Pearlstein: Executive Pay

Steven Pearlstein
Washington Post Columnist
Wednesday, April 9, 2008 12:00 PM

Washington Post business columnist Steven Pearlstein was online Wednesday, April 9, at Noon ET to discuss bonuses for top executives.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Pearlstein was honored with the Pulitzer Prize for commentary on Monday for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.

Read Pearlstein's latest columns.


Boston, Mass.: Steve - CONGRATULATIONS!!!! Those years at 'GBH seem SO far away...Wu (WCVB TV, Boston)

Steven Pearlstein: For those of you just tuning in, your correspondent has had a pretty good week, winning the Pulitzer Prize for Commentary. It's a great honor and very humbling, considering all the real giants who have won this award in the past. Many friends and readers have written wonderful notes, and I"m only now getting a chance to answer them, so please pardon the delay.

This little one comes from my former colleague, Janet Wu. We were reporters together back at the Ten O'Clock News at WGBH TV in Boston. And here's a little story that tells you why Wu is still in television and I'm not.

One day we go out to a diner for lunch near the station. As we are walking to our booth, an old lady calls us over very excited. "Janet Wu, you are my favorite reporter. I watch you every night on the Ten O'Clock News."

So Janet, being very polite, pulls me over and says, "Well, you must know my colleague Steve Pearlstein, who is also a reporter." And the woman replies, "No, never saw him."

Inasmuch as I was on air pretty much as often as Wu, I knew at that precise moment, I knew my on screen career would be soon coming to an end.

Thanks, Wu.


Santa Barbara, Calif.: Steven, I am so happy for you! Well done! Keep up the good work. Best, Michael

Steven Pearlstein: And this one, from my brother in law. Thanks, Michael.


Annandale, Va.: Okay so have you gotten used to the modifier "Pulitzer Prize winning business columnist" yet? Congratulations Mr. Pearlstein! Of course I'll still need rank on you when you are too soft on the ideologues who distort the system and ruin it for the little guy.

Steven Pearlstein: Thank you. And please, yes, keep me honest.


Minneapolis, Minn.: Congrats on your Pulitzer Award. After reading your columns last year, I took a serious look at my 401k from work and made some adjustments in March that I now am really glad I did. My question for you is when these investment banks or other financial institutions say they have taken a loss, or a write down of assets, what happens to those assets? Are they just written off like they don't exist? Are they still worth something?

Steven Pearlstein: Well, when a bank writes down an assets, it is acknowleding that the market value of those assets has declined from what it was last quarter, or what it paid for them. That's what the accounting rules require-- mark to market. But it doesn't mean that the bank is necessarily going to sell them into that market. And, indeed, if it holds on to those assets long enough, the market for those assets may well improve and then it will record the increased value as a gain later on, which will add to its profit in some future quarter. Or it could get worse. In the case of mortgage-backed securities, for example, if the bank holds on to the security until it comes due, the extent of the loss will depend on how many mortgages are foreclosed upon and how much of the principal is never recovered. Nobody can know that for sure at his moment, including the market, which may be oversold because money managers are generally not in a mood to be buying mortgage backed securities at the moment. But if the market price falls far enough -- and some think it already has -- then money managers might start buying again, and in that instance the prices would begin to rise.


North Dartmouth, Mass.: Steve, Why is this allowed to continue? We see CEO's making obscene salaries,some not even raising stock prices,or worst. They even have the temerity to cut thousands of jobs while enriching themselves. Time for government intervention? Next administration, not this one.

Steven Pearlstein: No, not time for government intervention, actually. But it surely is time for people to treat CEOs who behave in this way like social and political paraiahs, which is probably the only way we are going to change corporate behavior.


Washington, D.C.: With the downturn in the mortgage industry having an affect on private equity companies, what are your thoughts on the continued viability of private companies like J.E. Roberts Co., which is a private equity company that focuses on real estate?

