Different Bargains:
In a simplified model of a corporation, there are four different roles, each with their own risk and reward profile:

1. Shareholder
2. Director
3. Management
4. Employee

Shareholders
Shareholders invest their capital to form the company (or, in companies that already exist, to grow the company or provide liquidity for exiting shareholders).  Their bargain is simple: I will put in my money, and I expect a return on my investment.  That return can come as dividends (profits paid to shareholders) or increased share price (i.e., the company becomes more valuable).  Their reward is based on the value of the company, and their risk is limited to the amount of money they paid for their shares.  (If they invest $10, they can only lose $10–the company cannot force them to invest more.)  Their incentive is to make the company as profitable as possible to maximize the return on their investment.

Directors
Directors have an unusual bargain–not one you should take without legal advice.  They are hired by the shareholders to oversee the strategic development of the company and select and oversee management.  Their reward is usually cash compensation and/or stock awards.  Their risk is that the company, the shareholders, the government or other directors will sue them, and they will be personally liable for the Company’s conduct.  (Most companies indemnify (agree to defend and reimburse) their boards for this, but certain conduct, if later deemed illegal is not covered.  The point is that the director can be liable for the company’s conduct, not just their own.)  Their reward is based on the value of the company and their risk is unlimited (i.e., incarceration).  Their incentive, therefore is to make the company as profitable as possible, within the known bounds of the law.

Management
Management is a hybrid of Employees and Directors: they are charged with conducting the day-to-day management of the company, but are also focused on growing the company long-term.  Like directors, they can be held personally, criminally liable for conduct that is later determined illegal.  Their rewards are their salary, as well as stock-based compensation (which usually vests over a period of 3 to 5 years) and bonuses based on performance metrics (like increase revenue, increased margins, etc.).  Their risks are (a) being incarcerated; (b) being fired (not laid off, fired) if the company does poorly, and (c) their stock grants being either taken away or being worthless (an option to purchase the stock granted at $10 is worthless if the stock price is $9.99).  Their incentive, then, is to maximize the profitability of the company within the bounds of the law over both the short (bonus and not being fired) and long (stock award) time frames.

Employees
Employees have the simplest bargain: they perform a job and are compensated whether the company does well or poorly.  In many companies, employees receive stock grants and bonuses, but the overwhelming majority of their compensation is a fixed salary or hourly wage.  Their reward is compensation for their work, their risk is limited to being terminate if they or their company performs poorly.

So among the four actors, from most risky to least is, Management, Directors, Shareholders then Employees.  Management can lose their job, their investments and their personal liberty.  Directors, similarly can lose their liberty and their directorship, but it is not usually their only source of income.  Shareholders have their capital at stake, and Employees, generally are only responsible for their own conduct, but can be laid off if the company performs poorly.

So the question is, should those who have the most to risk be compensated more than those who have relatively little?  Or, put another way, should reward be linked to risk? I will address that in Part 3.

The CEO Pay Ratio
You may have seen this chart:

Politifact looked into the chart, and its source is a student paper from 2005, which contained no source or citation for the 475:1 ratio.  So, unless you’re the type of person to rely on the unchecked accuracy of students, it’s not a reliable source of information.

The far-left Institute for Policy Studies (IPS), in 2010, did, however, claim that the average CEO pay ratio was 325:1 (see page 2, above the cartoon).  There are few issues with the ratio:

