Defense and Oil Executives Cash in on Iraq War

8/9/2019 Defense and Oil Executives Cash in on Iraq War

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Executive Excess 2006

Defense and Oil Executives Cash in on Conict

13th Annual CEO Compensation Survey

Co-Authors:Sarah Anderson and John Cavanagh, Institute for Policy StudiesChuck Collins and Eric Benjamin, United for a Fair Economy

Editor: Sam Pizzigati

Research Assistance: Matthew Paolini, Benjamin Warder, Sarika Sinha, and Daniela Vann

Embargoed until: August 30, 2006

IPS

Illustration: Matt Wuerker


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About the Authors

Sarah Anderson is Director o the Global Economy Project at the Institute or PolicyStudies and co-author (with John Cavanagh and Tea Lee) oField Guide to the GlobalEconomy(New Press, 2005).

John Cavanagh is Director o the Institute or Policy Studies and co-author oAlterna-

tives to Economic Globalization (Berrett-Koehler, 2004).

Chuck Collins is a senior scholar at the Institute or Policy Studies where he directs theProgram on Inequality and the Common Good. He was co-ounder o United For aFair Economy. He is co-author (with Felice Yeskel) oEconomic Apartheid in America: APrimer on Economic Inequality and Insecurity(New Press, 2005)

Eric Benjamin is a Research Analyst at United or a Fair Economy and a candidate or aMasters Degree in Economics at Northeastern University.

Sam Pizzigati is an Associate Fellow o the Institute or Policy Studies and the authoroGreed and Good: Understanding and Overcoming the Inequality Tat Limits Our Lives(Apex Press, 2004). He edits oo Much, on online weekly on income and wealth distri-bution.

Acknowledgements

Art: Matt WuerkerLayout: Alyssa Hassan

Te authors would like to thank the ollowing individuals or providing valuable com-ments on this report: Charlie Cray, Center or Corporate Policy, and Erik Leaver andMiriam Pemberton, Institute or Policy Studies/Foreign Policy In Focus.

Te Institute or Policy Studies is an independent center or progressive research andeducation ounded in Washington DC in 1963. IPS scholar-activists are dedicated toproviding policymakers, journalists, academics and activists with exciting policy ideasthat can make real change possible.

United or a Fair Economyis a national, independent, nonpartisan, 501(c)(3) non-pro-it organization. UFE raises awareness that concentrated wealth and power underminethe economy, corrupt democracy, deepen the racial divide, and tear communities apart.UFE supports and helps build social movements or greater equality.

2006 Institute or Policy Studies and United or a Fair Economy

For additional copies o this report, see www.FairEconomy.org or send $7 plus $3 ship-ping and handling to:

Institute or Policy Studies1112 16th St. NW, Suite 600Washington, DC 20036

el: 202 234-9382Fax: 202 387-7915Web: www.ips-dc.orgEmail: [email protected]

United or a Fair Economy29 Winter StreetBoston, MA 02108

el: 617-423-2148Fax: 617-423-0191Web: www.FairEconomy.orgEmail: [email protected]


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Contents

Key Findings .............................................................................................................. 1

I. Introduction .......................................................................................................... 3

II. Defense Executives: Personal Prots in a Privatized War ...................... 4

Te Post-9/11 Jackpot ................................................................................4Deense CEO Pay and Battlefeld Pay: A Comparison ................................6Te Biggest Deense CEO Winners .............................................................7Special Update: Te Rise and Fall o a Bulletproo Vest Profteer ............... 12Whats Wrong with Profting rom War? .................................................. 14What Should be Done? ............................................................................ 15

III. Oil Barons: Proting from Pain at the Pumps and in the Middle East ...17

Oil-Greased Paychecks ............................................................................. 17Perormance or Luck? .............................................................................. 18Oil Baron and Oil Worker Pay: A Comparison ....................................... 19Big Oil and Big Money ............................................................................ 20Petroleum Profteer Profles .................................................................... 21What Can be Done to Control Petrol Profteering? ................................... 25

IV. CEO Pay Trends ............................................................................................. 30

V. Reforming CEO Pay ......................................................................................... 33

Resources ................................................................................................................ 42

Appendix 1: Defense CEO Compensation Pre-9/11 (1998-2001) andPost-9/11 (2002-2005) .......................................................................................... 43

Appendix 2: Defense Contractor CEOs, Contract Value, and KeyProducts/Services ................................................................................................... 45

Appendix 3: Oil CEO Compensation .............................................................. 47

Appendix 4: Understanding CEO Compensation and Our Numbers ..... 49

Endnotes .................................................................................................................. 51


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Executive Excess 2006 1

Key Findings

1. Ratio of CEO pay to average worker pay now 411-to-1

Since we rst started tracking the CEO-worker pay gap in 1990, it hasgrown rom 107-to-1 to 411-to-1 in 2005. odays gap is nearly 10

times as large as the 1980 ratio o 42-to-1, calculated byBusiness Week.I the minimum wage had risen at the same pace as CEO pay since1990, it would be worth $22.61 today, rather than the actual $5.15.

2. CEOs of the biggest defense contractors continue to prot

from a privatized war

Since the War on error began, the CEOs o the top 34 deensecontractors have enjoyed average pay levels that are double theamounts they received during the our years leading up to 9/11. Teiraverage compensation jumped rom $3.6 million during the pre-9/11period o 1998-2001 to $7.2 million during the post-9/11 period o

2002-2005.

Deense CEO pay was 108 percent higher on average in 2005 com-pared to 2001, whereas pay or their counterparts at other large U.S.companies increased only 6 percent during this period.

