CEO Pay Bonanza-A Byproduct of USAPonzi
Jun 1, 2014
The following article was published by The Wall Street Journal "MarketWatch" on May 27, 2014 noting the rapidly escalating CEO pay over the last few decades relative to the pay of the typical worker.
May 27, 2014, 1:38 p.m. EDT
Top-paid CEOs get 400% raises — you’ll get 2.9%
By Catey Hill, MarketWatch
A report released this week by executive compensation and corporate governance data firm Equilar finds that 44 of the 50 top-paid CEOs were paid more in 2013 than 2012 — these 50 CEOs saw a 21.7% increase in median pay — and two of them got raises in excess of 400%, and in one case in excess of 500% (pay includes salary, stock, options awards, cash bonuses, perks and other incentives). And some CEOs did especially well last year: the highest-paid CEO, Anthony Petello, of Nabors Industries, raked in $68.2 million, up 246% from 2012; the second highest-paid CEO, Leslie Moonves of CBS, got $65.6 million, up 9%; and the third-highest-paid, Richard Adkerson of Freeport-McMoRan Copper & Gold, got $55.3 million, up 294%. The CEO with the biggest pay jump was number-four-ranked Stephen Kaufer of TripAdvisor, whose pay jumped 510% to $39 million, followed by Sandeep Mathrani of General Growth Properties, whose pay of $22.1 million was up 424%. “The biggest driver for change in pay for 2013 vs. 2012 was the stock award, the equity given to the execs,” says Aaron Boyd, the director of governance research at Equilar — which, because the stock market had such a good year, boosted their pay significantly.
What’s more, 2013 isn’t a fluke: CEOs have been quietly (and some not so quietly) ratcheting up higher and higher paychecks throughout the past few decades. From 1978 to 2012, CEO compensation rose 875% — a rise that was “substantially greater than the painfully slow 5.4% growth in a typical workers’ compensation over the same period,” according to a study released last year by the Economic Policy Institute . Furthermore, the CEO-to-worker compensation ratio was 29.0-to-1 in 1978, compared with a whopping 272.9-to-1 in 2012, and CEOs now earn 202.3 times more than than the typical worker, compared with 26.5 times in 1978.
CEOs are even raking in loot at a far faster rate than very highly compensated professionals (those earning more than 99.9% of other wage earners). In the ‘50s, ‘60s and ‘70s, CEOs made 1.62 times more than ultra-high earners, but in 2010 that ratio was 3.08 times more.
Meanwhile, the 99% is struggling — and has been for decades, according to several studies. A report by the Census Bureau found that the real median income of Americans — $51,017 — is virtually unchanged from the late 1970s and early 1980s. And a study by the Economic Policy Institute released last year found that the median worker has seen wage growth of about 5% between 1979 and 2012, even as productivity grew 74.5% over that period. “The wage and benefit growth of the vast majority, including white-collar and blue-collar workers and those with and without a college degree, has stagnated, as the fruits of overall growth have accrued disproportionately to the richest households,” the study authors conclude.
Even workers who do get raises typically don’t see anywhere near the massive pay hikes that some CEOs get. Workers who were among the highest-rated employees in a company got raises of an average of 4.3% in 2013, an increase of just 0.2% from a year earlier, according to the seventh annual Compensation Planning Survey by Buck Consultants. And according to a survey by Towers Watson, the highest performers got an average salary bump of 4.6% in 2013, compared with 2.6% for average employees. And employees shouldn’t expect their employers to make it rain anytime soon: According to Towers Watson, employers are planning on doling out average raises of just 2.9% for salaried, non-management employees — virtually unchanged from last year. “With the job market remaining relatively soft, most companies aren’t feeling pressure to raise salaries by much more than the rate of inflation,” said Laura Sejen, global practice leader for rewards at Towers Watson .
