Editors’ Note: Let’s face it: Power suits are career enemies of the public interest. We are using the word “career” here and that’s no hyperbole. A power shift toward democracy is not only just, it is indispensable at this point if democracy is to have the slightest chance of surviving in America. Evidence? Just consider this: The CEOs behind the “Fix the Debt” campaign are doubling down, Fortune reports, on their drive to convince Congress to cut spending for Social Security and Medicare. Need we say more?
This Week
Who better deserves to be richly rewarded for the risks they take on the job, the corporate and banking execs who gaze out the windows of comfortable suites high up in Manhattan’s skyscraper towers or the veteran window washers who dangle outside those windows in the bitter cold and searing heat?
Those window washers, we know from a just-published New Yorker profile, face all sorts of dangers. The wind “blows capriciously” around tall buildings. Updrafts and cross-drafts can drive rain torrents every which way. The window washer survival rule of thumb: four stories. If you fall more, you die.
And what risk do power suits face if something goes wrong? Well, JPMorgan chief Jamie Dimon lost his bank $6 billion. The price he paid? He had his annual pay cut — to $11.5 million. Lehman’s Richard Fuld crashed his entire bank. He had to downsize to a plush new apartment where the living room only stretched 40 feet.
But most execs don’t have to ever worry about sacrificing. They just rig the game so they never lose. More on their charades in this week’s Too Much.
GREED AT A GLANCE
Defenders of our unequal social order are feeling a bit defensive these days — and taking solace from wherever they can find it. The folks at Fox News, for instance, are happily claiming that Downton Abbey, the hit public TV series devoted to life and labor at a 1920s British estate, is helping average Americans warm to rich people. Downton Abbey’s wealthy, says journalist Stuart Varney, come across as “nice” people who “create jobs for heaven’s sake.” More good news for fans of aristocratic fortune: Technology is solving America’s servant shortage! If you can’t find a Downton Abbey-style valet, the luxury Robb Report advises, you can now pick up a fully automated “gentleman’s closet,” complete with a Cognac-and-cigar bar and a golf simulator. Prices start at $2 million . . .
Starbucks CEO Howard Schultz collected $28.9 million in 2012, the java giant has just disclosed, an 80 percent hike over the $16.1 million he took home in 2011 when he ranked as the highest-paid chief exec in the Pacific Northwest for the third straight year. Why the big boost? Starbucks board members wanted to reward Schultz for “his critical role as the chief architect and leader of the Starbucks transformation agenda.” That transformation started humming late in 2008 when the company informed baristas that Starbucks would no longer guarantee them an annual “fixed employer match” to their 401(k) contributions. To “grow responsibly and profitably for the long term,” the company explained, “we need to use our benefit dollars in a way that provides the most value to the greatest number.” Or at least to Howard Schultz . . .
How well is the U.S. Treasury monitoring executive pay at the corporate and financial giants U.S. taxpayers have bailed out? Not so well at all, the special inspector general for the bailout reported last week. The three firms still under federal bailout watch last year — AIG, GM, and Ally Financial — passed along 18 requests to hike executive pay. Treasury approved all 18. Overall, notes special inspector general Christy Romero, 68 of the 69 execs Treasury tracked at the three companies took home over $1 million in compensation — and 16 pocketed over $5 million. The original bailout guidelines stipulated that executive pay at taxpayer-rescued firms should not top $500,000 “except for good cause.”
PETULANT PLUTOCRAT OF THE WEEK
Big U.S. corporations, General Electric CEO Jeff Immelt griped in a recent letter to shareholders, are getting “vilified.” In 2011, Immelt did try to turn that around. He agreed to chair President Obama’s Jobs Council, convinced, he confided to friends, he could move Obama right. Immelt’s CEO-heavy Council went on to advance a variety of corporate policy chestnuts — less regulation, lower corporate taxes — and made no real effort to find common ground with the Council’s labor union reps. Last week President Obama let the Council expire. Immelt can now devote his full attention to sending jobs overseas, underfunding pensions, avoiding taxes, and other aspects of G.E. business as usual. That business pays well. Immelt has averaged $10.3 million the last six years.
