Cultural Shift Gives Executives License to Steal

By: Jay Bookman

The moral crisis afflicting the nation's economic system continues to deepen. For example:

During the late 1990's, corporate officials at Xerox used fraudulent accounting to overstate the company's profits by $1.4 billion, which in turn helped to drive up the company's stock price, which in turn made company executives rich through stock options and bonuses.

But last week, justice was supposedly done when six former Xerox executives settled a federal lawsuit by agreeing to cough up $19 million in excess compensation from that era.

Except... not really. You see, they get to keep the money.

The funds to settle the Securities and Exchange Commission case will instead be paid by Xerox, the company those executives were alleged to have cheated, the company that was forced to lay off thousands of workers when the fraud was revealed, the company whose stock price tumbled from $64 to $4.43 in 2000 alone, the company even now struggling to stay afloat.

Xerox will also cover the executives' legal fees and other costs, coming to a reported $4.8 million. According to Xerox spokesmen, the company is contractually obligated to cover those costs for its former executives because the executives did not actually admit wrongdoing.

The executives will, however, pay $3 million in fines on their own.

When executive income soared through the 90's, the justification was that stock prices were soaring as well, and that executives deserved to be rewarded for that. Pay for performance - who could argue? The American way, and all that.

Last year, though, the stock market was down markedly, jobless ranks were swelling and corporate profits had all but disappeared. Yet median executive pay continued to rise, jumping by 14%, according to Fortune magazine.

David Cote of Honeywell got paid $68.5 million last year, even as Honeywell's return to shareholders fell by 27%. Michael Capellas, the president of Hewlitt-Packard, was offered a $14.4 million incentive bonus that he could collect only if he quit within a year of accepting the job. So he took it. Last year, stock in Atlanta's homegrown Home Depot fell 70%, the worst performance of any company listed in the Dow Jones industrial average. Yet its CEO, Bob Nardelli, got paid $11.3 million, including a bonus of $4 million.

And of course, Atlanta-based Delta Air Lines, after reorganizing its nonunion pension plan in a way that could significantly reduce benefits to its older workers, will set aside as much as $65 million by next year to ensure that its top 35 executives get their full retirement even in case of bankruptcy.

It makes you think of those scenes in the movie Titanic, in which the first-class passengers fill the lifeboats while the poor suckers in steerage get locked below deck.

Yes, life is good at the top. They get rich if the stock goes up. They get rich if the stock goes down. They get rich if they stay with the company. They get rich if they leave. They get rich if the company makes a profit. They get rich if it goes bankrupt. As the Xerox and other cases demonstrate, they even get rich if it turns out it was all done with smoke, mirrors, and an auditor who agrees to look the other way.

A generation ago, a typical executive might be paid 40 times what the average worker in a company was paid. Today, the figure is more like 400 times the average company income, and rising quickly. That change cannot be explained by changes in the economy. Top executives did not suddenly become that much more important or talented.

What changed was the culture.

The restraining power on executive pay had always been cultural, not economic or legal. Theoretically, the folks in the board room have always had the power to pay themselves whatever they wished, but most of them felt bound by some sense of propriety and proportion.

But in a culture that elevates greed from a vice to a virtue, any sense of embarrassment is gone. It used to be possible to believe that people got what they were worth. Now they get whatever they can take. There's a difference.

An important difference.