Since 9/11, the 34 deense CEOs in our sample have pocketed a com-bined total o $984 million, enough to cover the entire wage bill ormore than a million Iraqis or a year.

Deense CEO pay was 44 times that o a military general with 20

years o experience and 308 times that o an Army private in 2005.Generals made $174,452 and Army privates made $25,085, whileaverage deense CEO pay was $7.7 million.

Te highest-paid deense executive was George David o Unitedechnologies, who hauled in more than $200 million during the pe-riod 2002 to 2005. Meanwhile, David is suing the Pentagon to keepthe public rom seeing documents about alleged problems with itsBlack Hawk helicopters.

Te largest post-9/11 total pay increase went to Health Net CEO JayGellert, whose managed care services or military personnel and their

amilies is booming thanks to the Iraq War.

Halliburton CEO David Lesar made $26.6 million last year, despitea continuing stream o scandals related to the companys work inIraq, the latest being reports that the contractor inected soldiers withcontaminated wastewater. While Halliburtons uture Iraq work isuncertain, Lesar will enjoy the nearly $50 million he has made sincethe War on error began.


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2 Institute for Policy Studies / United for a Fair Economy

2. Oil Barons Cash in on Conict

Te top 15 U.S. Oil Barons are paid 281 percent o the average CEOcompensation in comparably sized businesses. Te top 15 U.S. OilCEOs were paid an average o $32.7 million in 2005 while the aver-age compensation or CEOs o large U.S. rms in all industries was

$11.6 million.1

Tese top 15 Pump Proteers are paid 518 times the average workerin the oil and gas industry. Te disparity between U.S. CEOs as awhole and average U.S. workers is 411-to-1.

Te top 15 Petroleum Proteers got an average raise o 50.2 percento their 2004 pay packages. Meanwhile, the annualized average hourlywage o production workers in the oil and gas industry increased byonly 4.1 percent rom their 2004 levels.2

op three highest paid U.S. oil chietains in 2005:

#1 William Greehey (Valero Energy) = $95.2 million#2 Ray R. Irani (Occidential Petroleum) = $84.0 million#3 Lee Raymond (outgoing CEO oExxonMobil) = $69.7 millionAnd the lowest paid: Chad Deaton, CEO oBaker Hughes = $6.6million

Te second- and third-largest oil companies in the world are both or-eign rms, British Petroleum and Royal Dutch Shell. Both pay theirCEOs considerably less than comparable U.S. oil companies. Whilethey operate in the same global marketplace, their average pay was$4.8 million, compared to the average o $39.2 million or the top 2

U.S. oil CEOs.3

Construction laborers, who are among the lowest paid workers in theoil and gas industry, are paid an average o $22,240 per year.4 It wouldtake one o these workers 4,279 years to earn what CEO WilliamGreehey oValero Energyearns in a year.

Te average annual pay or a rotary drill operator is $43,450.5 RayIranis 2005 compensation at Occidental Petroleum would cover thewage bill or 1,932 rotary drill operators.

Te average annual pay or a petroleum engineer is $107,990.6 It

would take 645 engineers to earn the amount that ExxonMobils LeeRaymond got paid in 2005.


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I. Introduction

Over the 13 years that researchers at the Institute or Policy Studies and Unitedor a Fair Economy have been documenting CEO pay, we have chronicled levelso greed and excess that dey both reason and any old-ashioned sense o shame.Te shamelessness continues. Average CEO pay packages in the United States,

our latest analysis reveals, now weigh in at 411 times average worker pay. In2005, our nations most lavishly paid CEO, Richard Fairbank o Capital OneFinancial, raked in $250 million.

Numbers this grotesque are generating a growing popular backlash against excessthat reminds us how strong our democracy remains and points to a more reason-able uture. Te voices in opposition to excessive executive pay today extend arbeyond labor and religious circles to include both prominent business leadersand members o Congress. In this research, these reormers will nd ample newstatistical evidence that substantiates just how broken our corporate compensa-tion systems have become.

In this years report, we ocus on the two corporate sectors where Executive Ex-cess may be the most inexcusable, the deense industry and the oil industry. Inboth these sectors, windalls rom war are driving executive pay to record levels.

Our rst section updates last years look at compensation levels or top U.S. de-ense contractors. Over a hal century ago, Presidents Franklin Delano Rooseveltand Harry ruman considered proteering o war among the worst o immo-ralities. We share their conviction, and, in these pages, we present solid evidencethat several dozen leading CEOs are engaging in just the sort o proteering thatFDR and ruman so abhorred.

We are happy to report that the executive we exposed last year as the nations topwar proteer, David H. Brooks, has been orced to resign as CEO o armoredvest maker DHB Industries. Brooks is currently under criminal investigation.Criminal prosecutions oer one way to stop war proteering. Tis years reportsuggests several others.

In our second ocus areathe energy industryexecutives are exploiting Waron error oil market instability to cash in as grandly as the oil barons Presidenteddy Roosevelt went ater so aggressively a century ago. With average Ameri-cans eeling the pinch at the pump and death tolls mounting in the Middle East,todays oil executives are reaping record take-homes. We outline some innovativesolutions to share the wealth.

Te levels o inequality this report describes will, i let unaddressed, soonthreaten the oundation o democracy in our nation, or democracies decaywhen one segment o society ourishes at anothers expense, when ortunesand powerconcentrate at the top. On this holiday that sees our nation pauseto celebrate labor, we oer an agenda to narrow our dangerous divides andreinvigorate our democracy.


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II. Defense Executives: Personal

Prots in a Privatized War

In the most privatized war in history, lucrative opportunities abound or chieexecutives o an increasingly wide range o deense contractors.

