Sunday, December 18, 2005

Even a Diehard Capitalist Can Become Nauseated By Grabby CEO's

December 18, 2005
Everybody's Business
Executives Gone Wild: It's Not a Pretty Sight
THERE is a scene in the old gangster movie "Murder, Inc." in which a prominent member of that entity, a certain Abe "Kid Twist" Reles - ably portrayed by Peter Falk - is asked why he always wants more when he already has so much. "Don't ask questions," he shouts in response. "What've you got hands for, huh? Take!"

Then there was a scene I recall from my childhood during the Army-McCarthy hearings in 1954. After Senator Joseph R. McCarthy of Wisconsin said some nasty thing about a young attorney working for Joseph N. Welch, the canny Boston lawyer representing the Army, Mr. Welch asked Mr. McCarthy: "Have you no decency, sir? At long last, have you no sense of decency?"

These episodes come to mind because of some recent incidents in the world of managers, stockholders, bond holders and employees.

Robert S. Miller Jr., the chairman of Delphi, the auto parts giant that is now in bankruptcy, has said his company cannot compete with parts makers in Asia. To stay in the game, he said, he needs to cut his workers' base pay from about $25 an hour to $9 or $10 an hour, though he recently said he may be able to make it $12.

Well and good, and Mr. Miller, who is known by his middle name, Steve, has been in the news with some extremely astringent and on-target observations about the American labor force and its need to acquire more education to compete with workers in Asia. We would all like to see Delphi stay in business, and obviously something must be done in the way of sacrifice by all concerned. (I was a Delphi stockholder by inheritance, and I have already done my sacrifice by seeing my very small investment in it destroyed.)

But what's this echo of Kid Twist? Part of the package submitted to the bankruptcy court by Mr. Miller calls for the top 600 or so executives and managers to share about $510 million out of the corpse of the company to encourage a smooth transition. What? A bankrupt company enriching its executives even as it destroys its stockholders' equity and demands that its workers revert to spartan living standards? (To be sure, the compensation is concentrated at the high end of the corporate ladder - of course - and much of it is in stock, which is difficult to value. In these recapitalization situations, though, the stock tends to be a fabulous bonanza for those who got it free or for very little. And in the face of bitter labor union opposition, Mr. Miller says he will recast the package for executives.)

Now, I am a lawyer by training, and it seems to me, dope that I am, that this money belongs to us stockholders, the owners of Delphi, and not to the managers and executives. Mr. Miller's fiduciary duty runs to us exclusively, not to his colleagues. If he has a nine-figure sum lying around, it belongs to us stockholders first and foremost. I hope the bankruptcy court judge notices this.

However, despite my losses on Delphi, I still have a solidly comfortable life - at least for today. I don't desperately need my infinitesimal share of that $510 million (or whatever nine-figure sum it may be). But the workers on the assembly line and in the restocking room who make an hourly wage - they do need it. They need it badly. How on earth did the idea come into the head of someone as smart as Mr. Miller that he could get away with enriching those who already have high pay (or higher pay) and simultaneously demand that his workers accept poverty or lose their jobs?

This country is at war abroad. How can an executive try a bold maneuver against decency, like Mr. Miller's, at a time when we need to be united against terror? Maybe Kid Twist had the answer.

(Just for the future, it's worth taking a special look at Mr. Miller, whose salary is nil, but who no doubt sees a spectacular payday down the road when Delphi is recapitalized in the ashes of the employees' and stockholders' expectations. He is likely to walk off with what could literally be billions, based upon what has happened to smart people who seized companies after bankruptcy - see below and see the life and times of one Wilbur L. Ross Jr. And I certainly don't begrudge him high pay. I like high pay, too. But when my employees are suffering terribly? I don't think it looks pretty.)

Then let's briefly look at Edward S. Lampert, a staggeringly successful investor. He recently acquired Kmart, then recapitalized it; its stock soared, making him and his very rich investors a lot richer.

