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Post Capitalism
Created by Ronald Hilton on 05/22/04 9:20 AM

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Capitalism (Ronald Hilton, USA, 05/22/04 9:20 am)

For those who do not understand why our style of capitalism is unpopular in much of the world, here is one item (Insight, 4/13-26/04): "Wall Street's highest paid CEO, at $28.l million this year, is Stan O'Neal of Merrill Lynch, an African-American and one tough cookie. O'Neal has overseen the elimination of 17,500 jobs since 2001". RH: Insight is very right-wing and "one tough cookie" sounds like commendation, or "lean and mean". That an African American should behave this way should offset talk of racial discrimination. This makes me think that there must be something to the Last Judgment and Hell. It is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.

Tim Brown discusses the salaries of professors at the University of Nevada Reno, not a top private school: "More than 140 faculty (out of perhaps 600 full time) and eighteen administrators receive base pay above $100,000 per year. Some receive more than $200,000. Salaries are even higher in business well below the ranks of CEOs. The "Bank Vice Presidents," really the glorified title now given to branch managers, in my very small town mostly have salaries over $150,000 a year.

On CEOs with bloated salaries, while I viscerally also often feel many are over paid and empathize with workers who lose their jobs, in the real world of business the main reason for high CEO incomes is usually that a CEO who demonstrate the ability to increase profits and worth is rewarded by its owners, not its employees. Since labor costs are more often than not the largest expense of a business, slimming down the work force by increasing per employee production is a rather classic way of doing both. The railroads were forced by union agreements for decades to pay for totally unnecessary firemen and conductors. Take a look at a locomotive and any train when it now passes by and see if it has a second redundant person in the locomotive's cabin or a conductor in a caboose. They all lost their jobs when reality finally caught up with the industry.

I once had a student explain that he was paying for his education by working a job in an auto factory, making more than $25 an hour sweeping about 100 square feet of factory floor, nothing else. Asked what would happen were he to sweep 120, he answered, "the union shop steward would have my a--." Why? Because he would be infringing on the space and endangering the job of another union member who was sweeping the floor next to him.

While cutting employees is always very hard on the employee, it isn't always heartless. Nor is it always unnecessary if you want your business to remain competitive so that those who do not lose their jobs will be able to keep theirs"

RH: If the CEOs of big corporation deserve criticism, so do the leaders of many unions, whose actions can ruin a company. In California, grocery chains cut health benefits to meet competition and the unions struck. The chains lost millions. There is something wrong with the system.

Randy Black says "The Insight story fabricated the numbers and facts pertaining to Stan O'Neal's salary as it compares to other Wall Street CEOs. He is among the highest on Wall Street, but it is not possible to identify the highest paid due to the structure and pay out schedules related to stock options, bonus payments dates, etc. Further, under his leadership, Merrill Lynch's net income for 2003 was $3.99 billion, up 55% over 2002. Factually, his salary is $500,000 annually. Not $28.1 million. He received a bonus of $13.5 million, $11.2 million of restricted stock, and various stock options valued around $2.8 million. Depending upon when he is able to exercise his options, he may be paid more or less. The 52-year-old O'Neal is Chairman, CEO, President and COO of the firm and its 48,000 employees. His undergrad degree is from Kettering and his MBA is from Harvard, class of '78." RH: These details do not change the essence of the story. Those who cannot see how the world views this things is comparable to those who thought the US armed forces would be given a roaring welcome in Iraq. They are insensitive to world opinion.

Regarding excessive pay for CEOs, Cameron Sawyer said: "Society's interests are, in my opinion, aligned with the interests of the shareholders of companies, big and small. For the economy to work, companies much grow and produce profits, in order to create wealth, investment, and jobs. If companies are run badly, the whole economy goes to hell. Top management is the lynchpin of this system". John Heelan says: "If Cameron changes "shareholders" to "stakeholders", I would agree with him. The stakeholders comprise not just the owners of the company but also the employees and management (some might also the suppliers and subcontractors of major companies).

Concentrating solely on the shareholder's rights distorts the role of the company for the common good. As Cameron notes, top management is crucial to the success to be enjoyed by all stakeholders. However, they should be rewarded only in terms of that success. "Golden parachute" contracts by which top management are rewarded even if they are dismissed for failure should be made illegal as they remove personal risk from those managers and reduce long-term commitment.