PROGRESS AND PROMISE
The CEOs behind the “Fix the Debt” campaign are doubling down, Fortune reports, on their drive to convince Congress to cut spending for Social Security and Medicare. Fix the Debt now has 80 full-time staff and a $45 million war chest. Meanwhile, the corporations these CEOs run continue to sidestep billions in taxes. But activists are pushing back — with a campaign to “Flip the Debt.” Loopholes and shaved tax rates for America’s top 1 percent, Flip the Debt points out, have cost Uncle Sam $2.3 trillion since 2001. Instead of “fixing” the debt with cuts to programs that help average Americans, say activists, we need to “flip the debt” and “put responsibility where it belongs.”
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Before you read on…be sure to download this INDISPENSABLE REPORT: Who Pays? A Distributional Analysis of the Tax Systems in all 50 States.
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Stat of the Week
Nearly half of America’s households, reports the Corporation for Enterprise Development, now rate as “liquid asset poor.” These 43.9 percent — 132.1 million people overall — don’t have enough savings to cover “basic expenses” for three months should paychecks suddenly stop. America’s 400 Forbes richest, by contrast, hold assets that average $4.2 billion each, enough to cover what might be termed “lavish expenses” — of $1 million per month — for 350 years.
IN FOCUS
If This California Mansion Could Speak . . .
. . . we would have a fascinating, first-hand history of the roller-coaster first century of federal income taxation
The modern federal income tax turns 100 this year. In Washington, D.C. this week, a distinguished panel of tax experts and historians will be marking the occasion with a special symposium. More such 100th anniversary events are coming. All will no doubt make an important scholarly contribution.
But if we really want to understand just what the federal income tax has accomplished — and failed to accomplish — over the course of the last 100 years, the best place to start just might be a majestic century-old mansion that overlooks Santa Barbara in Southern California.
This mansion and the federal income tax both entered the world the same year, 1913. The manse reflected the prodigious wealth of America’s original Gilded Age plutocracy. The income tax represented an attempt to shrink that plutocracy down to democratic size. That attempt succeeded, but only for a time.
Our latest contemporary sign of federal income taxation’s ultimate failure: A luxury realtor has just placed Santa Barbara’s grandest fine old mansion up for sale — for a whopping $57.5 million.
Frederick Forrest Peabody would be pleased.
A century ago, Peabody rated as one of America’s richest corporate execs. The company he ran manufactured Arrow shirts, and Arrow had become one of America’s most recognizable brand names. The rewards from this recognition? Immense. In 1909, Peabody’s company would declare a 300 percent dividend.
America’s captains of industry faced no taxes back then on dividends or any of their other earnings, and Peabody took full advantage of his rapidly expanding fortune. In 1906, for a sunny getaway from his upstate New York business base, he bought 40 ocean-view hilltop acres in Santa Barbara and a few years later dotted his new acreage with 7,000 eucalyptus trees.
In 1913, Peabody would begin building the home of his dreams amid the eucalyptus, a palace he would call Solana, Spanish for sunny place. Money would be no object. He filled the over 20,000 square-foot edifice with only the finest of finishings, from hand-carved mahogany to 17th century French oak paneling.
Money would be no object because Peabody didn’t have to worry about sharing any of his money with Uncle Sam. The new federal income tax enacted in 1913, right after the ratification of a constitutional amendment that opened the way to income taxation, would prove no more than a minor inconvenience.
Progressive lawmakers in Congress had pushed for a steeply graduated tax that subjected income in the highest income brackets to rates as high as 68 percent. The legislation finally adopted set that top rate at just 7 percent.
This top rate would bounce up during World War I but then sink to 25 percent in the 1920s. By that time, Frederick Forrest Peabody had stepped down from his captain-of-industry perch and settled into a comfortable life as a country squire. In 1919, he would move full-time to Santa Barbara from New York and entertain as many as 150 guests at a time within his opulent Solana space.
Solana, even so, would not prove satisfying enough for Peabody. He divorced, picked up a trophy wife in 1920, and then honeymooned at a 4,500-acre ranch he had bought the year before near a hot springs resort in central California.
Peabody would continue his extravagant spending ways as the low-tax 1920s wore on. In 1926, his outlays for landscaping would win Solana a stop on the annual tour of the posh Garden Club of America.
Peabody would not live to host another tour. He died in 1927, late in his 60s. His widow carried on at Solana. But her plutocratic world was changing, and the federal income tax was rushing that change along.
