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Excessive CEO Pay and Job Losses: Are They Linked?

By Carl M. Cannon - November 5, 2011

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One of them was the rapid acceleration of globalization, which translated into the off-shoring of millions of American jobs -- but not the repatriation of the profits. Another was stock buybacks, in which corporations used profits to purchase its own stock. Such moves can be done to stave off hostile takeovers, thereby preserving the company, or to show confidence in the firm. But in actual practice, it’s done mostly to keep the stock price high. Buybacks come at the price of stock dividends, but that’s a trade-off shareholders are willing to make. The hidden cost of buybacks is that it diverts money that was once used for the true engines of corporate growth: R&D, along with investments in new technologies, new plants, and new workers.

A third trend was the acceleration in industry consolidation, the new wrinkle being the hundreds of millions of dollars taken out of the pie by the executives who effected the mergers. Last year, for example, the pharmaceutical giant Schering-Plough was incorporated into Merck & Co. “We recently merged to create a stronger, more diverse and more truly global company,” Merck announced. “This not only benefits our company and our shareholders, but it also benefits the millions of people around the world who rely on our products and expect us to continue to deliver exceptional value.”

Perhaps that’s true, but the corporate-speak did not mention two other facts of life: Thousands of employees were immediately deemed redundant, and lost their jobs. Meanwhile, the top executives of the two companies were handed rewards that must have stunned the dismissed workers.

The top four Schering-Plough executives were paid $160 million in 2009 alone. And this wasn’t an aberration. Corporate filings show that the top eight executives at the two pharma firms (Richard T. Clark, Peter Kelley, Kenneth Frazier and Bruce Kuhlik at Merck, and Fred Hassan, Robert Bertolini, Carrie Cox and Thomas P. Koestler at Schering-Plough) were paid $369.5 million total in the three years before the merger.

When the merger was announced, the company said that 16,000 people would lose their jobs. Since then, it has announced rolling layoffs with regularity: In July 2010, it announced that 15,000 jobs would be eliminated. In August of this year, another 13,000 jobs were marked for cutting over the next three years. By one count, the merger has resulted in the loss of 30,000 jobs.

Defenders of these corporations point out that in downsizing a workforce, CEOs are trying to protect their companies, along with the remaining employees. This is undoubtedly true. But this explanation rings hollow for many workers put on the unemployment lines, because these companies are often profitable, have huge cash reserves, and are paying their top executives a fortune.

Moreover, studies done during this period of stagnant employment show a disquieting correlation between outsized executive pay and layoffs.

The most ambitious was done by the Institute for Policy Studies, a left-leaning think tank that combines a liberal political agenda with restrained and fact-based economic analysis. The main finding of its 2010 report, “CEO Pay and the Great Recession,” was that chief executives of the firms that have cut the most jobs during the current downturn are making significantly more money that their peers at other companies.

“There’s still the idea that when an executive slashes thousands of workers that they are making the tough decisions necessary to make their company mean and lean,” said Sarah Anderson, lead author of the study. “But when CEOs slash jobs they are often very richly rewarded.”

The IPS data showed that those atop 50 layoff-leading companies made an average of $12 million in salary in 2009, 42 percent more than the average CEO pay at other large companies. In 2010 and 2011, as stock prices rose again, along with corporate profits (but without bettering the employment picture), so did CEO salaries and bonuses.

In July, Equilar, a Silicon Valley-based executive compensation data firm, did a study for the New York Times. “Brace yourself,” the Times warned its readers. “The final figures show that the median pay for top executives at 200 big companies last year was $10.8 million. That works out to a 23 percent gain from 2009.”

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Carl M. Cannon is the Washington Bureau Chief for RealClearPolitics. Reach him on Twitter @CarlCannon.

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