they, they are rock stars and live in another world. They would rather see the company sink with all its treasure because they have already extracted theirs.

I have met many executives over my business life and almost every one of them showed no conscious for the extreme incomes they make. In fact, when they are alone together they laugh about it.

This is disgraceful and is not what America is about. If congress will not do it then we must do it by a constitutional amendment.

If we can come together as intelligent, caring and involved citizens, we can regain our confidence and show the world that our form of capitalism does work.