Even with better information, shareholders lack power to correct problems

CEO pay has become so unhinged from logic that even even Christopher Cox, President Bush’s Security and Exchange Commission Chairman, has vowed reform. Cox calls it “absolutely a top priority” to give shareholders “comparable executive-to-executive and company-to-company” numbers so they can “discipline” corporate boards who approve mammoth compensation. (Presently, myriad forms of compensation, —corporate jets, country club memberships and ridiculous severance packages often are obscured from shareholders.)

Cox is right to be concerned. At the 367 biggest companies last year, average CEO take-home pay was $11.8 million, while compensation far outpaced increases in profitability. Average worker pay, meanwhile, was $27,460.

No doubt, adequate disclosure of pay packages is sorely lacking at many companies, but a bigger question remains: even if they have that information, how exactly will shareholders go about disciplining corporate boards?

I ask, because at almost all U.S. companies, shareholders have about zero say into who sits on the board of directors and how executive pay is set. The directors are typically nominated by management, and shareholders are given one and only one slate of directors to choose from—a Soviet-style election that virtually guarantees managers will get their trusted friends on the board of directors. So it’s no surprise that executive pay packages continue to defy common sense. After all, what’s a few million among friends?

Unfortunately, Cox has demonstrated no interest in injecting even a modicum of accountability into the process by making it easier for minority shareholders to nominate candidates to the board of directors, something his predecessor, William Donaldson, unsuccessfully pushed for. The Chamber of Commerce and other lobbying groups for large corporations vehemently opposed any suggestion of this “proxy access reform,” effectively killing the proposal.

Without giving shareholders some means of holding directors directly accountable, it’s not clear how pay packages will ever be brought under control. Shame clearly hasn’t worked. To claim that directors would be more diligent if only they had better information doesn’t pass the straight face test.

Yet, there is some reason for hope. We may finally be reaching a critical mass of big institutional investors who are legitimately concerned about runaway CEO pay—perhaps enough to effect some change.

After all, bemoaning runaway executive pay is not just for cranky Grinches anymore. It’s also for Florida Governor Jeb Bush, who just last week announced that he was sick of “outrageous” executive compensation and “undemocratic” proxy voting and that Florida’s state pension fund was going to start using its $116 billion in assets to push for better corporate governance.

Recently, the largest U.S. manager of retirement funds, for university and college employees with $360 billion in assets, TIAA-CREF, also denounced high CEO pay. “There’s a burden on the board of directors to justify its compensation choices and explain them, so that shareholders can be confident that these are the right decisions,” said John Wilcox, the organization’s senior vice president.

Even a whopping majority—90 percent—of institutional investors think that corporate executives are overpaid, according to a recent Watson Wyatt survey. And the 85 percent who think that these excessive payments are hurting corporate America’s image (according to the same survey). And the 10 pension funds from the U.S., Canada and Europe (which represent a combined $1 trillion in assets) recently sent a confidential letter to the SEC, urging the agency to look more closely at how executive pay is being set at big companies.

But will that be enough?

After all, while CEOs continue to receive double-digit percentage raises year after year, workers barely keep pace with inflation. At 431-to-1, the U.S. ratio of CEO to worker pay is an anomaly among industrialized nations, where a more typical ratio is 25-to-1. Meanwhile, the percentage of company profits going to the top five executives more than doubled between 1993 and 2003, growing from 4.8 percent to 10.3 percent.

Yet, with each passing outrage, it seems that we are getting closer and closer to a critical mass of influential and respected investors who are completely fed up. When that moment comes, it is hard to say.

More disclosure can help bring us closer by highlighting more abuses. But when we are finally at that critical moment where enough major investors want to do something about excessive pay, they are still going to need the tools to do so—be it more say in selecting directors, the ability to vote directly on executive pay packages, or both.

If Cox is serious about disclosure, great. More information is always helpful. But without also giving the shareholders the tools to actually use this information, disclosure alone may not be such a generous gift for reform after all.

Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy. An earlier version of this article was written for TomPaine.com.

© 2005 ReclaimDemocracy.org

By Steven Greenhouse
First published by The New York Times, April 4, 2004

Editor’s note: We’ve known the problem documented here is widespread because we’ve received numerous e-mails and calls testifying to the problem over the past few years, but we lacked the resources to investigate. We’re encouraged that a major media outlet finally has done one adequate, albeit superficial, report. Now we will see whether the story gets the follow-up it deserves from the media and the justice system.

As you read, note that there is no mention of any significant legal consequences to prevent corporate executives from engaging in these crimes. As a subsequent letter to the Timeseditor noted, “The toothlessness of the law is the reason for its constant violation. Regardless of the size of the offense, the culprits return to their business, a bit lighter in the pocketbook but not much the worse for the attempt.”

NY Times title: Altering of Worker Time Cards Spurs Growing Number of Suits

As a former member of the Air Force military police, as a play-by-the-rules guy, Drew Pooters said he was stunned by what he found his manager doing in the Toys “R” Us store in Albuquerque.