Steven Pearlstein: I suspect JE Roberts has taken some hits, but it has also probably taken some opportunity to buy some oversold assets at very cheap prices, and may have already begun to recoup some of its earlier losses. Remember, Joe started out by buying depressed real estate assets after the S&L crisis, so he knows how to do this stuff.


Mount Pilot, N.C.: I am shocked by your callous opinionizing about our great American leaders: our CEOs. How dare you criticize them for their salaries and bonuses. They deserve every penny of them for the great work they do in making this country great. If it weren't for them we would all be wallowing in primitivism. If skycaps want to make more money then they should become CEOs. It is just your kind of nitpicking that will bring this great country down. Without a wealthy elite, nothing would ever have been achieved in this country and nothing ever will.

Steven Pearlstein: And you forgot to mention how much they contribute to charitable causes!


Houston, Texas: There has been a lot of press coverage lately about the cost of gasoline and record profits of oil companies. One thing I have not seen a lot of is the pay structure for oil executives. By this I mean not just the top guys. I live in Sugar Land Texas, a fairly wealthy suburb of Houston. A good portion of my neighbors work for big oil companies. However, I still don't understand exactly what most of them do. They all seem to get home by 4 each day, and only work 4 days a week at that. Many retire at 50-55 and live in million dollar homes and drive expensive SUVs. I'm wondering how much of the cost of gasoline is wrapped up in a sizable population of mid-level executives with excessively generous pay and retirement packages for doing basically next to nothing. Am I off base here?

Steven Pearlstein: Well, it looks like there's a Pulitzer prize to be won by some enterprising Houston Chronicle reporter!

Truly, however, executive compensation as a percent of revenue in the oil business is probably a pretty low number. It may drive you crazy to see them get so rich so easily, but that's not driving up the price of gasoline.


Freising, Germany: I've been meaning to read, "The Walmart Effect" by Charles Fishman for a while now, in order to gain an appreciation for the pros and cons of minimum wage legislation. I once mentioned on one of your chats that I was surprised that many low earners in the U.S. didn't support minimum wage legislation, and you replied that these people don't perceive themselves as members of the downtrodden Working Class, a term which evokes the image of Communist East Europe. They may still believe in the American Dream, but aren't the low wage earners slowly losing the ability to move up the ladder of affluence in the U.S.?

Steven Pearlstein: There is a significant underclass in the United States that, over the generations, has proven unable to move up the ladder. But in general, mobility is still pretty good here and Wal-mart cashiers can grow up to be Wal-mart managers or accountants or business owners if they have the skills and the drive and the luck.


Annapolis, Md.: Why is the business press, including yourself, ignoring the most culpable party in the subprime bubble? This is rating agencies. Without their negligence, or maleficences none of this could have happened. A Sarbanes/Oxley sampling requirement of investments would appear a logical outcry. Thanks

Steven Pearlstein: Who says we're ignoring them. I'm not aware of any serious discussion of the subprime mess that doesn't give their screwup prominence. The more difficult question is what to do about that. They will be sued from here to kingdom come over the next few years, and the courts will have to decide whether their free speech rights -- the right to express their opinion -- gives them immunity from legal responsibility. And there is the question, if they are liable, of whether their bankruptcy will really do anyone much good. But I think one thing we can say, going forward, is that nobody in the future will want to rely on credit ratings as much as investors did in the past. They may be one factor to guide an investor, but the AAA rating can no longer be relied on to be as safe as a US Treasury.

We also need to change the way rating agencies are paid, so they do not have such a big financial incentive toward ratings inflation.


Reston, Va.: Great column today! Airlines and executive compensation are two of my favorite topics. Do you think there's any hope for getting some sanity into executive pay or will this just continue to be ridiculous? The bonus structures that cause corporations to maximize short term gains while neglecting long term problems really bothers me. It's also disturbing how executives tend to hop from corporation to corporation regardless of how a company performed during their tenure, e.g. Stephen Wolfe who went from United to US Airways and harmed both.