Why did its stock soar? Certainly not owing to Mr. Lampert's genius at retailing. Kmart is struggling against the Wal-Mart and Target juggernauts. No, Mr. Lampert's Kmart is considered a real estate play. Its stores, while not selling a lot of merchandise, are in good locations and are expected to deliver huge returns on liquidation. Mr. Lampert, meanwhile, acquired Sears and merged it with Kmart, and is contemplating laying off employees in large numbers. Again, this is expected to be a real estate play.

But if the poor pre-bankruptcy Kmart was so loaded with valuable real estate that it has made investors in the post-bankruptcy Kmart rich, didn't that real estate belong to the stockholders of Kmart? Why was it not liquidated for the benefit of existing stockholders? Why was it turned over to the new stockholders while the old stockholders walked off with nearly nothing? Where was the management of the old Kmart? Asleep?

And what about Mr. Lampert's plan to lay off Sears employees, which he inevitably must do if he sells off the stores in which they worked? What about the severe cuts in retirees' medical benefits that Mr. Lampert has announced? How can he square these with decency to the employees? They are hard-working, modestly paid men and women who probably expected to be with Sears for a lifetime. Mr. Lampert is already fantastically rich. Does he really have to fire people in small-town America or cut their health care to become even richer? How many yachts can he sail on? How many meals can he eat a day? How many homes does he need to own?

Then there is Carl C. Icahn, badgering the brass at Time Warner to make the stock go up so he can make money on his multibillion-dollar stake. One way he is suggesting that Time Warner can do this is by slashing what he says is its "bloated bureaucracy" - meaning, no doubt, laying off thousands of people in New York.

I KNOW some of these people from my many visits to CNN. They work hard. They are not paid a lot. Is it really necessary for Mr. Icahn to demand that they be fired, just before Christmas or at any other time, so he can make more on top of the billions he already has?

I'm a small Time Warner stockholder, and I would love to see the stock recover from the beating it took when tech crashed. But at the expense of firing a makeup artist or a secretary supporting her children? I don't think so. I don't need the money that badly. If I don't, how can Mr. Icahn need it so badly? I calculate that he has roughly 200 times what I have, maybe a lot more.

Alas, there are other examples, but I'll say it again: This is a country at war. For men who are already billionaires to look for more billions by firing hard-working middle-class employees or demanding they take a pay cut is not the kind of thing that unites a nation. I'm a devout capitalist, but this is just plain ugly.

Ben Stein is a lawyer, writer, actor and economist. E-mail:

Copyright 2005The New York Times Company

December 18, 2005
The Boss Actually Said This: Pay Me Less
BLIZZARDS swept through Wall Street last week - bonus blizzards, that is. Henry M. Paulson Jr., chief executive of Goldman Sachs, received $37 million in shares and options. Richard S. Fuld Jr. of Lehman Brothers got $15 million in restricted stock, while John Mack, Morgan Stanley's new chief executive, pocketed an $11.5 million stock grant for six months' work.

But one Wall Street executive atop a fast-growing firm is saying no to the piles of pay that make corporate America's world spin so splendidly. In a remarkable two-page letter to the chairman of his company's compensation committee, this executive requested that he receive no increase in salary, zero stock options, a smaller bonus than last year and a piece of the company's profit-sharing pie equal to that received by all employees. This, in a year when his company's revenue grew by more than 40 percent.

Who is this magnanimous executive? Ethan Berman, founder and chief executive of RiskMetrics, a private company that was formed at J. P. Morgan Chase and spun out to private investors in 1998. RiskMetrics, based in Manhattan, helps institutions and corporations assess risk in their investments; it is owned by its employees and three private equity firms. It will generate revenue of $100 million this year.

Haven't heard of Mr. Berman? That is not surprising: his company is small and he is no self-promoter. Unlike other executives uttering the bromide about how the team contributes to a company's success, Mr. Berman not only says it, he also acts on it.

