E. Gordon Gee, the energetic, 68-year old, bow-tie-wearing president of The Ohio State University was the subject of a news article in today’s paper. The story seemed to be critical of Gee’s lavish spending for travel and entertaining over the past five years, and made comments about “his” 9,600 square foot mansion. I’ve been critical in the past regarding excessive compensation for America’s Chief Executive Officers, and being president of a major university is very similar to running a large corporation. Since I’m an OSU graduate, the article caught my attention and caused a wince of shame. We think of academics being more like the impoverished Mr. Chips than the wealthy Daddy Warbucks.
However, my finance degrees from OSU gave me a strong foundation in analyzing the underlying numbers, which I did. The paper reported that Gee’s compensation was $8.6 million, but buried the fact that it was over a five-year period, so he earned an average of $1.72 million per year in salary and benefits. He had travel and entertaining expenses of $7.7 million over the same period, so $1.54 million per year. During a 38-month period approximately $895,000 was spent entertaining guests at the residence, which numbered about 16,000 over a five-year period. As close as I can figure, that’s a little over $88 per guest. Gee’s 9,600 square foot residence is not really “his”, it belongs to The Ohio State University Foundation, and was donated by a local resident. The foundation is not funded by taxpayers, but with private donations.
During the five-year period, the popular university president presided over an increase in the university’s endowment of $2.6 billion dollars. In other words, for every dollar spent by Gee, he brought in almost $160. Too bad my stock portfolio never achieved that kind of gain. It doesn’t really seem like Gee has been terribly over-compensated.
Compare that with the performance of the CEO of Home Depot in 2006. Over a five year term he had been paid $123.7 million, excluding stock options, or almost $25 million per year. During that period, Home Depot’s stock price decreased by 10%. When he was finally ousted, he left with a wonderful "golden parachute" whereas the company was left with a financial mess. Last year, the Bureau of Labor Statistics reported that median CEO pay had increased 27%, while median worker’s overall pay increased only 2.1%. The rich are truly getting richer, while the rest of us are getting screwed.
A story produced by ABC News last year showed 26 CEOs received more in compensation than the company paid in income taxes, and added that tax breaks that contribute to excessive executive pay cost taxpayers $14.4 billion annually.
How can we change this? There is already a limit of $1,000,000 on executive pay that can be deducted for tax purposes. Companies have already circumvented this problem by compensating executives with stock options, allowing them to purchase stock in the future at below market prices. Even if they mess-up the company, they can still profit.
Famous management consultant/economist/professor Peter Drucker said that CEO pay should be no more than 20 times the rate of worker’s compensation. Higher CEO pay tends to erode worker morale and productivity. The CEO of the company that I work for made well over 350 times what I’ll make this year, and there’s lots of people in the company that earn less than I do. Incidentally, the morale at our company really sucks.
Again I ask, how do we remedy this situation? It is argued that CEOs must have large compensation packages in order to bring in the “best and brightest”, executive compensation is a market-based figure, and “the market” always knows best. Obviously, companies like Home Depot in the situation described above were not correctly gauging the market. I’ve always wondered what the effect on such things would be if corporate income taxes were eliminated entirely.
The argument is that corporate income taxes are simply another cost passed along to consumers. One way or another, we end up paying the tax. The ability of corporate accountants to play the system and allow CEOs to be paid more than the company pays in taxes is already documented. If all business decisions were made based on the immediate impact on the bottom-line profits, instead of being based on an after-tax basis, would the decisions change? I don’t know, but I think they might. There are a whole lot of other effects to consider, and major changes to individual income tax laws would have to be made in order to compensate for the loss of corporate taxes. Corporate income taxes remain popular with the government simply because they’re easier to collect than personal income taxes. But large companies are playing games with accounting to escape paying significant taxes anyway.
I would love to hear your take on the matter. Leave a comment. The issue is complex, but any idea could have merit. Should we continue to allow our country to morph into an oligarchy, where the richest rule over all, or should we implement laws to return power to the electorate? It is no longer an issue of the merits of capitalism over collectivism; I’m still a firm believer in capitalism. It’s really a matter of civilization over…I don’t even want to imagine the eventual alternative.
“ When a man tells you he got rich through hard work, ask him: Whose? ”
— Don Marquis
E. Gordon Gee
President, The Ohio State University
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