1. CEO Pay is inflated:  IPS says the average CEO pay they use is $10.8 million.
1. Included in that number is the value of stock options and restricted stock, valued at grant, along with bonuses and other compensation.  In the trade, this is known as “proxy comp,” the (often over-estimated) amount of compensation a publicly traded company is required to disclose by the SEC in its annual proxy statement to shareholders.
2. This is an overstatement because, at the time of grant, the shares are not vested (the executive may or may not actually receive them), and if the stock price goes down, they may be worthless (or worth a lot less).
3. This is also unfair, because well run companies will intentionally tie CEO pay to stock price.  The criteria on which public company’s CEO are (rightfully) measured, is improvement in stock price, earnings and profit margin.  This translates into equity and bonus-heavy compensation.  In other words, if the board wants to keep the CEO focused on what is good for the company, they will pay less in salary (less guaranteed), and more in stock grants and year-end bonus (more incentive-based).  More on this in part 2.
4. It is unclear whether it is included in the $10.8 million number, but proxy comp must, under SEC regulations, include fringe benefits, like retirement plans, healthcare benefits, etc.  You can argue about whether or not this is compensation, but it is not cash handed over for pay.
2. Worker Pay is understated: The IPS paper cites “average worker pay” of $33,121.
   1. Unlike with CEO pay, the “average workers pay” does not include benefits, like stock options, 401(k) contributions, medical, dental and vision insurance premiums paid by the employer, or even bonuses.  Any other compensation received by the employee is excluded.  As noted in the IPS paper (page 37, endnote 3), “worker pay” is simply an average hourly rate for “production workers” ($19 per hour) multiplied by 33.4 hours over 52 weeks.  Why 33.4 hours?  I suppose the proletariat get 90 minutes a day for lunch, and the evil cleptocrats don’t pay them for it.
   2. In contrast, according to the federal government, the average wage index (most recent year available is 2009) was $40,711.62.  That would yield a ratio of  265:1, not 325:1. Again, even this larger number does not include bonuses, retirement contributions, medical, dental or other benefits paid by the company.
3. The CEO compensation study only looked at S&P 500 companies. There are thousands of very sizable US companies not on that list.  The S&P 500 only represents about $325 billion in earnings ($10.16T/31.3), globally (about 0.6% of global GDP) and only employs a total of 25.6 million people–globally.  (In contrast, there are over 130 million total people employed by all employers in the US alone–5 times what the S&P 500 employs globally.)  These are the largest and most powerful international public companies in the world–not a place to look for modestly compensated executives.
4. Finally, “production workers,” the basis for the low-ball $33,121 number, are not the sort of workers employed by most S&P 500 companies.  Companies like Google, Apple, Microsoft, GE, McDonalds (the franchisor company, not the burger restaurants–there’s a difference), Visa, MasterCard, Pepsi (again, franchisor, not bottler), etc., do not employ a lot of production-line workers, much less workers paid hourly.  Most of these companies employ salaried workers in the fields of finance, sales, legal, engineering, computer technology–most are college entry level companies.  So most of these “overpaid” CEOs are not leading companies full of “production workers.”

To give a concrete example of proxy comp versus reality, the 2010 proxy statement for Google shows that, in 2009 their CFO received a (relatively modest) salary of $450,000 (see summary compensation table at page 59).  This would put him in the 10:1 range for (relatively well compensated) Google employees.  (The CEO received only $1 in direct compensation).  When you include his bonus, stock and option awards (awards that may never vest, and may be worthless when they do), he received $24.7M.  Now, no one should feel sorry for Mr. Pichette–he took home over $3 million in cash, which even after taxes, is a nice living wage.  But his “proxy comp” is inflated 12 times larger than what he actually took home.  Similarly, the evil Goldman Sachs CEO, Lloyd Blankfein had a salary of $600,000 in 2010, but his proxy comp number was over $14 million (page 29), the bulk of which is in stock awards.

In sum, the oft-cited ratio is based on false premises and comparing narrowly selected groups to inflate and understate, respectively, both sides of the equation.  It is like comparing apples to apple pies.

The core argument is that lower income Americans (the 47% who pay no income tax today) would end up paying more in taxes, and the taxes on goods and services would unfairly be placed on them.  The logic being that lower income Americans have less disposable income, and therefore have less choice in whether and what to buy.  A tax on goods would therefore be borne by these currently untaxed Americans.

Although Cain hinted at it, he fails to make the most compelling counter argument to the regressive tax charge: All Americans are already paying indirect taxes through the taxes embedded in the price of goods and services they buy.  To be fair, Cain mentioned embedded taxes On Meet the Press, but only to argue that prices will drop under his plan (a fair point, as well).  He has not yet argued that the tax is not regressive because the high corporate tax rate is already embedded in the cost of goods and services.

For example, if a grocery store sells a loaf of bread for $3, embedded in that price, is the following costs:

1. farming and transporting the wheat, eggs and milk used to make the bread;
2. milling and re-transporting the wheat to make flour;
3. baking and packaging the bread;
4. warehousing and transporting the bread to the store; and
5. stocking the shelves, paying the cashier and the cart guy, and the night janitor, etc., who all work at the store.

At every level, from farmer to mill to baker to wholesaler to store, the relevant business has to pay a 7.65% payroll tax on all employee wages, plus a 35% tax on the business’s profits.  As many conservatives have pointed out, those taxes are only paid by the companies in a technical sense.  In a real sense, they are passed on to the consumer in the form of higher prices.

If it costs $1.00 to produce the bread, the baker will sell it to the wholesaler for about $1.30, making a 30% margin.  That margin covers the profit the baker needs to make, net of taxes.  At a 35% tax rate, the baker would pay 10.5 cents on each loaf of bread, meaning the baker nets a profit of $.195 per loaf.  (If the taxes are reduced from 35% to 9%, the baker could sell the same loaf for $1.21 and make the same profit after taxes–this does not count the cost of employer paid employment taxes.)