CEO Pay Escalation is a ByProduct of USAPonzi
It is my contention that a significant portion of this CEO pay escalation can be attributed to the USAPonzi scheme massively undertaxing the U.S. citizenry and U.S. businesses.
As this website has repeatedly explained, USAPonzi is caused by the U.S. Government overspending, overcommitting, undertaxing, and lying by using corrupt and fraudulent accounting. The Government is spending much more than we can afford, is committing to provide a whole lot more social benefits than we can afford, is using an accounting methodology (Cash Accounting) that only assesses the taxes required to meet current year spending, and then does not tax the U.S. citizenry enough to meet even the current year spending. This Cash Accounting system totally ignores the growing liability for future year social benefit spending commitments. The much more informative GAAP Accounting system assesses the required level of taxes for not only the current year spending but also the additional taxes that are required to fund the social benefit trust funds sufficiently to meet the current year increase in future year social benefit commitments for the citizens that are currently eligible for these benefits.
As a result the U.S. Government has been dramatically undertaxing the U.S. Citizenry and U.S. businesses by a total, over the last 46 years, of $95.9 Trillion (as of June 1, 2014) and $6.4 Trillion during FY2014. This $95.9 Trillion is our current GAAP Obligation and the $6.4 Trillion is our GAAP deficit in FY2014.
Warren Buffett Warns Katharine Graham of The Washington Post Company
The following is an excerpt from the now famous 1975 letter from Warren Buffett to Katherine Graham then Chairman and CEO of The Washington Post Company about "the pitfalls of pension promises".
Start of Buffett letter excerpt.
So, rule number one regarding pension costs has to be to know what you are getting into before signing up. Look before you leap. There probably is more managerial ignorance on pension cost than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs. Actuarial thinking simply is not intuitive to most minds. The lexicon is arcane, the numbers seem unreal, and making promises never quite triggers the visceral response evoked by writing a check.
In no other managerial area can such huge aggregate liabilities - which will be reflected in progressively increasing annual costs and cash requirement - be created so quickly and with so little immediate financial pain. Like pressroom labor practices, small errors will compound. Care and caution are in order.
End of Buffett letter excerpt.
As Mr. Buffett's letter warns, future benefit promises create progressively increasing annual costs and that is the reason we today have such massive unfunded social benefit liabilities. The U.S. Government made the decision in FY1969 that none of these future benefits would be funded and as a result the U.S. citizenry and U.S. businesses have had a tax holiday for 46 years for this portion of our Government "spending". Funding these future liabilities has the same financial impact as writing a check but since it is a future expense it does not, as Mr. Buffett says, "trigger the same visceral response". Not funding these future liabilities means that the 'should be" payers of these taxes get to keep the money.
This $95.9 Trillion of undertaxing makes the U.S. citizenry appear to be dramatically more wealthy than they really are and makes U.S. businesses appear to be dramatically more profitable than they really are. Since these businesses have much more profit than proper tax assessment would reflect, it is easy for the companies to show strong earnings results and therefore make these businesses and their management (in particular the CEOs) appear to be highly successful. Also this dramatic undertaxing makes available huge dollars that can be paid to the senior management (in particular the CEO) in salary, cash bonus, and in stock options which also have an inflated value since the stock prices are also elevated because of this same massive undertaxing.
At the same time the U.S. citizenry that is anticipating the receipt of these social benefit promises is making current period financial commitments based on this promised future stream of benefits. This means that the Government is not saving for these future benefit promises and the U.S. citizenry is not saving for their own future spending needs which creates a much higher than affordable i.e. sustainable current period consumption rate (see U.S. "Real" GDP). This is also producing an ever increasing number of U.S. citizens that are expecting to receive what are totally unaffordable and unfunded social benefits and an ever decreasing percentage of U.S. citizens that are in the work force creating productive economic activity that can generate tax revenue to pay these benefits (see Joblessness-A Byproduct of USAPonzi).
