THIS TEAM

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THIS TEAM

• Team members
• Corrina Ortiz Heidi Welberry
• Roland Sandoval Xinchen Han
• Steven Law

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Are American CEOs overpaid? Should their pay be
restricted?
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A Few Stats

• From 1990 to 2003 in the U.S.
• Inflation rose 41 average worker pay rose 49
• Corp profits rose 93 average CEO pay rose 313
• Average weekly paychecks in 2003
• US worker 517 large firm CEO 155,700
• In 2003, U.S. CEOs earned 301 times the avg
  worker (3011)
  
• Up from 2821 in 2002, and 421 in 1982
• Currently, Great Britain is 351 and Japan is
  201
  
• From 2000-2002, U.S. large firm CEOs averaged
  14.2M/yr
  
• Similar Japanese CEOs averaged 421,000/yr
• In 2001, 58 of U.S. CEOs pay were stock options
  
  
• From 1992 to 2001, the top 5 execs of largest
  1,500 U.S. companies made 67B in stock-options
  
• In 1992, 1 million employees received options

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In 2004, Bank of America announced 12,500 US jobs
cut. In 2003, CEO Lewis earned 37.9M (a 110
raise).In 2001, Tyco laid off 11,300 workers.
In 2002, CEO Kozlowski earned 71M (a 34.7M
raise), even though he was forced out in
disgrace mid-year. In 2000, Oracle CEO Ellison
exercised 706M in options while his companys
stock dropped 50. In 1998, Black and Decker
laid off 3000 workers, while CEO Archibald took
a 360 pay hike to over 50M.

• Deserving CEOs???

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A typical year2000

• Yahoo reported a profit of 71M, but adjusting
  for employee stock options would have been a loss
  of 1.3B.
  
• Cisco reported 4.6B in profits, which should
  have been a 2.7B loss.
  
• Qwest Chairman Anschutz made 1.9B in options,
  and CEO Nacchio made 23M.
  
• Enron Chairman Lay cashed in 123M in stock
  options, and CEO Skilling took home 60M.
  
• At Global Crossing, Gary Winnick cashed in 73M
  in stock options.

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So whats the problem?
Lower morale, higher cynicism
Firms with widest pay gap have lower product
quality higher turnover. The smaller the gap be
tween high-low workers, the higher the team per
formance. Wider gaps do not improve high-paid wo
rkers, but do lower the performance of lower-paid
workers Only 1.7 of non-executive workers got st
ock options in 2000 30 of options go to top 5 em
ployees Other 70 spread narrowly among other ex
ecs managers
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Less capital reinvestment Cuts in RD, pursuing n
ew markets, employee training
Wealth influences government Wealthy campaign co
ntributors impact political processes, laws
regulations. Board room cliques Executive pee
rs retired CEOs sit on boards compensation
committees
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• Options dilute stock value
• The more company shares are issued, the less each
  share is worth
  
• Earnings per share is reduced.
• Short-termism Stock options tempt execs to
  boost short-term market value, not long-term firm
  value.
  
• Bottom line
• By not expensing stock options in financial
  statements, companies report inflated profits to
  shareholders
  
• Overvalued companies are good for CEOs, but bad
  for workers, investors, the economy.
  
• Taxpayer burdens
• By deducting exercised stock options from tax
  returns, corporations reduce tax burden, shifting
  tax to citizens.
  
• Corporate share of federal taxes dropped from 12
  in 1996 to 8.7 in 2001.

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What are stock options?

• Managers employees who hold stock options can
  buy stock at a fixed strike price at any future
  date.
  
• If stock goes up, holder profits if declines,
  orgs frequently reprice
  
• But orgs dont give free shares to stockholders
  in falling market
  
• Stock options distort companys financial health
• Fixed-price stock options are only compensation
  companies dont expense
  
• Options are only a footnote in financial
  statements
  
• But corporations receive tax deductions based on
  compensation execs receive from cashing in options

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IMPACT

• In 2000, Microsoft took a 5.54B tax deduction
  for exec stock options, Cisco took 3.08B, Enron
  took a 1.4B
  
• Had options been expensed in 2001, SP 500
  earnings would have been 21 lower, and IT sector
  39 lower.
  
• Proposed regs would require fixed-plan employee
  stock options be expensed for the CEO 4
  highest-compensated executives.
  

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WHO GETS HURT BY THIS?

• Shareholders---with CEOs gaining larger
  incentive packages, profits are taken away from
  the company and therefore away from the
  shareholders.
• Employees---when employees discover that their
  leaders are earning large amounts of salary while
  they earn little, it causes stress at work and
  leads to a fall in moral, production and an
  increase in turnover

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SALARY DISCREPANCIES
CEO155,700 Worker517
Amounts are per week
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COOL QUOTES
I hold it to be our duty to see that the wage
worker, the small producer, the ordinary
consumer, shall get their fair share of the
benefit of business prosperity.

Theodore Roosevelt, 1912 Its wrong to drive a
company into the ground and have the boss bail
out with a golden parachute to a cushy life. The
government should not support such largesse
through unlimited tax deductions.
Bill Clinton
Can we afford a 2B subsidy to businesses who pa
y their executives unlimited compensation?
Senator Tom
Daschle By reporting make-believe profits, comp
anies may have conned investors into bidding up
their stock prices.
Money Talks, 04/18/02 Virtually every c
orporate disaster that has struck in recent years
has had a stock option component.
Senator Carl
Levin
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SUGGESTIONS

• Put regulations on the bonus packages and force
  the CEOs to actually work for more long-term
  vs. short-term goals to earn
  
  their bonuses.
  Dont let them
  lounge around to earn their money
• Do not allow CEOs to swap their old stock
  options for new ones to counteract new
  regulations.
  
• Allow shareholders to have more say in
  the pay/incentive
  packages given to CEOs

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CLOSING

• In closing, we believe that companies will fare
  better when CEOs are capped on how much money
  they are able to make through salary and bonuses.
  
• Workers will produce more, work harder, and be
  more enthusiastic about their work knowing that
  there are larger bonuses and larger salaries
  available to them since the CEO is no longer
  getting all the money.
• Over time, profits will increase more, therefore
  allowing more bonuses for everyone involved,
  including CEOs.
  
• Exit packages should also be regulated to prevent
  harm to the company when the CEO leaves and
  cashes out their stock options.