Giants o what President Eisenhower called the Military Industrial Complexlike Lockheed Martin and Boeing continue to reap the largest deals. But in ourcontemporary outsourcing age, contractors are scoring big prots perormingmany tasks previously handled by the military itsel, everything rom trainingU.S. interrogators and Iraqi police to recruiting U.S. troops, eeding them in thebattleeld and providing their health care.

Tis unprecedented outsourcing reects the conventional wisdom, in andaround the Bush administration, that private corporations can always perormmore efciently than public sector institutions. Has privatizing the War onerror indeed made the U.S. war eort more efcient? We dont really know,

because we have, in this war, no serious government oversight e-ort in place.7

Still, even i we cant determine what privatization has meantor the wars prosecution, we can explore what privatization has

meant or the wars leading privatizers, the top executives at the companies that

have received the most deense contracts. And as the human and economic costscontinue to mount, it is important to take a hard look at who might be benet-ing rom a War on error with no end in sight.

The Post-9/11 Jackpot

Te companies included in our sample are the 34 publicly traded U.S. corpora-tions that were among the top 100 deense contractors in 2005 and took at least10 percent o their total revenues rom deense contracts.9

Te CEOs at these 34 companies have enjoyed, since the War on error be-gan, average pay levels that are double the amounts they received during the our

years leading up to 9/11. Average total compensation, including options gains,jumped rom $3.6 million during the pre-9/11 period o 1998-2001 to $7.2 mil-lion during the post-9/11 period o 2002-2005 (see Appendix 1 or details).

Defense Spending Flows into Executives Pockets

Te sharp rise in pay or deense industry executives since 9/11 closely tracks thepost-9/11 boom in U.S. military expenditures. In 2005 alone, deense contractstotaled $269 billion, up rom $154 billion in 2001. Tis ood o unding has

We must guard against the acquisition of unwar-

ranted inuence, whether sought or unsought, by

the military-industrial complex.President Dwight D. Eisenhower8


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contributed to a massive surge in deense con-tractor prots. Between 2001 and 2005, averageprots or the 34 rms in our sample jumped 189percent. In that same period, U.S. corporations asa whole saw their prots rise only 76 percent.10

Wall Street has taken notice. Between the endo the year 2000 and the end o 2005, the shareprices o the 34 companies in our sample in-creased 48 percent on average, compared to a 5percent drop or the S&P 500 during that peri-od.11 Tis has translated into big paydays or de-ense industry executives. In act, deense CEOpay has risen even aster than our mushroomingmilitary budget. Te value o all Department oDeense contracts rose 75 percent between 2001and 2005, while pay or the 34 deense CEOs inour sample rose 108 percent.

Deense CEOs also enjoyed higher pay ratehikes than their counterparts at other lead-ing U.S. corporations. Historically, pay or topdeense industry executives has lagged behindthe pay or other large company CEOs. Tat gaphas narrowed since the War on error began. In2005, average total compensation or the CEOso large U.S. corporations as a whole was only6 percent above 2001 gures, whereas deenseCEO pay was 108 percent higher.

In the our years since the War on error be-gan, the 34 deense CEOs in our sample havepocketed a combined total o $984,008,400. oput that huge sum in some perspective, it wouldbe large enough to cover the entire wage bill ormore than a million Iraqis or a year.12 Iraqi andU.S. ofcials acknowledge that the millions oIraqis who have been without steady jobs sincethe 2003 invasion create a vast pool o potentialrecruits or insurgents.13

Figure 1: Defense CEO Pay, Pre-9/11 and Post-9/11(Average Total Compensation)

Source: company proxy statements.

Figure 2: Defense CEO Pay vs Defense Contractsand Average CEO Pay(% Increase 20012005)

Sources: Calculated by authors based on Wall Street Journal executivecompensation survey, April 10, 2006; company proxy statements; and

Department of Defense, Summary of Procurement Awards.

75%

6%

108%

Valueof

Defense

Contracts

DefenseCEOpay

AverageCEO

pay

$3.6million

$7.2million

Pre-9/11(1998-2001) Post-9/11(2002-2005)


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Defense CEO Payand Battleeld Pay: AComparison

Deenders o current CEO pay levels oten

argue that corporate leaders deserve the amplecompensation that comes their way since theybear such tremendous responsibility and operatein such a complex and risky business environ-ment. Military generals also ace tremendousresponsibility and operate in difcult environ-ments. Yet they receive only a tiny raction otypical deense contractor executive pay.

In 2005, military generals with 20 years o expe-rience made $174,452, housing allowances andextra combat pay included. Te average 2005

pay or a deense CEO: more than $7 million.

Army privates in combat, or their part, acedconsiderably more everyday risk than CEOsor generals or that matter. Yet they averagedonly $25,085 in 2005.

Te deense industry-military pay gap is actu-ally growing. Since September 11, 2001, theratio between average pay or deense contrac-tor CEOs and pay or military generals with 20

years o experience has increased rom 27-to-1to 44-to-1. Te pay gap between deense CEOsand low-ranking enlisted personnelarmyprivates (E-2 grade), or instancehas jumpedrom 190-to-1 to 308-to-1.14

Tese disparities are, not surprisingly, accelerat-ing the virtual revolving door between the Pen-tagon and private contractors. One prominentexample: ormer Deense Secretary William S.Cohen, who let his post in 2001 with a pileo credit card debt and quickly made a ortune

lobbying or deense contractors. Cohen nowhelps Lockheed Martin, United echnologies,Northrop Grumman and other major contrac-

tors get deals rom his ormer underlings in the Deense Department.15

Defense CEO Defends Military Pay Gap

In a blistering seven-page letter responding to our 2005 report, Jack London, thechie executive o deense contractor CACI International, argued that deense

Figure 3: Military-Related Pay, 2005

Figure 4: Change in Pay Ratios, 2001-2005

Sources: Department of Defense, Defense Finance and AccountingService, 2001 and 2005 Military Pay Rates for E-2 (second-lowest rank

enlisted personnel) and O-10 (Generals). Includes: base pay, housing al-lowance, and imminent danger/hostile re pay. Some military personnel

qualify for additional assistance, such as a $250 monthly allowance forfamily separation.

