Editor, Manteca Bulletin,
Let’s address the free market. Wells Fargo has been a bad corporate player of late. Each one of us gets to vote with our checkbook. If we are offended by Wells Fargo, we can simply move our accounts to another bank that will provide the same services at approximately the same price. It may take some effort on our part but it is our choice. This is how a “free market” works right? Let me pose a few more questions.
Are there any other “markets” at work? In my experience there is an internal market in every company. In Wells Fargo’s case the responsibility for performance was pushed down to the lowest level of employee. Most of the people selling accounts made less than $50,000 a year while top executives like Carrie Tolstedt and John Stumpf leave with exit packages of over $100 million. I guarantee you that performance bonuses were paid to lower level employees with the instruction that any disreputable business practices would result in disciplinary action up to and including their termination. I also guarantee that failure to meet goals would result in disciplinary action up to and including their termination. This is the definition of “a rock and a hard place.”
The lower level employees can find another job, right? They are not indentured servants but the vast majority of employees in the USA are living paycheck to paycheck. The risk is too great for many families to bear. The skills learned at these levels may not be in high demand and gaining new skills is expensive. These employees are free to leave but can they? There will be a loss of benefits and seniority. There is also the fact that Wells Fargo pays well, has good benefits and lots of room for advancement. It may be a very bad idea to leave.
Why do C-level Senior Managers make so much money? If there is a competitive market wouldn’t someone of equal qualification agree to do the job with an exit package of $10 million? While these jobs are difficult, all consuming, and political the exit packages put them in same net worth category as many of the royal families. Queen Beatrice of the Netherlands has a net worth of $200 million and is 14th on the net worth list of the royals. While I would be the first to argue that they make greater contribution to society than the royals I would also argue that the Board of Directors and the Compensation Committee are being overly generous with stockholder money.
Wells Fargo has 279,000 employees. The C-level senior managers are compensated through stock options. Stock prices rise through earnings. If stocks rise through earnings then it is an easier decision for Board and CEO to give 100 Senior Managers a million dollar raise than 279,000 employees a thousand dollar raise. They spend $100 million instead of $279 million dollars and save $169 million in the process. That $169 million goes directly to the earnings and raises the stock price for the Senior Managers. This is why employees “drink the Kool-Aid” and try to join the executive ranks. That is not an evil choice but a pragmatic one.
Are some CEO jobs worth more than others? The Waltons, Bill Gates. Mark Zuckerberg and Larry Ellison all created their companies from scratch. They created value where none existed and they originally owned the company. Companies like Wells Fargo is an old company started in 1852 by Henry Wells and William Fargo not John Stumpf. It is a regulated company. The Federal Reserve sets the interest rates, reserve requirements and the myriad of regulations they must abide by for all big banks which have major influence on their profitability. Regulated businesses don’t have the creative leeway that entrepreneurial companies do so why do the executives get paid so much? Wells Fargo, PG&E and Comcast are clear examples of regulated businesses where CEO compensation needs to be reconsidered.
So why is the middle class shrinking? You may be thinking that I am some socialist trying to point out the folly of the free market. I assure you that I believe in conservative economics and the free market. I believe that government is too expensive a burden on our households and needs to be smaller. Wells Fargo is not evil and has provided jobs for 279,000 people. By all accounts John Stumpf has been an outstanding CEO who most of you wouldn’t recognize without the recent news scandal. I am trying to point out that one of the causes of the shrinking middle class is corporate structures that reward the few and pay subsistence level wages to the many because stock compensation packages demand it. If you believe that Wells Fargo is the exception I can assure you that virtually every public company works this way. As with all things, the pendulum has swung too far toward stock based compensation. There are fair alternatives that could spread the compensation down the ranks of the employees.