Steven Pearlstein: I've somewhat given up on most public policy solutions to the executive compensation problem. As I said before, social disapprobation is probably the strongest tool. In the press, I think we should most just ignore them. They have already lost their legitimacy in terms of public policy debates -- from a political standpoint, nobody cares what CEOs think about anything any more. And the press, for the most part, doesn't lionize them much any more. They seem to have adopted the attitude that they are unfairly tarred because of compensation and have given up trying to convince us that they are right and we are wrong. So there's something of a stalemate, which I think won't change until a new generation comes along that has different values. My own attitude is basically to ignore them.


McLean, Va.: I don't know. If I put myself in the CEO's shoes, this seems like at least two separate issues. First issue: can the market for curbside luggage service bear a $2 charge? Apparently, it can; otherwise, the airlines would have retreated on that by now, as they do with many of their attempted fare increases. Second issue: am I satisfied with the wages paid to my skycaps? Well, as CEO, my duty is to decrease costs as best as I can, but balancing that against the best service my company can provide. Right now, as CEO, I'm just as satisfied with this as I was two years ago. I am paying the skycaps the same amount, and they still have incentive to hustle and provide good service. It's still probably unjust that the skycaps are bringing home less money. But does that necessarily fall to the CEO to correct, sua sponte? Where is the union? Why don't the skycaps walk off the job? Could it be relevant that $80 in tips plus $41 in wages, while certainly less than $200 in tips plus $41 in wages, is better than most workers of similar training and putting forth similar exertion are faring? I'm not suggesting that it should be anathema for the CEO to give the skycaps a bit more. But I don't know if the CEO should get the most blame for it. There are constituencies that exist to maximize the workers' pay; the CEO is not among them.

Steven Pearlstein: Well, I'm happy to go toe to toe with you on this analysis. But there are two problems with it.

One, now that their pocket has been picked by their employer, the porters will become as surly as the rest of the airline employees and the one service that people still like will decline in quality. And, as time goes on, you can bet that airlines will raise these fees to the point that fewer people will be willing to pay them and go inside, where the lines will become even longer and customers will have to show up evern earlier and the quality of the flying experience will decline even below where it is now. And in the long run, that is not good for the industry or for current competitors, who will become vulnerable to service challenges in the future the way they were vulnerable to price challenges in the past.

Second, if the company can get away with raiding the tip jar of the porters, then why doesn't it try to do the same with high-paid executives. You will say that market is much more competitive and they don't because if they did they would wind up with inferior executives. And I'd say: how would you know, since nobody has tried that one. And how do you know that the industry is not paying the opportunity cost for not paying its porters more and getting a higher level of service?


Annapolis, Md.: Congratulations on the Pulitzer. Why hasn't your producer updated this page with six or seven uses of the adjective "Pulitzer Prize-winning"?

Steven Pearlstein: I don't know. Let's ask her.


Great Falls, Va.: Sincere congratulations on your honor. It was well deserved.

Steven Pearlstein: Thanks.


West Chester, Pa.: In your article you state that "Up to that point, the skycaps had been paid $5.15 an hour, below minimum wage, but typically took in $200 a day in tips ..." But according to the Boston Herald, the skycaps' pay was initially $2.63 an hour but went up to $5.15 an hour after the $2 fee was imposed. Who's right--you or them?

Steven Pearlstein: I was just relying on a report by USA Today, I believe. It may have been that moving to a mandatory fee system put the porters in another category for the purposes of minimum wage. Or it may be I'm mistaken.