$25,085 $174,452

$7,737,400

Armyprivatein

combat

Generalw ith20+

yearsexperience

DefenseContractor

CEO

44:127:1

190:1

308:1

0

50

100

150

200

250

300

350

2001 2005

DefenseCEOsv.Generals

DefenseCEOsv.ArmyPrivates


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executives ully deserve much more pay than military generals. In Londons view:

Generals are responsible or their command, just as CEOs are responsibleor work they perorm and the livelihoods o their employees and respec-tive amilies. However, CEOs o publicly owned companies also bear addi-tional duciary responsibilities to their shareholders, nancial markets and

ederal oversight groups. Generals do not. Companies are accountable orprotable perormance and sustained customer satisaction. Generals arenot. CEOs are responsible or the growth o their organizations. Generalsare not. Because o the varied and diering, and additional responsibilities,CEOs are currently rewarded additional compensation.16

Londons company has had some problems on the customer satisaction ronto late. CACI International drew headlines in 2004 when investigators linked aCACI employee working as an interrogator with the Abu Ghraib prison scandal.Te rm later announced a pullout o all personnel rom the country as o Sep-tember 2005.17 But CACI remains a major provider o vaguely dened inorma-tion technology, logistics and administrative services to deense and intelligence

agencies. In 2005, the company received $765 million in deense contracts andLondon made $3.6 million.

The Biggest Defense CEO Winners

The Highest-Paid Defense Executive:United Technologies CEO George DavidHelicopter Maker Suing Pentagon to Keep Secrets About Alleged Defects

George David o United echnologies Corporation (UC) has hauled in armore than any other deense executive since September 11, with total com-

pensation o more than $200 million during the period 2002 to 2005. In hispeak pay year, 2004, he amassed $88.3 million in annual total compensation,including options gains. His pay dropped last year to $31.9 million, but thattake-home still put him at the head o the deense executive pack, ollowed byBoeings new CEO W. James McNerney Jr., with $28.4 million.

axpayers, through deense contracts, provide about a third o United ech-nologies operating income and, presumably, have the right to know how theirtax dollars are getting spent. 20 United echnologies apparently disagrees. Tecompany has led suit to keep secret documents with inormation about allegedproblems with United echnologies products that may have endangered lives.

Te secrecy push began ater a 2003 scandal in which the Deense ContractManagement Agency cited UC subsidiary Sikorsky with 19 quality controlconcerns about its Black Hawk helicopters, including installation o unquali-ed parts.21 Military ofcers told an investigator or Connecticut-based WNHtelevision that Sikorsky had delivered deective Black Hawk replacement parts tobases in Iraq.22 Te company subsequently claimed that all problems had beenimmediately xed. But Pentagon ofcials were concerned enough about the situ-ation, in 2004, to temporarily halt deliveries o the helicopters.23


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WNH pursued the story by ling a Freedom o Inormation Act request orSikorskys quality control documents. Around the same time, the Hartord Cou-rantled a similar request related to concerns about another UC subsidiary, jetengine maker Pratt & Whitney. Te Deense Department agreed to release thedocuments in 2005, but the company led an unprecedented suit against thePentagon to block the release.24 Te case is now pending.

Meanwhile, despite the lawsuit, the Bush administration was generous to thecompany in its 2006 deense budget, requesting $2.3 billion or Black Hawk-class helicopters and several billions more or Pratt & Whitney aircrat engines.25In 2005, United echnologies ended up the year as the 7th-largest U.S. deensecontractor, with orders totaling more than $5 billion.

Top Post-9/11 Total Pay Increase:Health Net CEO Jay Gellert

Military Mental Health Care a Booming Business for Managed CareProvider

Health Net CEO Jay Gellert has seen his ortunes soar as the massive deploy-ment o troops in Iraq and Aghanistan has boosted demand or the companysmanaged care services. Between 2002 and 2005, Gellert took home more than

$28 million, 1,134 percent more than his $2.3 million compen-sation over the our preceding years.

Tanks to Pentagon outsourcing, Health Net currently holds con-tracts to provide health services to as many as three million active

duty military personnel, veterans and amily members. Health Net revenues rommilitary contracts, the company notes in its most recent 10-K report, increased by$286 million in 2005 resulting rom a rise in demand or private sector services asa direct result o continued and heightened military activity.

Heightened military activity juices Health Nets bottom line in a variety oways. Dependents o National Guard and Reserve troops become eligible orbenets once amily members are called up or duty. In addition, war increases

the demand or the doctors in Health Nets private network, as military doctorsat domestic bases are dispatched to battle zones. War-time stresses also increasethe demand or Health Net mental health counseling.

Health Net, sums up company spokesperson Steve Cell, helps servicemen andwomen and their amilies deal with the issues o troop mobilization around theworld and issues o the conicts that theyre dealing with.

Tat, he adds, is a ast-growing business or us.26

I dont want to see a single war millionaire cre-

ated in the United States as a result of this world

disaster.