By not taxing now to fund these future commitments the Government has created this huge GAAP Obligation ($95.9 Trillion as of June 1, 2014) and is increasing this Obligation by an exponentially increasing amount each year ($6.4 Trillion in FY2014) as measured by the GAAP spending deficit. This means that our future Obligation is increasing each year by more than twice as much as our current period income stream which is estimated to be $3.0 Trillion in FY2014 (see USAPonzi Fiscal Model). It does not take a genius to figure out that this is not a sustainable fiscal model.
But it does create a Ponzi scheme that is spewing off phantom money at the rate of $6.4 Trillion a year benefiting the wealthy and the powerful while ignoring the cost of funding the social benefits for the underprivileged but yet still promising to pay these benefits.
So how does USAPonzi cause CEO pay to escalate?
1) U.S. businesses (and U.S. citizens) do not pay enough tax to finance the Government "spending" with the FY2014 shortfall being $6.4 Trillion.
2) U.S. businesses appear to make a lot more profit because they don't pay enough taxes.
3) U.S. businesses appear more profitable and successful than proper Government accounting would indicate.
4) U.S. businesses appear more valuable because of the false level of profitability.
5) U.S. businesses have more positive cash flow because they do not have to pay these taxes so it appears that they can afford to pay management because of this false profit, cash flow, and false success.
It only takes a small portion of this $6.4 Trillion of undue tax relief to pay these CEOs (and senior mangement) a lot of money.
So, one of the byproducts of USAPonzi is the dramatically escalating CEO pay that has become a hot topic as noted in the above article in "MarketWatch" but is just one of the outrageous distortions created by USAPonzi and its corrupt and fraudulent accounting. It should also be noted that this compensation bonanza is not just for CEOs but it is also a bonanza for other senior managers. It is just more prominently publicized for the CEOs. This money is being pushed into the U.S. and global economy by the U.S. Government fiscal policy (undertaxing the U.S. citizenry) and it has to go somewhere. As U.S. Total Assets Bubble indicates, another place that these GAAP basis deficit spending dollars go is into the purchase of existing financial assets creating "asset price inflation" (see Inflation-A Byproduct of USAPonzi). But because this is a Ponzi scheme it is a temporary phenomenon that will end when USAPonzi implodes. The new and phantom money (our GAAP basis deficit spending), the elevated economic activity, the elevated corporate profits, the elevated stock market wealth, the elevated private sector net worth, the 1,426 billionaires, the millions of millionaires, the multitude of billion dollar hedge funds, the elevated real estate prices, the elevated CEO (and executive management) pay, and the promised social benefits are all an illusion created by USAPonzi.
Most people know about USAPonzi and choose not to tell
I am personally convinced that almost all CEOs know full well (and have known for some time) that they are benefitting massively from USAPonzi and choose to keep quiet so that they can continue to accumulate massive (but phantom) fortunes. Not one of them is willing to step forward and declare that the Government is using corrupt and fraudulent accounting. It is the Government that is running the Ponzi scheme so they do not feel compelled to declare to the U.S. citizenry and the world that the U.S.Government is running a Ponzi scheme.
I am also personally convinced that now almost all of the members of the U.S. Government know full well (and have known for some time) that they too are benefitting massively from USAPonzi. The members of the U.S. Government also choose to keep quiet so that they too can continue to benefit as long as possible from their positions of power plus they know that when USAPonzi is acknowledged it will implode creating a financial catastrophe of epic proportions. That is always the case with a Ponzi scheme, there is never a graceful exit.
The U.S. Government avoided catastrophe when the Housing Bubble burst by doubling down on USAPonzi by dramatically increasing cash basis deficit spending and bailing out the banking system, Fannie, Freddie, AIG, and the automotive industry. The only tool that the Government seems to have left in an attempt to contain USAPonzi is massive and exponentially increasing money printing and we know what happens when governments elect this option (see Roman Empire and Weimar Republic).
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