Capitol Hill: Steve, is the problem more systemic than just greed? I think it goes much deeper into our way of thinking. Under the old industrial age Taylorist model, jobs were divided into thinkers and doers. Managers (engineers, scientists, etc.) were thinkers; front line workers were doers. Thinkers told the doers what to do and how to do it. Front line workers did what they were told. While the more rigorous application of Taylor's Scientific Management (like time-motion studies) survives in only a few places, the mentality of the division of labor remains rooted in our psyche. Overlay this deeply rooted mindset with a thin veneer of the information age rhetoric of "employees are our greatest asset" (with little understanding--or, more likely willingness to understand--the deeper meaning of that phrase). The result is what you describe. Obviously, in the information age, "thinking" is important. So managers (thinkers) are seen as important intangible assets and given high compensation in order to keep that asset; front line workers such as the porters (doers) are invisible.

Steven Pearlstein: I think you've hit the nail on the head. The only thing is that, in a service business, if your doers (particularly the doers who interact with customers) aren't becoming thinkers, then you are in trouble.


Re: Moral Outrage vs. CEOs: I don't agree that moral outrage will work. Ordinary people don't matter to this class of people and their disgust won't effect their behavior. People may be outraged, but unless stockholders decide to pay attention to who sits on the compensation committee (something not noted for being interesting or drawing attention) and unless corporate board members come from a diverse group or cross-section of ordinary people instead of a diverse group of professional board members, there won't be any reform.

Steven Pearlstein: Look, I didn't predict there would be any reform. I've sort of given up on that. I don't think there's a way to crack this nut, the way modern corporations are structured. I think the only thing we can do is to treat these guys like social pariahs. I think some may respond to that, but only some. As you point out, they live in their own rarified worlds in which they don't really interact with other people -- they belong to exclusive clubs, send their kids to exclusive schools, live in exclusive neighborhoods. They don't even take plane rides with regular people any more. And at the office, everyone kisses their rings, or other parts of their anatomy, all day. So I think the only thing to do is to ALWAYS vote no on proxy ballots to all director nominations and don't give them the public respect they think they deserve. It won't necessarily change their behavior, but it will ruin their day every once and a while, which may be all you can hope for.


Dupont Circle, D.C.: While I sympathize with the plight of American Airlines' skycaps, your proposed remedy seems surprisingly naive. With discount carriers JetBlue, AirTran and Southwest rated highest in the latest quality of service survey, how is AA supposed to address the lean times with "raising ticket prices to reflect the reality of higher fuel costs?" What are you suggesting? Doubling or tripling fares? Sorry, Mr. Pearlstein, but already fed-up travelers will choose reasonably-priced airfares over the skycaps' tip jar every time.

Steven Pearlstein: Look, all airlines are raising their total fares, including Jet Blue and Southwest. There's no alternative. Fuel costs what it costs. Some may have hedged a bit more than others, so they may have a temporary advantage. But, by and large, the prices will be going up. But for the airlines, the worst thing would be to further reduce service levels to try to avoid that. In terms of pay (work rules may be another matter), they've squeezed their employees about as much as they can.


Seattle, Wash.: First, congrats on the Pulitzer. Second, how can the public, general public or government, limit excessive compensation? Relying on shareholders doesn't work because so few of them that are disinterested would pay attention to item #6b on the next agenda, the make-up of the compensation committee, especially enough to double-check who is actually going onto that committee and their history, etc.

Steven Pearlstein: As I said, I don't think we can. And, frankly, its not the most important item on the economic agenda, and those of us who are critics should acknowledge that. On the other hand, when CEOs try to tell us how to handle the items on the economic agenda that are more important, we should simply ignore them. They have lost their credibility.


Suburbs, Md.: Congratulations on the Pulitzer! I am the farthest thing in the world from a business major, and find your columns very educational and informative without being oversimplified. You've been a must-read in this time of economic turmoil. Bravo!

Steven Pearlstein: Thank you so much.


Baltimore, Md.: Steven: No question today, just congratulations on winning your Pulitzer. And a big thanks for your early warnings about the meltdown--I moved a lot of my retirement money out of stock funds early in the year and I have bled a lot less than I did when the tech bubble burst in '01. Please keep explaining complex business and economic issues so clearly that even an old English major like me can understand them.

Steven Pearlstein: Ah, now that's real impact.


