‘Executive Excess’ report finds fund managers reaped windfalls in 2006

Date: Wednesday, August 29, 2007
Author: Diane Stafford, Kansas City Star

The 20 highest-earning managers of private equity firms and hedge funds had an average income of $657.5 million last year.

To compare: That was 22,255 times the annual pay of the average American worker.

Stratospheric earnings of those investment company income leaders received particular attention in the 14th annual executive pay study by the Institute for Policy Studies and United for a Fair Economy.

The groups, which say that rising income inequality is a major problem in the United States, will release their report, “Executive Excess 2007,” today.

This year’s report levels special criticism at equity and hedge funds. The managers have figured prominently in the collapse of the subprime lending industry.

Overall, CEOs of large U.S. corporations earn in one day as much as the average U.S. worker earns in a year, the report said, citing a survey of 386 of the Fortune 500 companies.

Those big-company CEOs also enjoyed perks — such as corporate jet use, country club memberships and company-paid personal taxes — worth an average of $438,342 last year.

In comparison, America’s lowest-paid workers this year received an increase in the national minimum wage from $5.15 to $5.85 an hour.

Recognizing that leadership deserves financial reward, the report focused more on the “How much is enough?” question and the social responsibility of the income leaders.

“Private equity managers, to extract such massive personal rewards out of the companies that sit in their portfolios, typically make decisions — on matters ranging from job cuts to pensions — that place steady downward pressure on U.S. working standards,” the report said.

The report said the equity- and hedge-fund leaders “are leading a revival of the 1980s leveraged buyout phenomenon that hollowed out a variety of once-venerable companies, while enriching a precious few.”

Last year, there were more than 1,000 corporate buyouts, with hedge funds accounting for between one-third and two-thirds of daily global turnover in financial markets, according to the International Trade Union Confederation.

“Unlike companies that are publicly traded on Wall Street, private equity and hedge funds are not required to report executive compensation to the federal Securities and Exchange Commission,” the report said.

The report explained that private equity and hedge-fund managers typically receive 20 percent of the profits that their funds generate, plus annual fees equal to 2 percent of the assets they manage.

Such fund managers “typically attempt to quickly increase the value of firms they buy through drastic cost-cutting that hits workers hardest,” the report said.

For example, Bain Capital’s buyoutof KB Toys led to cutting about one-third of the KB Toys work force, or 4,000 jobs.

“These privately held funds are neither accountable to shareholders nor required to report on their activities to the SEC,” the report said.

The financiers’ abilities to extract huge sums from their deals last year led in a few cases to managing partners earning incomes exceeding $1 billion.

Also, managers of private equity firms and hedge funds have a tax loophole that allows them to pay lower income tax rates — the 15 percent capital-gains rate — than the top 35 percent rate that would apply if their earnings were treated as ordinary income.

The Economic Policy Institute estimates that this tax loophole costs the federal treasury about $12.6 billion a year.

“Executive Excess 2007” also compared pay levels for private industry leaders with the much lower compensation paid leaders in the U.S. government, military and nonprofit sectors, many of whom supervise comparable budgets and staffs.

Corporate chieftains in the United States also earn significantly more than their counterparts in European companies, the report showed.

To reach Diane Stafford, call 816-234-4359 or send e-mail to stafford@kcstar.com.