In the 1930s, under the pressure of growing mass movements for economic justice, tax rates on America’s highest incomes would begin to rise. By 1944, the tax rate on income over $200,000 had soared to 94 percent. The top federal income tax rate would hover near that level for the next 20 years.
Some of America’s rich, mainly the nation’s oilmen, had depletion allowances and other loopholes that shielded them from any significant tax squeeze. But the rich overall felt a real tax bite. By 1958, the year Peabody’s widow died, the nation’s top 0.1 percent had seen their share of national income shrink by two-thirds.
In America’s new tax-the-rich environment of the mid 20th century, manses like Solana, with their huge maintenance costs, had a hard time finding private buyers able to afford their pleasures. Great palaces of America’s plutocracy would soon, in the years after WW II, be turned into suburban subdivisions.
Solana, for its part, would sell in 1959 for just $283,000, a fraction of the estate’s former value. The buyer: the Center for the Study of Democratic Institutions, a nonprofit led by former University of Chicago president Robert Hutchins. The robust debates that took place at his Center, Hutchins announced, would serve as an “early warning system” for American democracy.
But Hutchins and his fellow deep thinkers never saw the danger to democracy that could come from a re-emergent plutocracy. The nation, they believed, had leveled plutocracy forever. Stiff taxes on the rich, they assumed, had become a permanent fixture of American life. They would be wrong.
By the mid 1980s, the high tax rates on high incomes that helped make Frederick Peabody’s Solana such a hard sell in the 1950s had all faded away. With their disappearance, America’s plutocratic order would soon reappear.
The nation’s top 0.1 percent, newly updated research from Berkeley economist Emmanuel Saez documents, collected 9.4 percent of the nation’s income in 2011, the most recent year with stats available, over triple the top 0.1 percent share in the late 1950s. This hefty top 0.1 percent share, Saez noted last month, “will likely surge” even more once the 2012 figures become available.
In other words, the luxury realtors from Sotheby’s now hawking Solana — for $57.5 million — don’t figure to be disappointed.
NEW AND NOTABLE
The Games Top Executives Play — and Fix
Ella Hale and Ryan Hyde, In a Rebounding Market, Fortune 500 Companies Granting Fewer Shares and More LTI Value, Towers Watson Executive Compensation Bulletin, January 29, 2013.
Advising corporations on executive compensation has become a lucrative sideline for corporate consulting firms. These firms like to claim they’re helping corporations match up “pay with performance.” But the entire CEO pay-setting process actually serves to make “performance” as irrelevant as possible.
Sometimes the consulting companies inadvertently spill the beans about the charades they’re playing. This new Executive Compensation Bulletin from the consultants at Towers Watson does just that.
In 2009, the bulletin details, Fortune 500 companies saw “a spike” in the number of stock option awards going to top execs. Options give their recipients the right to buy company shares several years down the road at today’s share price.
What made options so attractive in 2009? That year saw the worst of the Great Recession. Corporate shares were trading at their lowest levels in ages.
These shares, of course, figured to increase enormously in value over the next few years, as the overall stock market recovered, and, indeed, the stock market has recovered. Those CEOs who received big option grants in 2009 can now buy their company’s shares at 2009 prices, then turn around and sell them at today’s hugely rebounded 2013 stock market level. Automatic windfall!
With the stock market now back up, of course, new stock options rewards no longer make for sure windfalls down the road. An option to buy shares in 2018 at 2013 prices might not be worth anything. The stock market has already regained all the Great Recession lost ground. Overall share prices might now stagnate over the next few years — or even trend lower.
How is the CEO compensation community responding to this new stock market uncertainty? Corporations are shifting CEO rewards from stock options to just plain stock, shares that executives will automatically own in a few years — without paying anything — so long as they remain on the job.
Executives, once they gain title to these “restricted” shares, can sell them and pocket the proceeds as pure personal profit. So even if their company share price drops from $20 to $15 between now and then, they can still walk away with a $15 per share profit. More windfall!
Fortune 500 companies, Towers Watson reports, are now giving out 72 percent more restricted share rewards to their execs than five years ago. The number of stock option grants is now running 33 percent lower than five years ago.
And people wonder why CEO pay is rising endlessly upward.
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