U.S. CEOs Could Learn From Their Asian Counterparts

Email

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Judging from recent reports that JP Morgan Chase & Co. (JPM) Chief Executive Jamie Dimon and Citigroup Inc. (C) board member Robert W. Rubin will forgo bonuses this year, it appears that at least some U.S. executives are starting to change their habits, as we’ve long suggested they should.

Just yesterday (Monday), in fact, U.S. heavy-equipment giant Caterpillar Inc. (CAT) announced it was cutting executive compensation by as much as 50%, because of weakening global demand.

But let’s be very clear: U.S. corporate leaders still have a long way to go, and many lessons to learn.

In fact, American executives could learn a thing or two from some of their counterparts abroad. Just look at Haruka Nishimatsu, CEO of Japan Airlines Corp for example (OTC ADR: JALSY).

Each morning, Nishimatsu gets down to business immediately after his morning commute to the office – on a city bus.

His desk – like those of all the other Japan Airlines employees – sits in the middle of an “open office.” I know this from personal experience, having sat at a desk just like that when I’ve worked in Japan over the years. He eats lunch in the company cafeteria and hopes – like all Japanese employees – that he’ll have time to eat his meal before it gets cold as he stands in line waiting to pay, says CNN’s Kyung Lah.

This hardly sounds like the life of a corporate CEO, especially when you consider that JAL is one of the world’s top airlines. Nor does the fact that when JAL cut back and asked many of its employees to take early retirement, Nishimatsu first eliminated every one of his own corporate perks, including his own pay – which, at a mere $90,000 (U.S.), is below what JAL’s pilots get paid.

Nishimatsu noted in the CNN interview that many of the affected employees were about his age, 60, so he “thought he should share the pain with them.”

Obviously, that’s very different than in the United States, where top executives regularly make tens of millions of dollars a year, and where some compensation packages actually eclipse the hundred-million-dollar threshold. And some of the top earners are the very same executives who “managed” their companies into financial oblivion – and who took their trusting shareholders along for the ride.

If you want to see the latest example, just watch the parade of corporate-jet-riding, custom-suit-wearing corporate “beggars” that have been appearing (hat in hand) before the House Financial Services committee lately and you’ll see what I mean.

The pay gap between the boardroom and the factory floor – already a longtime topic of controversy here in the United States – has widened to the point that it’s become absolutely staggering. According to a survey conducted by the non-profit group, United for a Fair Economy, CEOs of large corporations made an average of $10.5 million in 2007, which is 344 times the wages of the average U.S. worker. The Economic Policy Institute puts it at only 275 times higher, which is still outrageous when you consider that the average working stiff won’t see in his lifetime what these guys have made in a year lately [To see how that disparity has grown over the past four decades, look at the accompanying chart, “Leaders vs. Workers”].

Capital One Financial Corp. (COF) CEO Richard D. Fairbank took home a cool $73.1 million last year, which is 1,456 times the median household income of $50,233 for taxpayers footing Capital One’s $3.55 billion bailout, according to The Corporate Library.

In Japan – and throughout much of Asia, for that matter – there’s a much more balanced approach, with CEOs more commonly making only 10 times to 15 times more than their base level employees.
“Businesses that pursue money first fail,” Yoshichika Terasawa, a Singapore-based managing director for the Japan External Trade Organization (JETRO) told me when we spoke at his home in that Southeast Asia city-state earlier this year. “Companies that have their employees in mind tend to do better longer and recover faster. We learned that in Japan during our own bubble economy.”

The numbers seem to bear out Terasawa’s assertion. According to a USA Today study, the 10 best-paid CEOs made more than half a billion dollars collectively. Yet, half the members of this stratospheric club were actually heading companies whose profits shrank dramatically.
The poster boy for this club could well be General Motors Corp. (GM) CEO G. Richard “Rick” Wagoner Jr., who closed four plants and posted a $39 billion loss in 2007, a period in which his company’s stock cratered 19%. But in the face of this financial mess, Wagoner’s compensation jumped 64% to reach $15.7 million.And GM apparently had a little something set aside; after all, Wagoner was able to take a corporate jet to Washington to plead for a taxpayer-funded bailout [For a breakdown on the top-earning CEOs of 2007, take a look at the accompanying graphic, “Top of the Charts.”]
.

The numbers, when they’re in for 2008 will probably be more egregious.
JAL’s Nishimatsu clearly understands what his U.S. corporate brethren do not. As the global economy has worsened in recent months, the Japanese executive recounted how he’s dug into his savings like the rest of us have had to, in order to deal with life’s challenges.
“The air conditioner broke, the water heater … and my car,” Nishimatsu said. “My wife is still telling me this is all your fault.”
We can certainly sympathize with him. But clearly, he can sympathize with us. Making the effort to relate to what employees and customers are feeling during such a difficult stretch is very important: It fosters pride in the work force, loyalty from customers and in long long-run, will also win over investors. My guess is that we’ll all be the most sympathetic and supportive of companies led by CEOs like Nishimatsu.
And that might be just what’s needed to get out of this mess. [For additional coverage of the executive compensation controversy, check out this related story in today’s issue of Money Morning that details how the 116 banks that are receiving billions in taxpayer-provided bailout money this year actually paid out $1.6 billion in compensation and benefits to their top executives last year].