That tax effect is multiplied at each level of exchange.  The baker already takes on the farmer’s and mill’s taxes and grosses up his price to include those costs in his own profit margin.  So each merchant’s margin includes some multiplier of the taxes already paid at each prior level.  If we assume a profit margin of about 20% for the store, 10% for the wholesaler, 30% for the baker, and 10% for the mill and the farmer, the embedded taxes will add up to over $1.00. (Even if you assume an across the board 10% margin, $.62 of the $3 is due to taxing of profits at each level.)  Put another way, if the corporate tax rate were 0%, bread would cost about $1 less.

While it may be true that some Americans will pay more taxes directly to the U.S. Treasury, the critics who make this argument are not considering the indirect taxes those Americans are already paying.  The proper counter argument for Mr. Cain is that Americans already pay consumption tax, they just don’t realize it.  Under 9-9-9, Americans would have a more transparent view into their real tax burden.

Of course, as the Wall Street Journal points out, the real problem with 9-9-9 is that it will soon become 15-15-15.

Although I distrust Apple computers, I do use an iPhone.  Saying I use my iPhone is like saying Jonathan Stewart uses sarcasm or Obama may use a teleprompter now and then.  I rely on it for news, for sports, for work, for play, for family.  There is barely any aspect of my life that is not somehow improved or touched by my iPhone.

The truly amazing thing about Apple and Steve Jobs vision is that the iPhone is not even 5 years old and I cannot imagine a world without one.  Today, there are more iPhones in use than American Express cards. There are about as many iPhones in the world as there are pet dogs in the United States.  The adoption has been swift and relentless.  During the 10th anniversary of 9/11, one thing that struck me (obviously not the salient point of the remembrances), was how it seemed like yesterday, but no one had an iPhone that day.  At the time, I used this clunker:

(If you’re old enough, you may remember trying to play a game on that thing.  It was demoralizing.  I mean, 84 x 48 pixels? Monochrome?  It was like using a TRS-80!)

September 11, Peyton Manning’s first Superbowl, the Boxing Day Tsunami, Katrina, Obama’s first primary–none of these things were captured on a single iPhone. No one updated their facebook or twitter status from their phone.  These events seem like yesterday, but they’re all older than the oldest iPhone. Do you remember going to the theater to see Pirates of the Caribbean (the third one), Spider Man 3, the premier of Transformers, or Shrek the Third? You didn’t buy tickets on your phone, and you didn’t watch any of the trailers on it either–the iPhone hadn’t come out yet, and almost everything before it was just a phone:

Technology has moved quickly over the past few decades, but nothing has left so large an impact in such a short period as the iPhone.  Steve Jobs had a vision of the future and pushed technology as far as he could to make it happen today.  He delivered an easy to use, electronic companion that didn’t just connect you with your friends over a tinny connection, but allowed you to take with you anywhere, your photos, videos, music, recipes, websites, high school sweethearts, and yes, Angry Birds.

The new iPhone 4S was revealed earlier this week, and like each of its ancestors, it is an amazing leap forward:

You talk, and it understands. It doesn’t just record or transcribe, it understands. Now, this is a promotional video, and as they say, any sufficiently advanced technology is indistinguishable from a rigged demo.  But from the looks of it, the iPhone 4S is going to give Alan Turing a run for his money.

Steve Jobs’s vision, determination and skill took us from a world where a phone is just a phone, to one in which a device smaller than your wallet is indistinguishable from Jean Luc Picard’s ship’s computer. Steve Jobs pioneered personal computing, animation and business management, but his enduring legacy will be bringing the science fiction dreams of geeks everywhere, from face-to-face video calls to on demand video to near-sentient operating systems–all of it, to the masses for less than 2 days’ pay.  As a good friend said today, if anyone has left the world a better place than he found it, it was Steve Jobs.  He will be missed.

Two other facts you might find interest: (1) the company is in an industry that struggles to break even and (2) the company’s auditors cannot honestly say the company will be in business next year.  Investors have put in $1 billion, and the company is now desperate for cash.  Would you be willing to loan the company $535 million–more than half of its equity investment?

To put that in perspective, assume someone you know put up $100,000 for a Subway franchise.  He has lost money for four years straight, sells sandwiches for $5 when they cost him $15 to make, his bank and his accountant say he has no chance of staying in business.  Would you loan him $53,500 to open another store across town?

