On Exxon, Corporate Salaries, and Gouging
posted by Dave Hoffman
The blogosphere was abuzz toward the end of last week about Lee Raymond’s reported $398,000,000 retirement package. The obscene package contrasts sharply with Raymond’s congressional testimony, at the height of the post-Katrina gas gouging crisis, that “”We’re all in this together, everywhere in the world.”
Nope.
When you make $190,915 7 days a week, 365 days a year you aren’t in it with us. You don’t pump your own gas. In fact, I doubt you even see the guy who pumps your gas. Why would you? Let’s say your driver stopped to pump your gas on the way to your jet. It takes 3 minutes. That’s $400 of time, wasted. You could have jawboned oil prices up to $50/barrel in that time! Or doodled out a plan for world domination!
Sheesh. It’s numbers like this that have to give folks who believe in shareholder democracy some pause. This information was available last year, at the latest, but Exxon’s stock has been on a flier of late. Nor will forseeble changes in corporate governance prevent this type of compensation plan, whatever happens in Disney.
Needless to say, I think that the scope of this compensation package provides further evidence for the need of a windfall tax on Big Oil, not least because it would amount to the Kaldor-Hicks transfer that nominally supports arguments for permitting price gouging after catastrophes. Other taxes are equally attractive, because there is no incentive based reason that I buy that justifies a $398,000,000 pension plan.
Now, I’ll admit that Raymond was CEO of Exxon from 1993-2005, and had led the company from strength to strength. But Exxon wasn’t downtrodden when he assumed control, and reaping profit from an oil company couldn’t have been incredibly hard in an era of global instability, increasing demand for oil worldwide sparked by growth in China, the continued immunity of OPEC to antitrust liability, and, shucks, a war in the Mideast or two. I don’t know what in my book would qualify you for a retrospective paycheck like the one Raymond will collect. But steering the ship to its berth when the moon was full and the waters calm sure isn’t it.
[p.s. If you want to read a great case talking about oil company profit-taking during oil shocks, check out Eastern Air Lines v. Gulf Oil, 415 F. Supp. 429 (S.D. Fla. 1975), which I taught my class last week. Fun case. Great facts.]
[Update: Bill Sjostrom corrects my reliance on mainstream media reports and suggests that the real value of the pension is slightly under $100,000,000. Fair enough Bill. The other $200,000,000 looks to be largely composed of previously issued options and restricted grants of stock, i.e., potentially incenting compensation. But the windfall argument remains.]
April 17, 2006 at 12:01 am
Posted in: Corporate Law
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Responses (25)
John Jenkins - April 16, 2006 at 11:55 pm
Needless to say, I think that the scope of this compensation package provides further evidence for the need of a windfall tax on Big Oil, not least because it would amount to the Kaldor-Hicks transfer that nominally supports arguments for permitting price gouging after catastrophes.
I didn’t realize there was actually any evidence for the need for any such tax, which is not to say there are no reasons for it. Politicians need to appear as populists, and big business is always a convenient target. Heck, price controls (which is what this is a roundabout way of attempting) have worked so well in the past, why not try them again?
Given the already confiscatory (and stupid) double corporate tax (with up to 70% (50% for now) being taxed away at the federal level, I can see how more of a tax is just what we *need* to fix things.
Matt - April 17, 2006 at 12:05 am
All I can say is that I hope he spends some of that huge pile of money on some plastic surgery becuase, rich or not, he’s pretty gross looking with that huge roll of fat under his chin. (Maybe it’s full of money.)
John Jenkins - April 17, 2006 at 12:17 am
As a side note, Gulf Oil appeared in my Contracts casebook no fewer than four times (we skipped one chapter, so it might have been in there) and I got REALLY tired of that one before it was all over.
speedwell - April 17, 2006 at 8:44 am
The fact that we think he doesn’t deserve it and that Gulf could have made a better choice about what to do with their money is immaterial, no matter how right we are to think so. Your right to dictate to Gulf in this case is equivalent to your right to tell an individual how to spend their money. That is, none at all, unless you are the entity in question (i.e. a Gulf stockholder, or the individual in question).
Christine - April 17, 2006 at 9:54 am
Dave, I’m not sure that it follows from this generous compensation package that we should have a crude oil windfall profits tax. If the Delaware Supreme Court upholds Ovitz’s compensation package, then he earned over $300k a day. Should we then institute a Hollywood Windfall Profits Tax? We know that when life turns bad, people turn to escapist entertainment, so I guess Disney profits from others’ misfortune as much as oil companies do.
Kay Hoagland - April 17, 2006 at 10:16 am
You know, if most of their stockholders sold maybe we could get their attention when stock went down……. but, it is a win win situation for them then they could buy up at cheaper prices and make even more money when stock went up. Too bad we cant regulate the retirement benefits fot top management……..In my younger years I worked as an Exxon clerk and we sure didn’t get the benefits………..