[Editor’s Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this “New Reality” will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive.
Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “The Golden Age of Wealth Creation.” But Fitz-Gerald brings more than a realization – and an understanding – to the table, here. After a decade of work, he’s also developed a new computerized trading model based on a mathematical concept known as “fractals.” This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and this new market environment.]

News and Related Story Links:

Join the conversation. Click here to jump to comments…

About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

Read full bio

  1. H Therrien | December 23, 2008

    The real problem with CEO pay scales lies with the incompetent Board of Directors who hire the CEOs and agree to whatever pay they ask for.

    The Board of Directors makes the decision. If they are dumb enough to pay $10 million+ why not ask for it as a CEO.

    Clearly they don't have enough imagination or IQ to figure out a system that makes sense.

    The real problem is the incompetent Board members.

  2. Daduce | December 23, 2008

    Bingo ! They agreed to the deals with their respective CEOs, CFO's, they (the boards of dir) sucked their corporations dry – now they can shoulder the mess as far as we Joe & Suzie SixPacks are concerned.

  3. Garry | December 23, 2008

    I believe the "real" problem is the stockholders who have no idea how the company they invested in is conducting business.
    But this problem is being worked out as investors become aware of the need to know what is happening with their money.
    Also, as a retiree living on a very modest income, I don't blame CEO's who were smart enough to get paid well when they had the chance. They were paying attention when others weren't.

  4. M. Sloane | December 23, 2008

    Excuse Me, How many times have I seen a CEO of a major corporation being introduced as CEO and Chairman of the Board. That's right, Chairman of the Board who stuffs HIS/HER board with members who are friendly to HIM/HER. Therefore, the CEO gets whatever he wants.

    I call this Crony Capitalism. In fact, I have changed the Kudlow Creed to read: "We believe Crony Capitalism is the best path to our Prosperity!"

  5. R Tauss | December 23, 2008

    The heart of the problem is an ideology that has permeated U.S. corporations, media, and government. When Sen. Corker et. al. were demanding that auto workers cut their pay to that of Japanese companies, where were the accompanying demands that auto company CEO's cut their pay to that of Japanese auto CEO's?

  6. Thomas | December 23, 2008

    I agree with the general concept of the article. CEOs do get paid too much.

    However, it's obvious that the surveys you are looking at include stock and option based compensation. This skews the discrepancy for more shock value.

    But this compensation, especially in times like these, is worth $0. Richard Fairbank's, the CEO of COF, salary is actually $0. Fifteen years ago, when COF was spun off as a public company, he decided to take no salary and only be paid in stock options. If he's willing to take a risk like that, more power to him. He deserves what he gets, good or bad.

    Do CEOs get too many stock options? Sure, many do. But that practice has also been reigned in from the excesses of the late 1990s.

    Anyway, there's definitely too much camaradeie in the board room, where most board members are hand picked by management and are essentially a rubber stamp for whatever the CEO wants to do. That's the fault of investors. Many CEOs are just playing this system to their full advantage, which is a shame and, I'm guessing, will soon become a crime.

  7. John Lounsbury | December 23, 2008

    I have proposed that any compensation over approximately $1M per year (about 20X median family income) should be deferred and payable only after 10 years deferral. The a ultimate pay-out should be linked to company performance over the ten years, with the later years getting modestly more emphasis than the earlier years. The deferred amount would be be reduced if the executive did not stay with the company to the deferred payment year.

    Even with this formula, the maximum compensation needs to be limited below some of the extreme amounts that have been occurring over the past 2-3 decades.

    All of these reforms are in the domain of boards of directors and will not happen until the incestuous control of boards is changed.

  8. Josh Armstrong | December 23, 2008

    I think the biggest problem(s) lie not only with the CEO's but the greedy stockholders and board of directors. They want to make money fast, and line their own pockets first. But that never seems to enough with them it is always more, more, more. So they get the CEO that puts more of a show towards fast earnings. They are not realizing that it takes employees who are dedicated to make the company grow, and a giving back to the people, taking responsibility for their actions and actually doing some work in the end.

  9. Chris Hahin | December 23, 2008

    I have filed proxy proposals in the past to limit executive compensation only to find that the SEC previously considered pay and stock options as an "ordinary business decision" not subject to stockholder approval. The other startling fact was that other stockholders had literally filed hundreds of similar proposals. That rule was changed to making the stockholder proposals "advisory". Therefore, even if the stockholders overwhelmingly approve pay and compensation reductions for a failing executive, the corporate board can simply set the stockholder intentions aside. Every stockholder proposal I have ever seen always is described by these boards as "not in the best interests of the corporation", and the actual proposal is annotated with the note: "management suggests you vote no on this proposal". This is equivalent to going into the voting booth where individual candidates have "yes" and "no" listed next to their names. The stockholder voting process is not corporate democracy, it is corporate dictatorship.