President Franklin D. Roosevelt

18


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Te Pentagon made its privatized health system, called RICARE, attractive tocontractors by oering a risk-sharing arrangement through which taxpayerspick up the bill or cost overruns above a certain level.27 Tis taxpayer generosityhas helped Health Net register, since 2003, a 26 percent increase in prots onthe companys military contracting. On the commercial side, the company hasactually been losing money. In act, i not or Pentagon business, Health Net

would have ended 2004 $27 million in the red.

What would happen to Health Net i troops were withdrawn rom Iraq? HealthNet CEO Gellert isnt worried. His company, he told an institutional inves-tor recently, will do ne even i troops withdrew rom Iraq since the militarysown medical capacity will be stretched into the oreseeable uture by the hugenumber o injured troops.28

Second-biggest Post-9/11 Total Pay Increase:Anteon International CEO George KampfPrivatized Spy Training Drives Skyrocketing Pay

Anteon International CEO George Kamp may be the poster boy or militaryprivatization success. In the three years beore 9/11, Kamp earned annual com-pensation in the mere six gures, about $600,000. Last year, thanks to lucrativeintelligence-related contracts, he pulled in more than $9 million, up rom $6.2million in 2004.

Pentagon intelligence outsourcing has helped drive Anteon International earn-ings up tenold over the past decade. Anteons most recent 10-K report boaststhat its intelligence training exercises have played a major part in preparationo United States and Coalition Forces to meet the global war on terrorism andoperation Iraqi reedom.

Anteon currently holds a contract to conduct intelligence classes on an Arizonamilitary base, work traditionally perormed by the bases own military intelli-gence brigade. Many o the interrogators working in Guantanamo and the AbuGhraib prison in Iraq, notes CorpWatch investigator Pratap Chatterjee, receivedtraining at this site.29

Anteon also runs simulation exercises or the Pentagon, providing such hi-techtraining at more than 80 sites throughout the United States, Germany, Italyand South Korea. It also builds what Chatterjee describes as ake villages wheresoldiers can practice urban warare. At one advanced site in Fort Polk, Louisi-ana, trainers can watch every second o how soldiers perorm in simulated war

situations through nearly 1,000 cameras.30

Anteons 2005 annual report condently projects strong uture earnings, basedon continued military outsourcing and high levels o military spending. Gen-eral Dynamics will reap the ruits o these uture earnings. Tis deense giantpurchased Anteon this year or $2.1 billion.


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Top Earner Among Scandal-Plagued Iraq Contractors:Halliburton CEO David LesarIraq Windfalls May be Ending but CEO has $50 million to Fall Back on

Halliburton CEO David Lesar took home $26.6 million last year, a bigger pack-age than the $24.2 million send-o awarded his predecessor, Richard Cheney,

beore he let the job or the Vice Presidency.

Lesars haul amounted to quite an achievement, given Halliburtons record asthe most scandal-plagued o Iraq contractors. Te company has held the lionsshare52 percento Pentagon contracts or wartime services, rom oileldservices to eeding the troops.31 A steady stream o audits, employee testimony,and other evidence suggest that Halliburton has greatly abused this privilegedposition. Accusations have included bribe-taking, abandoning government prop-erty, overcharging the military, and even inecting soldiers with contaminatedwastewater.32 Government auditors have slammed Halliburton subsidiary Kel-logg, Brown and Root or inadequate internal nancial controls and identiedmore than $1 billion in questionable costs.33

Attempts to hold the company accountable have so ar allen short. Te top ArmyCorps o Engineers civilian contracting ofcial actually ound hersel demotedater she called a multibillion-dollar no-bid contract granted to Halliburton themost blatant and improper contract abuse I have witnessed.34 When the Penta-gons own auditors contested $253 million in Halliburton bills or delivering ueland repairing oil equipment in Iraq, the Army reimbursed the company anyway.35Finally, in July 2006, the Army announced it was discontinuing a controversialHalliburton mega-contract to provide logistical support to U.S. troops. Tecontract will be broken up into three parts and opened to corporations (includingHalliburton) or competitive bidding. Another Halliburton deal or oileld ser-

vices will be discontinued as U.S. unding or Iraq reconstruction is phased out.36

Even so, whatever Halliburtons uture in Iraq, David Lesar will be able to makeends meet with the nearly $50 million he has made since the War on error began.

Second-Biggest Iraq Reconstruction Paycheck:URS CEO Martin KoffelKoffels $14.4 million Highlights the CEO-Worker Divide in Wartime

Outside o Halliburtons David Lesar, no CEO active in Iraq reconstructionwork appears to have taken home a bigger paycheck in 2005 than Martin Koel,the top executive at engineering company URS. Koel walked away with $14.4million in 2005, more than double his $6.4 million pay in 2004.

In Iraq, URS has partnered with the Louis Berger Group to oversee repairs toIraqs communication system, hospitals and courthouses.37 Te company alsoprovides extensive engineering and maintenance services or the military in Iraq.

Te companys workon the ground in Iraqcan be hazardous. Mechanics,as the company explained in a help-wanted ad, should expect: extreme danger,stress, physical hardships and possible eld living conditions associated with thisposition. Only those willing to work and live under these conditions should ap-


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plyyou should expect to work 12 hour days, seven days a week.38 For agreeingto these terms, URS was paying mechanics $80,000 a year. Koel, in his some-what less hazardous ofce environs in San Francisco, made 180 times that amount.

Te URS web site, interestingly, ails to mention the companys operations inIraq. We ound a similar reticence rom other reconstruction contractors in our

sample. With some major Iraq reconstruction contractors, we cant even learnhow much the companies or their CEOs have actually made o the war becausethey are privately held companies that are not required to report this inorma-tion (e.g., Bechtel and Parsons).

