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September 01, 2005
War Millionaires: Defense Contractor CEO Pay Up 200 Percent Since 9/11
    by Willliam Baue

The ratio between CEO and worker pay across the market climbs to 431 : 1, up from 301 : 1 last year, according to a new CEO pay study from United for a Fair Economy and the Institute for Policy Studies.

"I don't want to see a single war millionaire created in the United States as a result of this world disaster." So said President Franklin Delano Roosevelt about World War II, and President Harry Truman first made a name for himself as a Senator by crusading against war profiteering. The same cannot be said about the current wartime situation, as war profiteering seems to be the trend of the day according to the twelfth annual CEO compensation survey conducted by United for a Fair Economy (UFE) and the Institute for Policy Studies (IPS).

The report, which surveys 367 leading US corporations, focuses particularly on 34 of the top 100 defense contractors in 2004 with 10 percent or more of their revenues from defense contracts. It finds "a trend towards individual war profiteering by CEOs," with CEO pay at these companies rising 200 percent from 2001 to 2004.

"As the death toll mounts among Americans and Iraqis, it seems particularly unjust to see executives profiting personally from the horrors of war," states the report, written by UFE's Scott Klinger and Liz Stanton and IPS's Sarah Anderson and John Cavanagh.

The report spotlights several individual defense contractor CEOs to illustrate the perversity of their personal wealth-enhancement. Bulletproof vest maker DHB Industries (ticker: DHB) CEO David Brooks pay rose a staggering 3,349 percent from 2001 when it stood at $525,000 to 2004 when it reached $70 million. In addition, last year Mr. Brooks sold company stock worth about $186 million, triggering a stock plummet from above $22 to under $7.

"In May of this year, the Marine Corps recalled 5,277 DHB Interceptor armored vests after questions were raised about the vests' ability to stop 9-mm pistol rounds," states the report. "By that time, of course, Brooks had pocketed $250 million-plus in war windfalls."

"Defenders of sky-high CEO pay often argue that such compensation levels are justified because corporate leaders bear tremendous responsibilities and must oversee complicated business activities," states the report before comparing defense CEO pay to that of military generals. "Although the military leaders are responsible for the lives of thousands of personnel and command highly complex operations, they receive only a tiny fraction of typical defense contractor pay."

The ratio between median pay for defense contractor CEOs to military generals with 20 years experience nearly doubled since the September 11 tragedy that set the so-called "War on Terror" in motion, rising to 23-to-1 ($3.9 million compared to $168,509), up from 12-to-1 in 2001.

Stepping back to look at across-the-board comparisons, the ratio of average total compensation for all 367 CEOs ($11.8 million) to average production worker pay ($27,460) is 431-to-1 in 2004, up from 301-to-1 last year.

"While this is still smaller than the 2000 peak of 525-to-1, it is more than 10 times as large as the 1982 ratio of 42-to-1," states the report.

The report also takes stock of CEO pay trends over the past dozen years, identifying five predominant trends such as pension underfunders, tax dodgers, book cookers, and stock tankers. The report also inducted CEOs representative of these trends into a "Hall of Shame." For example, in 1999 Computer Associates (CA) CEO Charles Wang earned $655 million, his share of a $1.1 billion stock bonus shared among the company's three top officers; the next year, questions about the company's accounting practices precipitated a collapse in its stock price of 72 percent.

This exemplifies a trend documented by the report by comparing S&P 500 returns since 1990 of a $10,000 initial investment to those of an equal portfolio invested every year in the company of the highest-paid CEO. The former portfolio would have risen to $48,350 by the end of 2004, six times the returns of the "Greedy CEO" portfolio, which would have fallen to $8,079. So much for "pay for performance."

Counterbalancing these negative examples are a few positive examples, such as Whole Foods Market (WFMI) CEO John Mackey, whose pay is limited to no more than 14 times the pay of the company's average employee. Best Buy (BBY) CEO Brad Anderson gave 200,000 stock options to outstanding non-executive employees in 2003.

"Foregoing the grant worth $7.5 million sent the message that Andersonís $3.2 million salary and bonus were enough and the contributions of others were critical to the companyís success," the report states.

These cases exemplify the report's recommendation of voluntary corporate action to address CEO pay disparity. Other recommendations include Congressional action, such as freezing pay levels for executives of companies receiving wartime defense contracts and other war-related contracts such as for Iraq reconstruction. Another recommendation is for the Securities and Exchange Commission (SEC) to foster competitive corporate board elections and increase shareholder participation in governance of executive compensation.


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