  10. Bill White | December 23, 2008

    There are two types of CEOs. The first is the man or woman who has to wear all of the hats and pushes a dream into reality, working late into the evening 7 days a week and deserves the compensation he or she gets. In truth, much like the sales executive, the salary is commensurate with the performance.

    On the other hand, the CEO who steps into to run the company in its mid to mature growth, systems in place, marketing churning in the prospective customers rarely ever gets a salary tied to a specified outcome.

    Herein lies the problem. I have no problem with an exec making 75 million a year if he pushed his companies profit up by twice that. The expertise and mastery of their market would gladly command such a fee. However, for a CEO to bleed a company of profits at the expense of their customers and shareholders then brazenly seek assistance from the government (which we all know means our pocketbooks) is double dipping the system and stepping into the rabbit hole of deceipt.

    Free enterprise means you are free to succeed or free to fail, but with this right comes the responsibility to manage with fiduciary responsibility.

    And for the shareholders, I can understand the desire to grow security and wealth, the right to seek happiness is woven into the American tapestry and in our market we should encourage that. But I must ask you, can any amount of money actually wash away the sins of profiting without care for ethics? Can you truly sleep well each night knowing your profit cost 30,000 jobs? If you can, then sleep well now while you're alive to do so, because I suspect that your sleep may not be as peaceful when it's time to transition into the next world.

    The behaviours we are seeing in the elitist components of modern commerce ought to go back and read about the French Revolution, there are many among us growing ready to bring out the guillotines.

    The problem is simple, we were once a nation who built the archetype of our leadership based on the hero/king, but somewhere in the last several decades we have thrown the hero to the minotaur and taken the villian as our guide.

    Perhaps you find evil shrouded in more glitter.

    This is a time of great opportunity, but it comes only from growing pains. The leadership who can stand up today and run a company with true integrity; sacrifice the occassional profit to show greater humanity to your workers and to your consumers; this will be the leadership who will grow in the decades to come. For those who would rise to this challenge, know, you will have to live it, not just talk it…thinly disguised veils of eco-friendliness and denim Fridays won't do anymore.

  11. WARREN P. FREED,CPA | December 23, 2008

    These bums should remind themselves that to enter paradise will be like a camel passing through the eye of a needle. Even worse is that these same leaders turned their heads to the fraudulent practices taking place by the Ivy League grads on Wall Street. What with their development of practically worthless packaged deals, CDO's, CDS's and other acronyms. And being paid obscene salaries and bonuses and now outside our law in their Hampton mansion and large bank account free from the market freefall.

  12. Paul Coote | December 24, 2008

    The problem is not how much these CEOs earn. It is rather what value you bring to your company. So, a CEO can always earn $50 Million per year, as long as he or she is generating revenue amounting to at least ten times that $50 million. The Capitalist System was designed to reward those who are innovative and hardworking. It was not meant for a bunch of parasites who think the world earn them a living. Good Corporate Governance is absent from many Corporations, both public and private. They are replaced by greed and rampant corruption. It cannot be business as usual. If the captain of these Corporations cannot run their businesses, then someone else is going to run it for them. When the dust finally settles, we will be faced with one gigantic predicament. That is, whether to sell off these iconic corporations to foreigners; and when I say foreigners I mean the Chinese, Middle- east, Asians; or to allow this great bastion of capitalism to metamorphose into State Capitalism. The Corporate landscape of America is about to change its face, defeated by the underbelly of the very system that was designed to be just and equitable.

  13. malcolm rollinson | December 24, 2008

    In 60 years of investing , I conclude that there are 2 kinds of C.E.O's and directors. The greedy and the greedier.

  14. s c sekar | December 24, 2008

    Sir,
    It is great and knowledgeable. This is all come out when the days are not great. We dont say anything if the results of the companies are good. Now each should save when the company earns profit and invest the same when they dont do good. Indian companies are doing the same. This will save them when the whole world face trouble.

    Any how it nice to know about others.
    s c sekar

  15. Nintendo DS Lite | December 24, 2008

    CEOs in China should keep tradition rather than follow USA.

  16. Ruby Schwanke | December 25, 2008

    Chryler and those other corporations should not be getting taxpayer money unless the big Executives, etc start taking a big pay cut with no Bonus. It is about time the taxpayers lay down some hard facts to these Rich People who want to live high on taxpayer money. Thanks

  17. Dale Mahlum | December 26, 2008

    I do not believe any CEO is worth more than 1 million a year in pay—bonus's can be paid if the company makes money, but bonus money cannot exceed yearly pay. The BofD have become too cozy with oneanother , and letting the CEO have these large salaries is just criminal and they should be punished.

  18. Searcher | December 28, 2008

    I am usually very uncomfortable with any position that smacks of populism. However, the marginal value to a highly paid executive of that extra 10(100!) million is merely score keeping. They expect the largesse and the BOD expects them to be unfavorably motivated if their value relative to their peer executives is diminished. These expectations are now in the process of being ratcheted down. Those formerly rudderless proxy 'owners' must step up and enforce realistic expectations by persistent pressure on all BOD's for an entire generation to come.

Trackbacks

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK