Editor's Note: Today's post comes to us courtesy of guest contributor Tony Bergmann-Porter.
Thomas Piketty’s Capital in the Twenty-First Century has reanimated the discussion on income and wealth inequality that was much with us in those long-ago (2011) days of Occupy Wall Street. To the extent that executive compensation is relevant to this discussion, it behooves those of us who know something about the subject to speak up.
I come not to mount a blanket defense of exec comp practices. Many allegedly “performance-based” compensation schemes are, upon closer examination, anything but. At the very best, elements such as golden handshakes, golden parachutes and virtually all perquisites have terrible optics. And at worst, some practices (usually in closely-held firms) are nothing short of unconscionable.
With that said, I leave it to the reader to decide if reportage apparently intended to equate summary compensation table income with W-2 income in the mind of Jane Q. Public is the result of misunderstanding or mendacity. For now, let’s be generous and suppose it to be the former.
It happens that I own a widow’s mite of GE shares and have their proxy close at hand. So let’s use GE’s CEO Jeff Immelt to illustrate a couple of points.
1) According to GE’s proxy, the SEC reportable total of Jeff Immelt’s compensation in 2012 was $25.8 million. But when you take away a performance-based award credited to a nonqualified deferred compensation account (i.e., unsecured and hence forfeitable in the event of insolvency, nationalization, death, etc.) and payable in the future, and the change in the NPV of Immelt’s pension (which is based on actuarial assumptions that may not be at all applicable to Immelt personally), you get to his actual W-2 income of $7.9 million.
Now $7.9 mil is hardly shabby, and I’m sure most of us could scrape by on even a tenth of that. But in context, it doesn’t strike me as disproportionate to the responsibilities that Immelt holds. In 2012, GE’s revenues were $146.7 billion, which is about equivalent to the 2012 GDP of Iraq. In GDP terms, in 2012 GE would have been the 57th largest country in the world.
2) In 2012, Jeff Immelt received a cash bonus of $4.5 million, and GE had about 305,000 employees. Were we to confiscate his bonus and redistribute it to GE’s toiling masses, each would receive (pretax) about $14.75. So, basically, a large pizza. Note too that the governmental take would be lower, given that in his hands, Immelt’s bonus must be taxed at the highest possible marginal rate.
3) In my experience, people of even modest educational attainment understand the idea of salaries and cash bonuses. It is after all self-evident that an enterprise like GE has to sell some number of jet engines or MRI machines to pay for Immelt’s salary and cash bonus.
But few people, regardless of educational attainment, understand how equity works as an element of compensation. It takes a bit of explanation to help them to grasp that grants of equity, whether in the form of restricted stock, stock options, or any form of stock-settled SAR, PSU or RSU, have NO ECONOMIC COST to the issuer. (Yes, yes, after FAS123R they have a financial accounting cost. That’s not the same thing.) To monetize equity in whatever form it's delivered, it has to be sold to someone else.
So grants of equity essentially outsource compensation cost. The economic expense is borne not by the toiling masses in the form of reduced paychecks, or by the wretched of the earth in the form of reduced subventions, but by the mutual funds, insurance companies, pension plans, and individuals who currently or prospectively own the enterprise, in the form of dilution of their ownership interest. Moreover, monetizing a stock option grant actually returns cash to the issuer, who may use it to fund productive activity or to buy back shares and reduce dilution.
Wealth and income inequality may or may not be the problems that some portray them to be. We can and should contribute to this discussion by bringing some context and understanding from our domain.
Tony Bergmann-Porter is the Principal and Owner of Yale Associates LLC, a compensation consulting and contracting entity. He has many years' professional experience in compensation and total rewards, and is the 2014 President-Elect of the Twin Cities Compensation Network, the leading WorldatWork Local Network partner. Tony holds a BBA and BA from the University of New Brunswick, and an MAHRIR from the Carlson School of Management. He also holds CCP, CSCP and SPHR certifications. He enjoys track days and autocrossing with his Corvette."
Image "Unbalanced Money" courtesy of smokedsalmon / FreeDigitalPhotos.net
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