Frank - April 17, 2006 at 10:51 am
Here’s a telling statistic from Tom Ashbrook’s show on this, featuring Jon Vogel and Rakesh Kumar from HBS: the top five salaried managers at publicly traded companies now are paid over 10% of corporate profits–up from 4% just 20 (I think) years ago.
It is troubling that entrepreneur-style returns are going to individuals who do not take entrepreneur-style risks.
Frank - April 17, 2006 at 12:01 pm
Here’s another interesting take on the topic:
http://nationaljournal.com/crook.htm
Chris - April 17, 2006 at 2:46 pm
You would think that the market would punish Exxon for this. Half a billion is quite a lot of money, even for Exxon. If another company tightened its belt they could claim market share through fiscal responsibility.
The fact that this doesn’t happen points to a problem with the market set up, probably with the fact that Presidents and board members have too much of a quid pro quo relationship.
All of which is my way of saying that a windfal tax is not the way of dealing with this. Especially if we believe that the tax will be paid by us at the pump and not by reducing executive packages…
Dave Hoffman - April 17, 2006 at 4:40 pm
Christine: But the underlying justification for the windfall profits tax is that the industry directly benefits by raising prices after an emergency, which isn’t the case in the Hollywood example. Movie ticket prices are relatively stable: gas prices aren’t. If wealth maximization justifies repealing PGRs, then surely redistributive taxation ought to follow.
John Jenkins refers to high corporate tax rates, but the key statistic is the percent of corporations who fail to game the system and pay any tax. At least historically, that figure has been very, very low.
The argument that Exxon is free, all things equal, to reward its employees as it likes is, to my eyes at least, a little overdrawn. Exxon is a creature of state law and federal regulation, not a natural person. This pension grant amounts to an enormous wealth transfer from gas-consumers to one individual. If this isn’t something of public concern, worthy of (at least) public comment, what is?
Chris suggests that taxes will be paid on the pump. This is a complicated issue, I think. If we had a windfall tax, it is unclear what the pass-through rate would be. Moreover, at some point, gasoline demand would shift.
Maryland Conservatarian - April 17, 2006 at 6:57 pm
“the underlying justification for the windfall profits tax is that the industry directly benefits by raising prices after an emergency”
…and increased profits lead to more exploration and hopefully greater supplies. Despite the populist wailing and gnashing of teeth regarding this, oil company profits for 4Q 2005 were still less than $.09/ per dollar of sales. (Many other industries enjoyed far greater profit margins than that)
But what do I know – maybe Professor Hoffman and a few of his friends could do us all a favor and start up an oil company, selling their product in a non price-gouging way, all the while ensuring their workers, shareholders and constituent governments are content with their share of the pie…after all “reaping profit from an oil company [sh]ouldn’t..be…incredibly hard in an era of global instability, increasing demand for oil worldwide sparked by growth in China, the continued immunity of OPEC to antitrust liability, and, shucks, a war in the Mideast or two.”
Next time you’re at a gas station, buy a bottle of spring water & calculate its cost per gallon as compared to the gas you just purchased….and reflect on the fact that over the past 25 years, taxes represent the fastest growing cost component of a gallon of gas…..
John Jenkins - April 17, 2006 at 10:13 pm
he other $200,000,000 looks to be largely composed of previously issued options and restricted grants of stock, i.e., potentially incenting compensation. But the windfall argument remains.
I wasn’t aware that you had made an argument. I see an assertion, but no argument (and a second assertion about the Corporate income tax, also unsupported). If there is an argument to be made for a windfall profits tax, you’re not making it. Did you make the argument somewhere else that I’ve missed? I’d love to read it.
Dave Hoffman - April 17, 2006 at 11:30 pm
John and MC both seem choleric this evening. As to both, I’d ask what moral principle they believe justifies enforcing substantively unfair contracts. If the principle is wealth maximization, then tax-and-transfer payments are the normally accepted way of squaring the circle.
John Jenkins: I don’t know what evidence you want about corporate tax rates. I read the GAO report on the topic. Do you have contervailing statisics? As for an argument, please read the linked posts. And, by all means, tone it down. This isn’t the VC.
geoff manne - April 18, 2006 at 12:46 am
I can’t speak for the others, of course, but among the things I find troubling with your claims is precisely the idea that you or anyone else is in a position to deem ex post an entire swath of contracts as “substantively unfair.” I gather you know it when you see it, but I, for one, am exceptionally uncomfortable with your assessment here. You dismiss incentive arguments because there is none “that you buy” to justify this particular compensation arrangement. So where do you draw the line? What’s your principle? How do you do the math to arrive at the conclusion that efficiency in fact requires that gas company profits be “returned” to consumers in these cases? Do you account at all for the dynamic consequences? And can you defend your assertion (in your other, linked post) that price gouging laws work as well as the market to convey information? You must implicitly assume that the trigger will be set at the “right” price. How robust could that claim possibly be? And why should the information contained in the binary mechanism (PGR is either triggered, or it’s not) be more informative than the market’s dynamic mechanism? Just a few thoughts. I remain wholly unconvinced by your claims about price gouging, but I would be interested in hearing some better-developed arguments if you have them.