If you think this is a “good bet,” please contact me for a great deal on a slightly used, but historic bridge in lower Manhattan. This company (in case you’re wondering, it is the infamous Solyndra, circa 2010) is a stinker. But even with the benefit of hindsight, President Obama has no regrets over Solyndra. Obama, even now, defends the $535 million loan guaranty as a “good bet.”

This is why central planning will always fail.  Not only are politicians not equipped to pick winners and losers, their hindsight is 20/2000–qualifying for legal blindness.

If you think this is an isolated incident, think again.  Dick Durbin was warned repeatedly that his amendment to the Dodd-Frank bill would lead to increased costs for consumers.  When those predictions become reality, he impotently tells consumers to bank elsewhere.  As if the country’s smaller banks are less susceptible to his cost shifting than Bank of America.

Ignorance may be bliss, but it’s also the Democratic Party’s economic platform.

You’ll no doubt recall that Senator Durbin’s misplaced arrogance led to price fixing on debit card transaction, a move that costs banks and consumers dearly, but will benefit the bottom line of his big box retail donors. Dick believes it is inappropriate for the GOP to pressure the Fed on monetary policy.  Of course, he should know, this is the exact same thing he did seven months ago.  Dick, who’s never had a real job outside of politics, also believes he knows how to allocate risk in an insanely complex system that safely processes over $1.3 trillion a year better than people who have done it for decades.  So maybe we should take the crazy things he believes with a grain of salt.

Liberals love to throw money at things, especially when it’s someone else’s money.

There is no reason why the GOP, or anyone, cannot send a letter, an email, a video, a dead fish or a horses head (subject to local law, some exclusions apply), to the Fed.  The Fed is an independent central bank, and is designed to shrug off political criticism.  If Ben Bernanke cannot handle a few angry politicians, he is not the right man for the job.

To the substantive point of the criticism, though, discouraging the Fed from printing more money is not sabotage, or even evidence of some Vast, Right Wing Conspiracy™ to bring down President Obama.  Governing is choosing, and there is a clear choice here:

1. Do we print more money (a THIRD try at quantitative easing) and hope against experience that this time, the banks begin to lend to companies and investors that don’t want to borrow and people begin to spend on things they don’t need; or
2. Do we reform our tax and regulatory process and encourage people to invest and spend the money they already have.

Liberals love to throw money at things, especially when it’s someone else’s money.  But there are real consequences to quantitative easing (a fancy phrase for printing more money to throw at stuff).  When you print more money, each dollar becomes less valuable.  This is great if you’re a debtor, because it’s cheaper to pay off $14 trillion when the dollar is not worth as much as when you borrowed it.

They see capitalism as an incomprehensible dark art involving incantations read from the Wall Street Journal over mahogany altars.

But if you already have money, inflation is a silent thief.  Warren Buffett, Obama’s best buddy, has said for years that inflation is more confiscatory than any tax increase.  And if we show a willingness to pay off our enormous debt by devaluing the dollar, we may find that the dollar is no longer the world’s reserve currency (see artists renderings).

More importantly, the purpose of printing money is to make it cheaper for people to borrow.  Interest rates are already ridiculously low.  No matter how low they go, no one can force unwilling capital to invest.  Obama has made it clear that he is no friend of capitalism, and his regulatory promiscuity and demagoguery is impairing expansion and investment.  The CEO of Euro Pacific Capital testified today that he was fined for hiring too many people, and had to spend half a million dollars to fight off regulators.  Regulators have run amok, and the uncertainty is undermining expansion.

They beat on the fuselage of the gleaming, silver jet of capitalism and grunt “make fly now!”

It’s not just hiring and expansion, either.  Investor confidence is almost as low today as it was right after the Lehman collapse.  Ask yourself, if you came into money tomorrow, would you buy a second home, or would you hold on to the money until the housing market hits bottom?  Would you invest in the stock market, or wait until the ups start outnumbering the downs on a more regular basis?  Would you invest in a business, hire new workers and expand, or would uncertainty–not just in your product–but in the regulatory and economic landscape make you guard your nest egg?

Unless an investor believes prices are more likely to go up than down, investing is a fool’s errand.  And a fool and his money are soon invested in Solyndra.   People are spooked, and until the world starts to make sense again, they will keep their money under their mattress–no matter how cheap Bernanke makes it to borrow more.

Liberals may understand this, or they may not.  It is tempting to believe that our liberal friends see capitalism as black magic voodoo; an incomprehensible dark art involving incantations read from the Wall Street Journal over mahogany altars..  Like an anachronistic caveman, they beat on the fuselage of the gleaming, silver jet of capitalism and grunt “make fly now!”  All the while, damaging the sensitive avionics with their thorny, regulatory clubs.  Occasionally, Warren Buffett shouts “beat harder!”