New York City, N.Y.: Steve, I noticed that today's column, unlike most of your columns, did not include any suggestions to remedy the abuses you described. I was wondering if you had any suggestions. From my standpoint, it doesn't seem like there's anything to do. The boards don't seem to care, and the CEOs will take the short lived embarrassment if it involves getting lots of money. Public outrage doesn't seem to have taken us very far.

Steven Pearlstein: No, it hasn't. I could suggest raising marginal tax rates, but what we know now is that CEOs will just get the companies to pay the taxes for them under some "gross up" provision to their contracts, so they've even immunized themselves from that. And, while you are struggling to complete your own tax forms this week, the CEOs have handed it over to their accountants, who, of course, are paid by the company. You wouldn't expect them to have to pay for it themselves, would you? And just to add insult to injury, the taxes they owe for having the company pay for their tax preparation -- the company pays those as well.


Frustrated Flier in Washington, D.C.: Great article today; thanks. I've long thought that there are too many airlines for what they provide, and there's no rational currency of competition. As a result, flights are too cheap to support anything like adequate service. Do you agree? If so, when might the market winnow down the number of airlines? Every time one goes away, it seems, a new startup takes its place and the cycle continues. Now Alitalia is in trouble...

Steven Pearlstein: Well, Alitalia is always in trouble. The Alitalia unions have simply bled that airline dry with their silly work rules. But you are right: some flights have become too cheap, and one reason the market isn't clearing at a sustanable price is because their is excess capacity.


Baltimore, Md.:"It won't necessarily change their behavior, but it will ruin their day every once and a while, which may be all you can hope for." Well, damn, that's depressingly cynical. Wish I didn't agree.

Steven Pearlstein: Yeah.


Takoma, D.C. :"So I think the only thing to do is to ALWAYS vote no on proxy ballots to all director nominations..." Help me, I'm a financial ignoramus and you're my only hope. What does this mean?

Steven Pearlstein: If you own stock, you get these mailings about this time of year, asking you to vote on various matters that will come up at the annual meeting of shareholders of the company. Unless you want to attend (don't waste your time), you send in your vote by "proxy." And one question on that proxy is to vote for election of directors. These are Soviet style elections: you almost never have a choice. So all you can do is vote for the slate recommended by the directors, or vote against. My advice is to always vote against, as a matter of principle. And what principle is that? The principle that corporate democracy is a sham and that you need to signal in any way you can your disrespect for the system, for the directors and for the pay schemes that they approve. Their view is that if you don't like the way they run the company, then sell the stock. And you can return the favor by voting against them.


Annapolis, Md.: Steve, I don't think ignoring CEOs in the media is a good strategy. They'll just happily continue making their millions in the background without scrutiny. I think you should focus on many of the abuses and hypocrisies that are happening and keep writing about them on a constant basis. Your article today is a good example. It takes a while until it sinks in but if people keep reading about what's going over time they will realize how f***ed-up the system is.

Steven Pearlstein: I don't disagree. In this one area, we shouldn't ignore them, but continue to shine light on the abuse and bring them into further public disapprobation. But if they call up and say they want to talk about how important it is for there to be a new trade treaty, we should just ignore them, since in my opinion they have no more credibility on the issue than the porters at the airport. Less, in fact.


Washington, D.C.: First, along with all the others: congratulations. I find your columns easy to read and understand from a layman's perspective and that's important. Second, wouldn't it be great if CEO and other management return came as a result of performance? Aren't CEO's, who receive a large salary and perks SUPPOSED to make their company perform well? The idea that they need additional bonuses and incentives for doing well (or, even for not doing so well, because if they're not rewarded they might leave for some other organization) is absurd.

Steven Pearlstein: Exactly.


New York, N.Y.: When I was unemployed a few years ago, I decided that I would make a difference by becoming a CEO myself and disrupting the system from within, man. But now that I'm a CEO, I find that I kinda like the money. Sorry.

Steven Pearlstein: Funny.