Also missing, or both publicly traded and privately held contractors, are basicperormance data. In a February 2006 report, the U.S. Government Account-ability Ofce complained o the absence o this data, observing, or example,that government reporting on water projects has ocused on numbers o projectscompleted, not how much clean water is reaching intended users. On electricity,reports note progress in restoring generation capacity, but not whether intendedusers have uninterrupted and expanded service.39 Inormation about contracts,

work proposals, and much o the bidding processes is also kept rom public view.

Highest Pay Among Defense CEOs Under SEC Investigation:ESSIs Gerald PotthoffPresident Bushs Uncle Bucky also a Winner

Te War on error has been good or business at the logistical services companyEngineered Support Systems International (ESSI). As CEO Gerald Pottho can-didly i somewhat indelicately told a reporter who queried him about the impacto the war on the company stock: obviously, we got a pop during the Iraq andAghani thing. 40

A big pop. A series o war-related contracts, some awarded on ano-bid basis, drove company earnings to record levels and set up executives ora lucrative sale o the company to another deense contractor, DRS echnolo-gies, in January 2006. Among the beneciaries o that sale: President GeorgeW. Bushs Uncle, William H. . Bush, an ESSI director. Uncle Bucky cleared

$2.7 million in cash and stock as a result o the sale.41 Known to the President asUncle Bucky, he claims he had nothing to do with the company landing lucra-tive deense contracts.

Company executives dont seem to have been particularly satised with theselucrative contracts. Te ederal Securities and Exchange Commission is nowinvestigating whether company ofcials manipulated option grant dates to boostpay or current CEO Pottho, co-ounder Michael Shanahan Sr., and othercompany executives.42 In all, the companys top our executives have cashed in a

There is such a thirst for gain [among military suppli-

ers]that it is enough to make one curse their own

Species, for possessing so little virtue and patriotism.President George Washington, 177819


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total o $104 million in options gains over the past ve years, a sum equivalentto more than 40 percent o the companys net prot during that period. Analystswho have looked careully at the companys option pricing claim the chances othe gains occurring withoutmanipulation are remote.43

Special Update: The Rise and Fall of a

Bulletproof Vest ProteerLast years Executive Excessreport exposed the scandal o bulletproo vest makerDavid H. Brooks, who cashed in nearly $70 million in options in 2004, as parto a $186 million stock sale that sent stock in his company, DHB Industries,into a tailspin. Shortly thereater, the military began recalling thousands o thecompanys Interceptor body armor over concerns about its eectiveness.

In November 2005 Brooks gained even greater notoriety by blowing a pile o hiswar windalls on a celebrity-studded bash in New York Citys Rainbow Room.For Brooks, the highlight o the gala, estimated to cost $10 million, was aperormance by rockers rom Aerosmith. So pumped was the middle-aged Long

Island businessman that he reportedly donned a hot pink, metal-studded suedepantsuit to cavort onstage with Steven yler.

But Brooks reign as Americas most ostentatious war proteer was short-lived.On July 10, 2006, the DHB Board o Directors put Brooks on indeniteadministrative leave pending the outcome o unspecied investigations. Treedays later, he was orced to resign as part o a settlement with shareholders whohad accused Brooks and other company ofcials o a pump and dump schemeto inate the value o DHB stock beore the massive sell-o in 2004.

Te Justice and Deense Departments are also jointly investigating Brooks or

possible criminal raud and insider trading. Te company was booted rom theAmerican Stock Exchange in June 2006 or ailing to le nancial reports.

Getting canned rom a company you named ater yoursel must be painul.But Mr. DHBs orced resignation hardly makes up or the troubles hes causedshareholders, taxpayers and soldiers as he capitalized on the War on error.

Te war has been very good to Brooks. In the early 1990s, he was running asmall brokerage business with his brother until the SEC temporarily barredhim in 1992 over insider trading violations. Seeking a new line o work,Brooks turned his attention to a small body armor company hed purchased or$800,000 rom a rm on the verge o bankruptcy. His ortunes turned dramati-

cally when Brooks successully lobbied in 1998 or an exclusive contract to makethe vests used in the body armor now issued to every U.S. soldier in Iraq.

A retired Marine colonel and ormer head o DHBs Point Blank subsidiary toldthe Washington Postthat by hiring only DHB, rather than spreading the workaround to the 20 or so qualied companies, the military created a bottleneckthat kept many troops in Iraq rom having state-o-the-art body armor untilnine months ater the war began.44


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Eventually, the Pentagon broke DHBs monopoly to speed up production, butthat wasnt the end o the militarys problems with the company. Over the courseo 2005, the Marines and Army recalled a total o 23,000 vestsall o themproduced by DHBater an investigation by the Marine Corps imes revealedthat the vests had ailed ballistics tests or stopping 9 mm bullets. Te exposshowed that Pentagon ofcials had dismissed inspectors recommendations that

DHB vests be rejected.45

Te militarys line on the scandal continues to be perplexing. Tey maintain thatthe recall was merely to calm ears stoked by the Marine Corps imes exposears they claim are unounded because subsequent tests on a sample o the vestsound nothing wrong.

While Brooks personal ortunes may have soured, the company remains in goodstanding with Pentagon procurement ofcers. DHB raked in a total o $145million in deense orders in 2005 and announced a new body armor contract or$9.2 million on July 21, 2006.

Figure 5: The Rise and Fall of a War Proteer

$50,000 $143,750 $413,542 $525,000 $575,000 $625,000

$70,605,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

DHB Industries CEO

David H. Brooks' total

annual compensation(no2005datadueto

company'sfailuretofile

financialreports)

1998:DHBwinsex-clusivedealtoprovideInterceptorveststomilitary Vestsalesspikeafter9/11formilitaryuseinIraqandAfghanistan

Summerof2004:Militarybal-listicsexpertrecommendsrejectingDHBvests.