Anthony - April 18, 2006 at 6:57 am
Geoff,
Maybe the principle is, when there are millions of people starving and living on less than a dollar a day, it’s obscene that a group of corporate gangsters can hand one of their friends dynastic wealth that will support an extravagant lifestyle for generations to come.
andreww - April 18, 2006 at 7:46 am
I don’t think that just because this guy made millions for his retirement package means that we need to add another tax onto oil companies. They already pay billions more than the make in profits every year to the gov’t. More than I can even imagine. It has been proven that another tax like the WPT will only make things in the oil market worse. I think the last thing we need in this country right now is a declining oil market.
Maryland Conservatarian - April 18, 2006 at 9:20 am
sorry for the cholera – as to enforcing an “unfair contract” – doesn’t sound like either party to the contract has any problem with it so I’m guessing the government won’t be called upon to decide enforcement….but if we are still insistent upon exacting some measure of populist justice on Exxon, we can just return the money to the people directly in the form of lower gas prices. Using the number of $100,000,000, we can lower gas prices a dollar ’till the amount is “returned”….ok, that’ll take about a day.
KipEsquire - April 18, 2006 at 9:59 am
Could you do what he does? If not, then what standing do you have to complain?
Every advocate of central planning envisions himself as the central planner.
Julia - April 18, 2006 at 1:26 pm
I wonder if some of the people so vehemently defending Exxon here are connected on this chart?
http://infosthetics.com/archives/2006/04/greenpeace_exxon_secrets_visualization.html
Or are they just deluded tycoon-wannabes who think someday they too will join the ranks of the ultra-elite?
Rachel - April 18, 2006 at 5:42 pm
I don’t really see how more taxes on oil companies is going to help us at the pump. Like andreww said, these companies already pay exhorbitant amounts of taxes, and any extra costs tacked on are only going to be fed to consumers. I don’t think it’s really a matter of defending Exxon… it’s a matter of common sense. The only way to get our gas prices down is through good energy policy (including finding domestic sources of oil, investing in alternative sources, etc.), not more taxes.
Kipster - April 18, 2006 at 7:15 pm
If the point is really to help the “millions of people starving and living on less than a dollar a day,” why support a tax that would disproportionately hurt the poor here in America? I understand wanting to hurt big oil–their profits seem obscene. Having said that, I’m not sure it follows that they are to blame for selling BILLIONS of consumers a product every day. They’re meant to make a profit, which not only helps them, btw, but also the millions of people whose pension and retirement packages include big oil…teachers and cops and nurses, etc. At the end of the day, WE are to blame for consuming so much of their product. And until we stop pointing fingers and start talking about a sensible, comprehensive energy policy that reduces our dependence on foreign oil, big oil will continue to make staggering profits.
Joel - April 18, 2006 at 9:13 pm
Wow…that sure does seem like A LOT of money. But if I worked over forty years at a company that became the most profitable in America I’d want a nice chunk too. Alas I am not in his shoes. I am a middle class American trying to get by. That’s why I myself oppose a WPT. It would surely trickle down the pipeline (no pun intended). A WPT imposed on US oil companies will in turn be imposed on consumers. I just don’t understand how taxing these companies even more is going to help us at all. It didn’t help the last time it was tried. In fact the last WPT was repealed because it backfired. I cannot afford for my government to make the same mistake again.
Debbie - April 19, 2006 at 12:52 am
As KipEsquire said:
“Every advocate of central planning envisions himself as the central planner.”
This has never worked in modern times and won’t work no matter how many times you try it. Democracy (or a Republic) is messy and things like huge pensions happen. But it beats the alternative of Big Brother and taxing away any incentive for creativity and productivity.
How are France, Germany, Sweden, et. al, doing these days? Still suffering under double digit unemployment? They’ll never learn from their neighbors like Ireland or the US: less taxation is the road to sustained prosperity.
make money online - April 28, 2006 at 8:12 am
Great article, that was interesting
Andy Maidment - February 6, 2007 at 10:34 am
I have to give this site credit, at least it did state at the top that it was an OPINION site. Most don’t. As for Exxon, I’ll never be a multi-millionaire, not at the rate I’m going but I’m not going to hold it against anyone else who can get there. If you really want to complain about the cost of gas, think about it, you can lower the cost of gas by nearly a dollar by not taxing it, and the gas company will still only make $0.08 per gallon and most of that from the rest of the world.
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