Reports Draws Correlation to Offshoring, Political Activity and CEO Pay

Average CEO compensation at the 50 firms outsourcing the most jobs offshore increased by 46% in 2003, compared to a 9% average increase for all CEOs at the 365 large companies. With this hike in pay, top offshorers earned an average of $10.4 million in 2003, 28% more than the average CEO compensation of $8.1 million, according to the report Executive Excess 2004: Campaign Contributions, Outsourcing, Unexpensed Stock Options and Rising CEO Pay.

Concurrently, from 2001 to 2003, the top 50 outsourcing CEOs earned $2.2 billion while sending an estimated 200,000 jobs overseas.

At this point, the gaping holes begin to appear in the report co-authored by Sarah Anderson, John Cavanagh, Chris Hartman, Scott Klinger, and Stacey Chan.The report is unable to provide an exact number of jobs sent offshore from 2001 to 2003, shielding the figures behind the guise of a “sensitive political issue” that companies attempt to hide.

The largest problem with the Institute for Policy Studies and United for a Fair Economy’s study is the present valuing of CEO salaries and making comparisons between 2002’s and 2003’s pay levels without providing the proper context. For example, Oracle’s CEO Larry Ellison saw his total compensation rise more than 1,000% from 2002 to 2003, The Corporate Library said in a July report (See Exec Comp Is Up ); a statistic that was further supported in the Institute for Policy Studies and United for a Fair Economy.

However, what the left-leaning Institute for Policy Studies and United for a Fair Economy fail to provide is any context as to the business environment or external factors that had a much larger impact on executive compensation than any offshoring activity.Ellison’s increase was due in large part toexercising approximately $40 million worth of stock options in 2003. By comparison, in 2002 Ellison had no option exercises and had a total compensation of just $40,000. Rather than a sudden spike in the number of positions Oracle may or may not have sent overseas, Ellison’s compensation appears to more closely mirror the NASDAQ’s impressive gains in 2003. But to hear it from the two group’s sponsoring the latest research, “Firms appear to be channeling their outsourcing profits not into US jobs, but rather into the pockets of chief executives.”

Political Discussion

As misguided as the assertions that CEO pay is somehow linked to a company’s offshoring activities, an even further stretch made by the report is to connect an executive’s pay to their political activism. “CEOs of those firms most heavily engaged in financing political conventions and presidential campaigns have been richly rewarded in their paychecks,” the report said pointing to a survey conducted by Business Week magazine to bolster its claims.

As evidence of the rewards executives reap by pitching into party coffers the report said CEOs of the 69 companies that sponsored this summer’s Democratic and Republican National Conventions saw their pay jump 52% in 2003, outpacing the aforementioned 9% average large company CEO raise. Similarly, the 38 CEOs who have personally raised at least $100,000 for either the Bush or Kerry presidential campaigns earned an average of $15.2 million in 2003, 88% more than the average large company CEO, the report said.

There is no logical connection drawn between an executive’s political activism in 2004 and their total compensation received in 2003. The Institute for Policy Studies and United for a Fair Economy draw connections to CEO pay as it relates to their involvement with a particular political party, but make no mention of other, more relevant factors, that may have influenced executive pay, such as the granting of executives stock option awards and the run-up in the broader markets in 2003.

Thus, the Institute for Policy Studies and United for a Fair Economy says “one sign of the political clout of corporate leaders” is the current effort in Congress to block new rules that would require corporations to report all stock option grants as expenses in their financial statements. Rather than say anything about the impact such a move would have on technology and other smaller companies that try to attract top labor for all fields, the Institute for Policy Studies and United for a Fair Economy says any move to prevent the Financial Accounting Standards Board’s (FASB) recent exposure draft mandating option expensing is “accounting trickery” deployed by corporate boards to “lavish massive options grants on top executives with no repercussions for their income statements.”

Current accounting rules have encouraged lavish options grants to executives. The report calculates that corporations have claimed an estimated $3.9 billion in tax deductions related to stock options exercised by 350 leading CEOs since 1997.

A copy of the full report is available at http://faireconomy.org/0831/ .