11/29/04-12/29/04:Brookssells$186millioninstockatpeakvalueof>$22.

3/05:DHBrevealsSECinvestigat-ingBrooksforusingcompanycreditcardforpersonalexpenses.

5/04/05:Marinesrecall5,277DHBvests.

11/16/05:Militaryrecallsan-other18,000

vests.

11/26/05:Brooksthrows$10millionparty.

3/06:SECinvestigat-ingBrooksforpumpanddumpscheme.

6/26/06:AMEXnoti-es DHB of

delisting.Stocklaterdropsto50cents/share.

7/10/06:Brooksput

onadmin-istrativeleavepend-ingstateandfederalin-vestigationsforinsidertradingandfraud.

7/13/06:Brooksforcedtoresignaspartofsharehold-ersettlement.

7/21/06:DHBannounces$9.2millionmilitarycon-tract.


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Whats Wrong with Protingfrom War?

A substantial number o the companies included in this study have had strongearnings growth during the War on error, kept their shareholders happy, andrerained rom committing major contract abuse or raud (at least to our knowl-

edge). Why then should we begrudge the top executives o these companies theirhundreds o millions in compensation rewards?

We see three major problems:

Excessive CEO Pay Sends the Wrong Message

Troughout American history, times o war have called or shared sacrice.We remember our Greatest Generation, the men and women who deeatedNazism and ascism, or their common commitment and social solidarity. InWorld War II, a number o top business executives became dollar-a-year menwho donated their know-how to the war eort or a token sum. Tat sort o

sacrice sent a powerul, positive message to soldiers at the ront lines. Whatmessage gets sent when those at the ront lines see contemporary CEOs strike itabulously rich year ater year?

Excessive CEO Pay Drains Brainpower from Public Service

A generation ago, commentators described a global brain drain that worked tothe benet o the United States. Good salaries and working conditions in Ameri-can workplaces were attracting the best and the brightest rom many oreignlocales. Were now witnessing a perverse brain drain, the direct consequence oturbo-charged executive salaries that lure top military managers into the private

sectorand the ast-track to ortune. In this environment, military service tendsto become less a calling and more a oot in the revolving corporate door.

Excessive CEO Pay Creates the Risk of a Prot Motive forWar

War, as Civil War General Sherman once amously stated, truly is hell. Te deci-sion to go to war, or a democracy, should never be made either lightly or orulterior motives. Excessive CEO pay in wartime raises the risk o a prot motiveor continuing the conict or getting into new ones in other parts o the world.And that is a risk no one should have to bearno matter what ones position onthe Iraq War.

Te vast potential or war proteering should be o even greater concern duringthis war than in past ones because o the extent to which the war and the recon-struction eort have been privatized.


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What Should be Done?

A. Require Defense Contractors to Restrain Pay DuringWartime

It is important to remember that it is public money which deense CEOs are

siphoning o or their own personal prots. axpayers have every right to insistthat strings be attached to these contracts which would set a more reasonablestandard or deense executive pay.

In act, U.S. law already imposes a cap on allowable compensation or contrac-tor executives, which stood at $473,318 in 2005.46 Tis cap was established in1995, in reaction to public concern over mass layos in the deense industry.However, in practice the law has been meaningless. Companies that receivedeense contracts remain ree to pay their executives whatever they please. Teyjust cannot bill the government directly or any o that compensation above thecap. I a government contract sends a companys share price soaringand setsup a stock option windall or hety golden parachute in a merger dealthe

cap does not apply.

We need a meaningul cap. Tat doesnt have to mean a xed dollar amount. Pro-curement rules could, instead, deny deense contracts to companies that pay theirtop executives more than 20 times what the lowest paid worker at the companyreceives. Tis is the standard proposed by management guru Peter Drucker, whoargues that the ratio o pay between worker and executive can be no higher than20 to 1 without injury to company morale.47 J.P. Morgan, the renowned nan-cier o a hundred years ago, also supported a ceiling on executive pay o no morethan 20 times worker pay.48

Deense contractors whose CEOs are unwilling to ocus on serving the countryrather than maximizing their personal prots should be ineligible or contracts.Te same should hold or companies that have violated the law or not ullledthe terms o past contracts.

B. Encourage Voluntary Pay Restraint

Until we have stronger government oversight over deense-related pay, com-panies should voluntarily restrain their executive pay and ban stock optionsexercises during wartime. Over the years, thoughtul CEOs have voluntarilypassed up bonuses in situations where company workers had to be laid o. odo otherwise, these executives reasoned, would undermine consumer condence

and worker morale.

Tese concerns are also relevant to the disparities between the payday bonanzastaken by deense executives and military compensation, especially given thecynicism ostered by well known ties between these companies and top ofcialsin government. Tese executives stand as part o a broader War on error inwhich thousands o people have lost their lives. With so many suering, CEOsshould not be cashing in.


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C. Strengthen Government Oversight of WartimeContracts

Outrage over the deense CEOs at paychecks is exacerbated by the act thatU.S. taxpayers have little reason to eel condent they are not being ripped oby these companies. Congress has done precious little to oversee the massive

unding that goes to the military each year, despite public anger over non-com-petitive contracting and evidence o widespread raud, corruption and waste.

Congress did appoint a special inspector general or Iraq reconstruction whohas identied billions in missing unds and uncovered evidence that led to ourconvictions or bribery and raud.49 But the mandate o the Inspector Generaldoes not extend to the hundreds o billions o dollars in deense contracts thatare unrelated to reconstruction. Moreover, the IGs ofce is a temporary agency,

while the overall war on terrorism has no end in sight.