While Mr. Berman's may not be a household name, his egalitarian executive pay philosophy is worthy of the spotlight. His letter to the board, outlining this philosophy, should be read by anyone who serves on a compensation committee. It should also be memorized by institutional investors, who too often let managers siphon wealth from their pockets. (The letter can be found at

As soon as the letter begins, you know that you've left the me-first executive world behind. "I know H.R. will be giving you a formal presentation outlining our overall proposed plan," Mr. Berman wrote, "but last year I was disappointed in the way I was compensated and I have therefore taken to writing this note in the hope that it does not happen again in 2005." His unhappiness last year? Excessive pay.

First, he asked that his relatively modest salary remain the same. "The banker J. P. Morgan once said that he would never lend money to a company where the highest-paid employee was paid more than 20 times the lowest-paid, as it was in his view unstable," Mr. Berman wrote. "While we are a long way from that threshold, last year I felt I was given an overly generous raise, putting my salary 20 to 40 percent higher than my direct reports. If the proposed salary increases are given to the other managers within the firm, my current salary will be at a level more appropriately above the other key employees in 2006."

Then he requested that bonuses across the company be raised significantly above last year's - except for his own. "I do not feel my own performance was as strong as in previous years," he wrote. "I would therefore ask that my discretionary bonus reflect this by an appropriate amount."

On the subject of stock options, Mr. Berman recommended that he receive none. "As I told the committee before last year's meeting, there is no amount of stock options, restricted stock or any other stock-based compensation that would make me feel more of an owner, or increase my commitment to the company," he advised. "Instead, I ask the committee in looking at the list to broaden its definition of 'leaders' beyond employees with significant managerial or financial responsibilities to those who display time and time again the values that we as a company believe in and therefore 'lead' others by example not by mandate. That, as much as any other attribute, will create value in the long run."

Mr. Berman did not intend for his letter to be made public. But Arthur Levitt, the former chairman of the Securities and Exchange Commission and the head of the compensation committee at RiskMetrics, found it notable enough to send to me, a sharp critic of runaway executive pay.

During his career, Mr. Levitt has served on some 20 boards and a dozen compensation committees. "I never heard a C.E.O. say, 'I didn't do so well, don't give me a bonus,' " he said. "It's always, 'I didn't do so well because we couldn't get the parts on time, or the C.F.O. didn't do the job,' or some other excuse."

Mr. Berman, 44, said in an interview that when the RiskMetrics directors first learned that the company's profit-sharing plan made identical grants to all employees each year, they were shocked. "This was designed by me," he said. "If your assets are your people and you treat them well, you will bring more people and profits to your organization. I think it's in the long-term interests of the shareholders, the company and the clients of the company." RiskMetrics began with 25 workers and now has 270.

Why did he ask for a lower bonus this year? "My job at this point is developing people, developing success plans to make sure this company will continue to grow and be successful 5 to 10 years from now, and I didn't get that done," he said. "I'm a hard grader. I think I did more in that way last year than I did this year."

GIVEN his unusual background, it is perhaps not all that surprising that Mr. Berman takes a different view on compensation from others on Wall Street. A theater major who graduated from Williams College in 1983, he initially moved to Paris to write plays. Several were performed, but he returned to New York in 1985. He started working for a temporary agency and was dispatched to several Wall Street firms. J. P. Morgan hired him permanently, and he began doing risk management work for the bank in 1995.

Mr. Berman recalls when he realized how wacky corporate compensation practices had become. He was working for a large firm and had just received his first bonus that was more than his salary. "After hearing the amount from my boss, I immediately called my father with the news," he wrote. "The first words out of his mouth were 'don't ever feel that you are worth it.' I don't want him to say that to me again."

While 2005 has been RiskMetrics's best year by financial measures, Mr. Berman said that other areas of the company could have performed better. "I don't think one should simply look at a company's financial results for a year, because they were probably not impacted by the C.E.O." but by many employees, he said.

"I wrote the letter because it's something I believe in," Mr. Berman said. "But if other people read the letter and say, 'Maybe I should rethink this,' that would be success, to me." And to shareholders everywhere.

Copyright 2005The New York Times Company


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