Brooklyn, N.Y.: Get a job, you hippie. Take a bath why don't you.

Steven Pearlstein: Also funny.


Dayton, Ohio: Has anyone made a serious, in-depth examination of executive compensation as it relates to workforce reductions and off-shoring? From my own observations of this subject over the last 20 years, there seems to be a very clear "skimming off" of the cost-savings in the form of executive bonuses, almost as if the executives were receiving a commission for each job that was eliminated? For many tech companies that do this in off-shoring, the shareholders don't receive as much tangible benefit compared to the cash received by executives. Moreover, communities and the taxpayers often incur huge costs due to the workforce reductions. It seems that senior executives are often the only winners...What is your view?

Steven Pearlstein: I'm not sure that is mostly correct. Corporate profits as a share of GDP have been going up in a way that isn't just cyclical, and that is a reflection of the cost-cutting and outsourcing and reengineering that companies have done. Top management has taken 10 percent off the top of those savings -- a nice tip, considering how much money is involved. But the rest has gone to shareholders.


Thinkers and Doers: This is all right as far as it goes, but doesn't account for the fact that highly trained professionals who used to be considered thinkers are now treated and paid more like doers. Engineers, for instance, are usually planted in cube farms, have no say in corporate policy, have restricted benefits, and can only gnash their teeth as the big executives take home the 7 figure salaries. It takes years (decades?) before an engineer with a degree or two is safely into a 6 figure salary, and respect from HR and management might never come. Doctors are going in a similar direction, where large group practices provide them with enough income to pay insurance and student loans, but life is a financial struggle for a long time after med school. Meanwhile the medical and health insurance executives take home the profit. So we don't seem to be divided into thinkers and doers anymore, so much as thinker-doers and evil parasites who handle marketing and glad-handing take home the majority of the money.

Steven Pearlstein: Some good points there.


Union Station, D.C.: Steve, Regarding mortgage disclosures, are you aware that D.C. now requires a one-page disclosure form for all non-30 year fixed rate mortgages? The disclosure form breaks out all the costs and how expensive the loan can become, as well as explanations on terms used in the form. It seems like this sort of one-page disclosure form should serve as a model for other states and Congress.

Steven Pearlstein: No, I wasn't aware. I'll check into that.


CEOs and other workers: I agree, ignore them. In N.H., for example, we never fell all over the Tyco guys--mostly we mocked their vulgar housing extravagance--therefore we never missed them when they (so to speak) went away. What I think is unfortunate is the inability of other workers to gain pay increases. If a CEO can be motivated only by ever-bigger pay packages, why do we assume as a society that other workers will be motivated by stagnant wages? I understand the quantity issue--there is an endless supply of Wal-Mart managers--but there are areas where quality clearly matters--teaching, corrections, engineering, etc.--and yet these workers don't seem to be able to link financial reward and motivation. I understand it's partly myth (the loathsomely pious assertion expected of teachers: 'I don't teach for the money'), but why else? Does that disconnect make sense to you?

Steven Pearlstein: No it doesn't. I'm a big believer in incentive pay. But one group that generally opposes it is unions, or at least union leaders. They get overly hung up on the fact that managers might use it to show favoritism. Will that happen? Sure. But if managers themselves are subject to merit pay, it means they will do less well themselves if they reward the wrong people.


Washington, D.C.: If skycaps were successful in their lawsuit against the airlines, why haven't we seen a lawsuit by pizza delivery drivers against pizzerias? Restaurants have begun charging customers for delivery service, likely eating into tips as well.

Steven Pearlstein: The law on this varies state to state, so its hard to say. But that sounds like a similar situation.


Congrats!: And thanks for your great work--please don't ever stop educating your readers. I learn so much every time I read your columns and your excellent chats. Thanks and what's on the horizon?

Steven Pearlstein: You're welcome. That's all the time we have for today folks. "See" you next week at the usual time, I hope, 11 a.m.


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