The hi-tech industry that was my life for several decades had two theories about such top managers. The first was the "Seagull Theory" which suggested that some top managers fly into a company, deposit their detritus in the form of unworkable strategies and fly out before those strategies failed- normally a 2-3 year cycle. The second was the "Turkey Theory" which suggested that whenever an industry was in dire straits (as the computer industry was in the late 80s-90s), the top managers of the various companies changed to other companies in the same industry. As the theory said: "Different trees, same turkeys".

Discussing salaries, Randy Black says: "The office of the President of the USA has always been considered as a volunteer stewardship and has been paid along those lines. If the President of the US was paid a percentage of the revenues, he or she would earn billions, instead of $400 grand. The reality of corporate CEO salaries is that we only hear about the ones who make a ton and almost never hear about CEOs earning lower wages. Many people worry that a guy like O'Neal, for instance, earns millions while ignoring those earning less than $100,000 annually. Plenty of scientists earn above $100,000. I would imagine that with little trouble, I can confirm that there are scientists earning in the millions. So what? If they earn it, they earn it. The top physicists in the US earn well above $100,000 annually. If they get into management, the sky's the limit. A full professor at a major university earns well above $120,000 annually, before add-ons for consulting work". RH: I had never heard that the presidency of the United states was considered a volunteer stewardship. My point was that his case shows the absurdity of paying a CEO a percentage of revenues.

Of course I have great sympathy for CEOs earning a reasonable amount. My main objection is to CEOs who heartlessly fire thousands of people and then increase their own bloated salaries. The history of university salaries is interesting. When I came to Stanford the capitalist system prevailed. One university backer notoriously said "Perfessers is cheap". Professors teaching in the humanities received insulting salaries, while scientists who could go into industry received handsome ones. The result was bitter resentment among the first, similar to that of fired workers today. As a result, a salary scale was introduced, and now there is some kind of balance. Anger over salaries has practically disappeared. There may be a lesson here.

Regarding excessive pay for CEOs, Cameron Sawyer says: "We've discussed this before. The simple fact is that corporations compete for a limited pool of CEO talent, both among themselves and with entrepreneurial opportunities which such people have. Europe and the U.S. are very different in this because the U.S. has a more dynamic economy and it is much easier for a CEO-type person to simply start his own company. O'Neal was being paid less than 1% of Merryl Lynch's earnings.

That is much less, by the way, on a percentage basis, than the manager of a McDonald's restaurant is paid. I pay good managers a much bigger percentage of the profits they are responsible for. I think Merryl Lynch's shareholders were getting a good bargain, if O'Neal was running the company as well as it sounds. When I retire, I will have to find someone to run my own company. As the main shareholder, I worry much less about how much such a person will cost (he or she will surely get a big share of profits, much more than 1%) as whether it will be possible to find someone really competent. Really good CEO's are exceedingly rare and exceedingly sought after. Even slightly poor performance of such a person causes losses orders of magnitude greater than the person's salary. As a shareholder, you would gladly pay double, say, in order to reduce the risk of that; and that is how these CEO salaries get to be what they are. It is a bargain between shareholders and managers. You cannot expect shareholders to get all of the benefits of a well-run company without sharing it with the managers.

Society's interests are, in my opinion, aligned with the interests of the shareholders of companies, big and small. For the economy to work, companies much grow and produce profits, in order to create wealth, investment, and jobs. If companies are run badly, the whole economy goes to hell. Top management is the lynchpin of this system".

RH: There are more workers than shareholders, and society's interests should be aligned also with the interests of the workers. I am not sure that in corporations one rises to the top on the basis of competence alone. From my observations, executive success is often the result of skillful intrigue, and in some cases of criminal instincts which result in jail sentences. First class scientists are more difficult to find than CEOs, yet they get paid only a reasonable salary. The same goes for armed forces generals. Reasonable compensation cannot be calculated as a percentage of receipts. Suppose we paid the president of the US on the basis of a percentage of national revenue? Running the United States is a far more important job than running a corporation and it offers less security: two terms and you're out. It makes no sense that CEO's should earn ore than the President of the US.