Inside a cramped office, he said, his manager was sitting at a computer and altering workers’ time records, secretly deleting hours to cut their paychecks and fatten his store’s bottom line.

“I told him, `That’s not exactly legal,’ ” said Mr. Pooters, who ran the store’s electronics department. “Then he out-and-out threatened me not to talk about what I saw.”

Mr. Pooters quit, landing a job in 2002 managing a Family Dollar store, one of 5,100 in that discount chain. Top managers there ordered him not to let employees’ total hours exceed a certain amount each week, and one day, he said, his district manager told him to use a trick to cut payroll: delete some employee hours electronically.

“I told her, `I’m not going to get involved in this,’ ” Mr. Pooters recalled, saying that when he refused, the district manager erased the hours herself.

Experts on compensation say that the illegal doctoring of hourly employees’ time records is far more prevalent than most Americans believe. The practice, commonly called shaving time, is easily done and hard to detect – a simple matter of computer keystrokes – and has spurred a growing number of lawsuits and settlements against a wide range of businesses.

Workers have sued Family Dollar and Pep Boys, the auto parts and repair chain, accusing managers of deleting hours. A jury found that Taco Bell managers in Oregon had routinely erased workers’ time. More than a dozen former Wal-Mart employees said in interviews and depositions that managers had altered time records to shortchange employees. The Department of Labor recently reached two back-pay settlements with Kinko’s photocopy centers, totaling $56,600, after finding that managers in Ithaca, N.Y., and Hyannis, Mass., had erased time for 13 employees.

“There are a lot of incentives for store managers to cut costs in illegal ways,” said David Lewin, a professor of management who teaches a course on compensation at the University of California, Los Angeles. “You hope that would be contrary to company practices, but sometimes these practices become so ingrained that they become the dominant practice.”

Officials at Toys “R” Us, Family Dollar, Pep Boys, Wal-Mart and Taco Bell say they prohibit manipulation of time records, but many acknowledge that it sometimes happens.

“Our policy is to pay hourly associates for every minute they work,” said Mona Williams, vice president for communications at Wal-Mart. “With a company this large, there will inevitably be instances of managers doing the wrong thing. Our policy is if a manager deliberately deletes time, they’re dismissed.”

Compensation experts say that many managers, whether at discount stores or fast-food restaurants, fear losing their jobs if they fail to keep costs down.

“A lot of this is that district managers might fire you as soon as look at you,” said William Rutzick, a lawyer who reached a $1.5 million settlement with Taco Bell last year after a jury found the chain’s managers guilty of erasing time and requiring off-the-clock work. “The store managers have a toehold in the lower middle class. They’re being paid $20,000, $30,000. They’re in management. They get medical. They have no job security at all, and they want to keep their toehold in the lower middle class, and they’ll often do whatever is necessary to do it.”

Another reason managers shave time, experts say, is that an increasing part of their compensation comes in bonuses based on minimizing costs or maximizing profits.

“The pressures are just unbelievable to control costs and improve productivity,” said George Milkovich, a longtime Cornell University professor of industrial relations and co-author of the leading textbook on compensation. “All this manipulation of payroll may be the unintended consequence of increasing the emphasis on bonuses.”

Beth Terrell, a Seattle lawyer who has sued Wal-Mart, accusing its managers of doctoring time records, said: “Many of these employees are making $8 an hour. These employees can scarcely afford to have time deleted. They’re barely paying their bills already.”

In the punch-card era, managers would have had to conspire with payroll clerks or accountants to manipulate records. But now it is far easier for individual managers to accomplish this secretly with computers, payroll experts say.

Mr. Pooters, a father of five who left the Air Force in 1997 for a career in retailing, talks with disgust about photocopied Toys “R” Us records that he said showed how his manager made it appear that he had clocked out much earlier than he had.

“Unless you keep track of your time and keep records of when you punch in and punch out, there’s no way to stop this,” he said.

After leaving Toys “R” Us and Family Dollar, Mr. Pooters moved to Indiana and took a job as an account manager with Rentway, a chain that leases furniture and electronics. There, he and a co-worker, William Coombs, said, the workload was so intense that they typically missed four lunch breaks a week. Nonetheless, they said, their manager inserted a half-hour for lunch into their time records every day, reducing their pay accordingly.

“They told us to sign the payroll printouts to confirm it was right,” Mr. Pooters said, describing a confrontation last November. “When we protested about what happened with our lunch hours, the manager said, `If you don’t sign, you’re not going to get paid.’ ”

Mr. Coombs said: “They removed our lunch hours all the time. We were told if we didn’t sign the payroll sheets, we’d be terminated.”

Larry Gorski, Rentway’s vice president for human resources, said his company strictly prohibited erasing time. “As soon as we hear this is going on, we jump all over it,” he said.

