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Jewish World Review Nov. 16, 2001 / 1 Kislev, 5762

Matthew Miller

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Consumer Reports


CEO shamed on pay at last (but has $300 million to drown sorrows)


http://www.jewishworldreview.com -- SCIENTISTS thought it impossible, but we may finally be getting a precise measure of the outer boundary of corporate shame. It goes like this: If you're a CEO who's already made $300 million from stock options by cooking the books, then when the hoax is exposed and your wrecked firm is taken over, a further $60 million severance payout makes even you blush.

That's one lesson to draw from the meltdown at Enron, the high-flying energy firm that turns out to have been a house of cards. The business headlines make it sound as if CEO Kenneth Lay's decision to waive his contractually guaranteed $60 million severance is the act of a statesman, but a closer look suggests it's a signal of shame.

Lay led Enron as it grew from a pipeline operator over the last decade to become the nation's largest energy trader, a business Lay basically invented. But Lay's innovations apparently included some creative accounting, through which Enron overstated its earnings in the last five years by nearly $600 million, an inflation that helped boost Enron stock. These were the same years when Lay exercised stock options that gave him the bulk of the $300 million he's earned at the helm.

While Lay has presumably tucked most of those millions away in other safe investments, Enron employees whose stock sits in 401(k) plans have seen its value drop by 90 percent as the firm's woes have emerged.

This gap between the boss and the rest no doubt helps explain the revolt that took place the other day as terms of Enron's humiliating sale to smaller rival Dynegy were being finalized.

When word of Lay's severance package swept through the firm, "quite a bit of concern was raised," said a corporate spokesman. Translated, that means Enron's top traders - the men and women responsible for the bulk of the firm's profits - screamed bloody murder about the idea that the boss would make out like a bandit even as the company went down the tubes.

And so Lay backed down. Unfortunately, however, Lay's ethic of entitlement is the norm in corporate America, as showcased in an underappreciated Fortune magazine June cover story on "The Great CEO Pay Heist."

Fortune reporter Carol Loomis spoke to seven heavyweights who serve on the compensation committees of big company boards of directors - many of them CEOs themselves. She promised them anonymity in exchange for candid views on the state of CEO pay. Listen to what they said - and remember, these aren't left-wing radicals talking, but major corporate leaders:

  • "The scandal of what goes on is how much is paid in the many, many instances when it isn't at all deserved."

  • "People (board directors) understand they have to go along with (what) management (proposes for its own pay), because if they don't they won't be part of the club. You sort of get rolled by the system even if you try to do well."

  • "There's no one representing the shareholders. It's like having labor negotiations where one side doesn't care. That would be a travesty, and this is too."

  • "It's basically what's called a 'corrupt system' where non-evil people do evil things. That's the real problem. If there are corrupt people, you can do something about it. If it's a corrupt system, its very difficult stockholders are going to continue to get screwed."

  • "There's something intrinsically wrong with some of these amounts of money. I don't know that anything will stop that except self-control. But to ask for self-restraint flies in the face of human nature."

So forget about today's war profiteers. As the Enron case shows, it's the regular old peacetime profiteering that's so demoralizing and corrosive for capitalism.

And don't hold your breath for reform. "Government isn't going to change anything," said one of Fortune's cynical insiders. "We're not going to turn into Cuba. When you've got some smart lawyer (advising management) working against two members of Congress it's no contest."



JWR contributor Matt Miller is a senior fellow at Occidental College in Los Angeles. Comment by clicking here.

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