Outrage over CEO pay is so last quarter

The latest casualty of the recession is the pitchfork industry.

Only a few months ago, Americans were outraged over supersized executive compensation. It was epitomized by the nearly 700 Merrill Lynch employees who earned more than a million dollars in 2008 as the company was headed for collapse. Or Merrill's CEO John Thain, who spent $1,200 of company money on a trash can at the height of the crisis. Thain's pay package, valued between $50 million and $120 million, would have been fully realized over a number of years and if the stock price rose. His base salary was $750,000. He also received a $15 million cash signing bonus for joining the firm.

Closer to home, Kerry Killinger of Washington Mutual was paid $18.1 million in 2006 and $14.4 million in 2007 as the thrift was digging a fatal hole with risky subprime mortgages. Upon being sacked, Killinger expected his $16.5 million cash severance. In exchange, WaMu shareholders were wiped out and Seattle won the distinction of hosting the largest bank failure in U.S. history.

Priceless executive talent? In both cases, the newest person in the mailroom could have done a better job steering these firms. And remember, these are publicly held corporations, owned by shareholders. The CEO is just the hired help.

Yet the Howard Beal moment seems to have passed. Americans are no longer mad as hell and they seem ready to take it quite a bit longer. There will be no mobs with pitchforks invading the posh precincts of Darien, Conn., and Palm Beach. While President Obama has talked about reining in excessive CEO compensation, the rules being proposed by Treasury Secretary Timothy Geithner are feeble. Reform remains stalled in Congress.

Most top executives in The Seattle Times analysis of compensation would barely make the servants' quarters of the big-timers back East. At Chesapeake Energy, CEO Aubrey McClendon took home $112.5 million. Motorola's Sanjay Jha received $104.4 million. Even Ken Lewis, the embattled chief of Bank of America, was paid $9 million, despite the bank requiring a federal rescue and adding 30,000 people to the ranks of the nation's jobless.

And 2008 was a year of executive pay cuts.

Also, consider that the highest paid CEO in 1950, General Motors' Charles Wilson, received $4.4 million in inflation-adjusted dollars.

Yet dysfunctional executive compensation is not a sideshow to the great recession. It is one of the causes. WaMu is only the example closest to home. With a passive board, Killinger was compensated for growth that was unsustainable and ultimately fatal for stockholders — the ones directors are supposed to look out for.

Nell Minow, editor of the Corporate Library, an independent research firm that focuses on corporate governance, broke down the problem regarding Lehman Brothers that nearly caused the financial system to collapse. In testimony before a U.S. House committee last year, she described how Lehman's performance had been poor to failing from 2004 onward. Yet CEO Richard Fuld's five-year compensation package totaled $270 million.

"There is no more reliable indicator of litigation, liability and investment risk than pay that is not linked to performance," she said. "I think it is fair to say by any standard of measurement that this pay plan is as uncorrelated to performance as it is possible to be."

As with WaMu and other failing firms, the board was ineffective and the pay plans failed to provide incentives for sustainable growth in return on investment. CEOs didn't face a downside risk for bad management. By the way, Minow describes herself as a "passionate capitalist."

Unfortunately, the battle over executive pay has been going on for 25 years and not much has changed. Compensation at large publicly held firms was relatively stable from the 1940s through the 1970s. Then it began a rapid ascent — even as wages for most workers began to falter — bolstered by the "star CEO" cult built around General Electric's Jack Welch.

According to Harvard's Rakesh Khurana and Andy Zelleke, executives of large corporations in 1980 received compensation equivalent to 40 times what the average worker took home. By 2007, it was 360 times more.

Efforts to give average shareholders more say over compensation have come to little. The good ol' boy network on boards largely continues.

The offices of chairman and chief executive, which should check each other, are usually held by the same individual. Big institutional investors, who hold great power, have been reluctant to upset the status quo. Defenders of the current system argue companies should be allowed to pay whatever they choose.

Executive pay has become more and more disconnected from the domestic economy and the well-being of employees.

The wages of average workers stagnated through most of the 2000s as income inequality reached its highest gap since the eve of the Great Depression. Although productivity rose, workers saw little of it reflected in their pay.

Government shouldn't be capping executive pay, except where it involves companies now owned by the taxpayers. It can, however, raise taxes and close loopholes on high compensation.

Also, the government could tax golden parachutes heavily and take away the distorting tax advantages of mergers, and maybe executives would spend more time leading productive work and less time shopping their companies.

Beyond that, we can hope that Obama's slow push might result in corporate governance reform. Otherwise, we must wait for fresh disaster and see if Americans put down their myriad electronic distractions and reach for the pitchforks.

You can reach Jon Talton at jtalton@seattletimes.com.

This column was originally published June 21 and corrected June 29. The original column provided incomplete information about the pay package of former Merrill Lynch CEO John Thain, saying only that he received a pay package valued between $50 million and $120 million