Shannon Priller, who worked at a Family Dollar store in Rio Rancho, N.M., sheepishly acknowledged that she sometimes watched her district manager erase her hours. “The manager and I would sit there and go over everybody’s time cards,” she said. “We were told not to go over payroll, or we would lose our jobs. If we were over, my hours would get shaved.”

Some weeks, she said, she lost 10 or 15 hours, and her 6 a.m. clock-in time became 9 a.m. Patricia Bauer, a clerk at the store, said her paycheck was sometimes cut to under 30 hours on weeks when she worked 40.

Like Mr. Pooters, these women have joined a lawsuit that accuses Family Dollar of erasing time and requiring off-the-clock work. “It needs to stop,” said Ms. Priller, who now cleans houses.

Kim Danner said that when she ran a Family Dollar store with eight employees in Minneapolis, her district manager urged her to erase hours so that she never paid overtime or exceeded her allotted payroll. Federal law generally requires paying time-and-a-half to nonmanagerial employees who work more than 40 hours a week.

Ms. Danner said her employees could not do all the unloading, stocking, cashier work and pricing of merchandise in the hours allotted. “The message from the district manager was, basically, `I don’t care how you do it, just get it done,’ ” she said.

So she altered clock-out times and inserted half-hour lunch breaks even when employees had worked through them. “I felt horrible that I was doing this,” she said. “I felt pressured, absolutely. If I refused, I would have been terminated easily.”

After five months, she quit.

Sandra Wilkenloh, Family Dollar’s communications director, declined to respond to the lawsuit, but said, “Family Dollar’s policy is to fully comply with all wage and hour laws and to take appropriate disciplinary action in any case where we determine that such policy has been violated.”

She said Family Dollar maintained a hot line that employees could call anonymously to report wage violations.

Rosann Wilks, who was an assistant manager at a Pep Boys in Nashville, said she was fired in 2001 after refusing to delete time. She said her district manager told her, “Under no circumstances at all is overtime allowed, and if so, then you need to shave time.”

At first, she bowed to orders and erased hours. Some employees began asking questions, she said, but they refused to confront management. “They took it lying down,” she said. “They didn’t want to lose their job. Jobs are hard to find.”

When she started feeling guilty and confronted her district manager, she said, “It all came to a boil. He fired me.”

Bill Furtkevic, Pep Boys’ spokesman, said his company did not tolerate deleting time.

“Pep Boys’ policy dictates, and record demonstrates, that any store manager found to have shaved any amount of employee time be terminated,” he said. He added that the company’s investigation “revealed no more than 21 instances over the past five years where time shaving” had occurred.

More than a dozen former Wal-Mart employees said time records were altered in numerous ways. Some said that when they clocked more than 40 hours a week, managers transferred extra hours to the following week, to avoid paying overtime. Federal law bars moving hours from one week to another.

Wal-Mart executives acknowledged that one common practice, the “one-minute clock-out,” had cheated employees for years. It involved workers who clocked out for lunch and forgot to clock back in before finishing the day. In such situations, many managers altered records to show such workers clocking out for the day one minute after their lunch breaks began – at 12:01 p.m., for example. That way a worker’s day was often three hours and one minute, instead of seven hours.

Ms. Williams, the Wal-Mart spokeswoman, said Wal-Mart had broadcast a video to store managers last April telling them to halt all one-minute clock-outs. Under the new policy, when workers fail to clock in after lunch, managers must do their best to determine what their true workday was.

In interviews, five former Wal-Mart managers acknowledged erasing time to cut costs. Victor Mitchell said that as an assistant manager in Hazlehurst, Miss., in 1997, he frequently shaved time.

“We were told we can’t have any overtime,” he said. “It’s what the other assistant managers were doing, and I went along with it.”

Mr. Mitchell said the store’s manager ordered them to stop. But he said that in 2002, after becoming manager of a Wal-Mart in Bogalusa, La., a new district manager ordered him to erase overtime. He said he refused.

Ms. Williams said Wal-Mart had increased efforts to stop managers from shaving time or allowing off-the-clock work.

Wal-Mart has circulated a “payroll integrity” memo, saying that any worker, “hourly or salaried, who knowingly falsifies payroll records is subject to disciplinary action up to and including termination.”

Employees at Wal-Mart and other companies complain that they receive no paper time records, making it hard to challenge management when their paychecks are inexplicably low.

Ms. Danner, the former Family Dollar manager, praised the system at the McDonald’s restaurant she managed for seven years. At day’s end, she said, employees received a printout detailing total hours worked and when they clocked in and out.

“We never had any problems like this at McDonald’s,” she said.

The Times followed this story with the following “correction”: A front-page article on Sunday about doctoring of payroll time records misstated Wal-Mart’s response to claims by some former employees that managers had sometimes altered the records of workers who forgot to clock back in after lunch, to make it appear that their workday ended at lunchtime. Although Wal-Mart acknowledged the practice, called the “one-minute clock-out,” it said the intent was to draw the workers’ attention to problems with their time records, not to cheat employees.

© 2004 New York. Times Co.

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