A posting criticized a system in which Stan O'Heal received a salary of millions while firing thousands of workers. Randy Black defends the system: "Stating that O'Neal fired thousands of employees while earning a fabulous salary does not portray and accurate nor the entire picture of the firm's efforts to survive the terrorist attacks on the USA, a bear market and the resulting recession in our national economy. The record shows that O'Neal was not in a position, nor did he earn a fabulous (your words) in 2000. He did not attain the title of President and COO until July '01 shortly before the attacks and subsequent events that had negative impacts on thousands of American businesses. Let's look at the payroll versus earnings of Merrill Lynch. These numbers are from Morningstar.com. 2000, ML's payroll was $7.3 billion, earnings was $3.7 billion; 2001, payroll was $9.23 billion (O'Neal became President/COO in July, near the end of their fiscal year), earnings was $573 MILLION (note the drop off); 2002, payroll was $5.4 billion, earnings, $2.5 billion; 2003, payroll was $4.9 billion, earnings was $3.9 billion. O'Neal became President in July 01, CEO in Dec. 02, Chair in Apr 03. Employment at beginning of 2002 was approximately 57,000. Today, it's approximately. 48,000.

Shareholder value has increased enormously under O'Neal's leadership at a time when he inherited a severe bear market that dates to 1999, and only turned around in the past year, coupled with the economic impact of 9-11 and the resulting fallout caused by the WorldCom, Enron and other debacles. Layoffs to save a company are responsible actions. Don't misunderstand my intentions, I have suffered through three layoffs in the past 20 years and totally sympathize, but O'Neal is a brilliant leader who likely deserves every nickel that he receives."

RH: I am unconvinced by this argument. There are thousands of medical researchers working for a moderate salary, They are not firing thousands, but trying to save millions of lives, including perhaps that of Randy Black. Firing thousands of workers makes compassionate conservatism seem like a bad joke. Everyone needs a living wage, within a reasonable range, but we must learn to work as a public service, not in order simply to make more money, and we must stop judging people by the amount of money they make. Volunteerism if finally becoming an important factor in our society: Thousands of people are working without pay to improve society in different ways. Miles Seeley says:

Perhaps Randy Black would be interested in reading the latest Time Magazine about how CEO salaries in Europe are declining. Stockholders and the public are beginning to react against the (in my opinion) obscene amounts CEOs of large corporations are paid. It is a world concern when the same CEOs are firing thousands of workers in attempts to improve their bottom line and thus their stock value. There seem to be two different forces at work here: first, the need to downsize and globalize and become more lean and mean; and second, the remunerations the heads of the companies are paid. Boards of Directors say they must pay these salaries and options because the pool of people talented enough to run big companies is so small. According to other articles I have read, that is simply not so.

Whatever the validity of the above, it is outrageous that a CEO who has headed a major company that is losing money, should be given big pay and options increases. Investor value shrinks, people are fired left and right, and he prospers mightily". RH: Outrageous, yes, but it is simply the expression of the greed which seems to be dominant in our society.

Regarding the case of Stan O'Neal, who earns a fabulous salary while firing thousands of workers, Randy Black asks: "What does the income of a Wall Street CEO have to do with world opinion? Surely you are aware that the heads of public companies across the world earn similar incomes". RH: Two wrongs don't make a right. This week French TV ran a program about the same problem in France. Faced with this criticism, one executive used impolite language, which did not improve his image.

Corruption outside of the US

Randy Black says: "Mr. Guimares cites three examples of poor management of public US corporations while ignoring thousands of properly run firms. Why is it that many can cite only Enron, WorldCom and Global Crossing, yet ignore the criminal acts of European, South American, Japanese thieves that make Enron look like small potatoes? Italy, Parmalat, $11 billion stolen from shareholders; Royal Ahold, $2 billion and counting, Denmark; Skandia, Vivendi, the list seems pretty full, yet the US takes the brunt of the attacks. Bottom line: The US has no monopoly on mismanagement.
Incidentally, Enron in 2004 has more than $40 billion in assets and more than 12,000 employees. The firm is hiring, not firing. Global Crossing had revenues of about $3 billion last year and is no longer in bankruptcy and is also hiring. WorldCom (now MCI), also completed its reorganization and today employs 50,000, has business in 120 countries, and also is hiring". RH: Small potatoes?

Miles Seeley doesn't like Randy Black's choice of words: "Randy Black says Enron etc had "poor management," while foreign firms were "thieves." My oh my! I guess I need some serious attitude readjustment, perhaps by the likes of the infallible Paul Wolfowicz".

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