We have to decide if we’re going to make life easier for ourselves now and harder for our children later, or vice versa.  It’s a choice, and it has consequences.  So the next time someone you are part of the “let him die” party, or want to subsidize corporate jets at the expense of children’s safety, or that you’re trying to balance the budget on the backs of seniors, children and the middle class, ask them if they’d rather deficit spend and print money on the backs of their unborn grandchildren.

*Fair disclosure: I work in the credit card industry, though not for a bank.  I know these issues well, but I also have a (very indirect and slight) financial stake in the outcome.

Separately, Democratic Rep. Jim Moran from Virginia made a very similar and bold statement to Chris Matthews: “In fact, in the last six months more jobs were created than Bush was able to generate in eight years, Chris. People don’t understand that, the economy has recovered.“  Of course, this is a blatant distortion of what those outside of Washington like to call “facts.”  In fact, Bush created 3 million net jobs (not including the ephemeral “saved” jobs).  Given that Bush ended his term during a recession, this is an bad, but not negative number.  So far, Obama has lost 2.2 million jobs.  The last I checked, 3 million is greater than negative 2.2 million.

Of course, the more important thread here is that the Democrats seem to be repositioning themselves on the economy.  Team Obama originally promised a net increase of 3.5 million jobs thanks to the stimulus.  Now, Biden and Moran appear to be leading the charge on the “new normal:”  10% unemployment; growing public employment over higher paying private jobs; wasteful spending without accountability.

The net take home of all of this (apart from few jobs), is, if you were expecting things to get better, you better gird your loins.

As a matter of law, the board of directors  elect the CEO and certain executives.  That empowers the executives to conduct the business of the company.  Any major decisions would be brought to the board (like mergers over a certain amount, issuing new shares, or major strategic transactions, the kind that happen once a decade).  The board is tasked with protecting shareholder value and developing a long-term strategy for the company.  They have absolutely no control over the day-to-day operations of the company.

What Glibbs said is tantamount to a world leader refusing to meet with Obama because he was elected by the electoral college.  It’s complete idiocy.

Moreover, anything Obama wanted to get from BP would have to go through the CEO to the board in the same way a treaty goes through the President before the Senate ratifies.  Obama going to the board of BP (which Glibbs admits he didn’t do) would be just as inappropriate and moronic as Dmitry Medvedev going to Harry Reid to negotiate an arms treaty.

And, as the article above points out, Obama has had no problem dealing with CEOs before, when he wanted to winge about executive bonuses.  In fact, he even fired one; remember Rick Wagoner at GM?

If this is really how the Obama administration thinks corporate America works, they are exposing their naivete.  I suppose this may be how a community organizer would see things, and why Obama’s lack of real life experience is such an obvious weakness.

I’m afraid these repeated statements are so idiotic, so patently wrong, that it must have been said instead of the truth.  Whatever the truth is, the Obama administration does not want to or, even worse, is not able to, speak to Hayward.  In either case, Glibbs’s answers were cowardly and wrong.

“I want to reiterate, BP is the responsible party…” Was this ever in doubt?  Is there someone out there who thinks that, perhaps it was rogue dolphins who learned to make their own C4?

“[Admiral Allen] will call BP and bush to have them take every appropriate step.  He will order them to take the appropriate steps.”  Okay, so what are those steps.  This is typical Obama idiocy; imperious and useless.  If no one know how to stop this leak, what steps are appropriate?  You cannot, by fiat, control that which you do not understand.  You cannot shout “TAKE EVERY APPROPRIATE STEP” and say that you are providing useful oversight, anymore than you can create (or save) more jobs by saying “This jobs bill will create (or save) jobs.”  This is like a lawyer saying “don’t do anything illegal,” and then billing you $5,000 for legal advice.  Unfortunately, you actually have to do the work.

“We’re doing everything possible that needs to be done to ensure that BP protects this valuable area.”  Oh, wonderful!  So the Obama administration’s plan is a full court nag.  This is tantamount to “we will continue to do everything possible to ensure that BP takes out the garbage, whether it be recycling, uuuuhh, glass, uuuuhhh, plastics, uuuuuh….”  There is no promise of actually doing anything.

The ineptitude is staggering.

It’s simple, it’s elegant and it’s what more than 52% of the American people believe: Barack Obama is outside the Circle of Trust:

Get yours now at store.dailydanet.com.

Tune in tomorrow night for the Daily Danet liveblog of the monthly narcissism conference at 8 p.m. Eastern.