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Report: CEOs Who Cook the Books Earn More
Accounting Scandals Hurt Workers, Shareholders, Taxpayers
CEOs of companies under investigation for accounting irregularities earned 70% more from 1999 to 2001 than the average CEO at large companies, according to a new report, "Executive Excess 2002: CEOs Cook the Books, Skewer the Rest of Us."
The CEOs of 23 large companies under investigation earned an average of $62 million from 1999 to 2001, compared with an average of $36 million for all CEOs in the annual Business Week executive pay survey.
The report looked at companies which are under investigation by the SEC, Department of Justice, and other agencies and which have had market capitalizations over $1 billion sometime since January 2001: Adelphia, AOL Time Warner, Bristol Myers Squibb, CMS Energy, Duke Energy, Dynegy, El Paso, Enron, Global Crossing, Halliburton, Hanover Compressor, Homestore, Kmart, Lucent Technologies, Mirant, Network Associates, Peregrine Systems, PNC Financial Services, Reliant Energy, Qwest, Tyco, WorldCom, and Xerox.
Collectively, the CEOs at firms under investigation pocketed $1.4 billion from 1999 to 2001. While these executives are cushioned by the vast wealth they have accumulated, their shareholders and employees are dealing with massive losses. Between January 1, 2000, and July 21, 2002, the value of shares at these firms plunged by $530 billion, about 73 percent of their total value.
Employees of the 23 companies have suffered a total of 162,000 layoffs since January 2001. Tyco, for example, has laid off 18,400 workers in that time. The company paid CEO Dennis Kozlowski $331 million from 1999 to 2001 and gave him over $135 million for luxury living. Kozlowski has since resigned in disgrace.
Taxpayers shoulder the burden when corporations show different books to shareholders and the government. A recent IRS study shows that hocus-pocus accounting techniques allowed companies to report profits to shareholders that were 24% higher than the profits reported to the IRS. Profits reported to shareholders rose from $753 billion in 1996 to $817 billion in 1998, while corporate profits reported to the government declined over the same period from $660 billion to $658 billion.
Stock option accounting explains a major portion of this discrepancy, especially in the high tech sector. Merrill Lynch estimated that if stock options were treated as expenses, earnings for the S&P 500 would have been 21% lower in 2001 and an estimated 10% lower in 2002.
When Congress reconvenes after Labor Day, legislation to require the same option accounting for shareholders and the government will be debated. High-tech companies lobbying to preserve the status quo on stock options have a great deal to lose. TechNet, a high-powered group of high tech executives, is leading the lobbying effort. If the companies run by TechNet Executive Board members had been forced to expense options in 2001, their reported earnings per share would have declined between 14 percent and 100 percent.
CEO pay remains stubbornly high, despite a slight drop in CEO pay from 2000 to 2001. The CEO-worker pay gap of 411-to-1 is nearly ten times as high as the 1982 ratio of 42-to-1.
Worker pay is again stagnating: the Commerce Department reports lower wages and salaries in August 2002 than in December 2000. If worker pay had grown as fast as CEO pay since 1990, production workers would have averaged $101,156 in 2001 instead of $25,467. If the minimum wage had grown as fast as CEO pay, it would have been $21.41 an hour in 2001 instead of $5.15.
The explosion of corporate scandals has helped stoke a growing backlash against excessive executive compensation. The report offers a 9-course menu of remedies, including expensing options, ending taxpayer subsidies for excessive pay, banning special perks to executives, and improving transparency and corporate accountability.
The report, authored by Scott Klinger, Sarah Anderson, Chris Hartman, John Cavanagh and Holly Sklar, is the ninth annual CEO pay study by the Institute for Policy Studies and United for a Fair Economy.
The Institute for Policy Studies is an independent center for progressive research and education in Washington, DC. United for a Fair Economy is a national organization based in Boston that spotlights growing economic inequality.
Executive Excess 2002
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