Congress should establish a permanent independent investiga-tive subcommittee, responsible or investigating waste, raud andabuses associated with any war-related contracting, modeled on

the World War II-era ruman Committee. Tat panel, led by Harry S. rumanwhen he was still a senator, helped save taxpayers some $15 billion (in 1940s

dollars) and prevented hundreds, i not thousands o deaths by exposing aultymilitary equipment.50 We need similar investigative zeal today. Unortunately, bi-partisan bills to create a modern-day ruman Committee on wartime contractshave languished in both the Senate and the House o Representatives.51

I have never yet found a contractor who, if not

watched, would not leave the Government holding thebag.

President Harry S. Truman, 1941 speech calling for

special committee to investigate war-time contracts.52


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III. Oil Barons: Proting from Pain

at the Pumps and in the Middle East

Its Labor Day weekend, and youre standing at the gas pump, daydreamingabout those wonderul and distant days gone bysome 18 months agowhen

gas ran only $1.75 a gallon.

Seven o every ten Americans, the latest polls show, are now eeling a real amilyscal pinch rom higher uel prices at the pump.53 And that should be hardlysurprising. U.S. consumers, since late 2004, have experienced a deep and con-tinuing consumer shock, as oil prices have climbed rom $40 a barrel to morethan $70 in just a year and a hal. While increased demand is part o the ex-planation, most analysts also point to the instability caused by the Middle Eastconicts, rom Baghdad to Beirut, as a major actor in skyrocketing gas prices.54

U.S. consumers are expected to pay an additional $200 billion this year or oiland gas products. Tese billions, notes Senator Byron Dorgan, amount to a

massive transer o wealth rom average Americans who cant aord it, to big oilcompanies who already were experiencing all-time record prots.55

Oil-Greased Paychecks

While ordinary Americans are orking over upwards o $3 or a gallon o gas,15 distinctly unordinary Americansthe CEOs o the largest U.S. oil industrycompaniesare celebrating their biggest paychecks on record. Tese CEOs lastyear took home an average $32.7 million in compensation518 times morethan average oil industry workers in 2005. (see Appendix 3 or details)

Te Oil Barons take even ar exceeded their excessively paid counterparts atother leading U.S. rms. Teir $32.7 million average pay was 181 percenthigher than the average o $11.6 million or CEOs at 350 large corporationssurveyed by the Wall Street Journal.56

Te three highest-paid U.S. oil chietains in 2005: William Greehey o ValeroEnergy ($95.2 million), Ray R. Irani o Occidental Petroleum ($84 million), andLee Raymond, outgoing CEO o ExxonMobil ($69.7 million). Te lowest-paidmajor U.S. oil executive: Chad Deaton, CEO o Baker Hughes ($6.6 million).

Obviously, these are very, very large numbers, ConocoPhillips CEO JamesMulva acknowledged in an appearance earlier this year on Good Morning Amer-

ica. Between 2004 and 2005, Mulva saw his personal paycheck almost double,rom $16.6 million to $31.1 million.

But on the other hand, Mulva said, i you look at the oil companies, theinternational oil companies, there are huge responsibilities with respect to assetbases and hundreds o billions o dollars.57

One o these responsibilities, as some analysts point out, is to plan or the leanyearseither by building capital reserves or making investments to ensure


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uture prots. Tese analysts implore oil com-panies to dedicate their mountains o excesscash toward seeking new energy sources beorerising ossil uel prices break the backs o worldeconomies.58 Tese companies run inspiringV ads claiming they are indeed preparing or

the uture. However, when they throw massivewindall prots at chie executives, they seem tobe signaling that the coming lean years will besomebody elses problem.

Interestingly, the top executives o the second-and third-largest oil companies on the planetBritish Petroleum and Royal Dutch Shelloper-ate in the same global marketplace and ace thesame huge responsibilities as the top executiveso U.S.-based oil industry giants. Yet CEOs atthe top two oil companies in the United States

made eight times more last year than their or-eign counterparts rom BP and Shell.

BP CEO Lord Browne pulled in $5.6 million in2005, Shell CEO Jeroen van der Veer just $4.1million. While hardly suering, their combinedaverage pay was a mere 12.4 percent o the aver-

age pay o the top two U.S. oil company CEOs. 59

Performance or Luck?

Big Oil CEOs in the United States contend that high oil prices, not greed, arethe cause o skyrocketing prices at the pump.60 U.S. oil companies, the argumentgoes, operate in a global marketplace they cant control. I soaring oil companyprots ollow inexorably rom global supply-and-demand actors that oil com-pany executives have no power to inuence (e.g. war or natural disasters), thenCEOs deserve no particular personal credit or these prots.

In act, the close historical relationship between the trend in CEO pay and oilprices suggests that executives are simply reaping windall pay boosts beyondtheir managerial perormance. Our analysis indicates a 52 percent dependencybetween the price o gas and the pay o the top 15 U.S. oil magnates. Tismeans that the trend in pay o these top pump proteers is unrelated to the

trend in oil prices only 48 percent o the time.61

Even i oil company CEOs do deserve some credit or soaring company pro-its, broader criteria should be used to judge their perormance, including theirrecord on the environment.

Figure 6: Average Oil CEO Pay Comparison:Top US vs. Top Foreign

Source: Company Proxy Statements and Wall Street Journal 2005Executive Compensation Survey

$4,847,589

$39,154,640

Top2ForeignOilCEOs Top2USOilCEOs


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Oil Baron and Oil WorkerPay: A Comparison

In one sense, whether oil companies owe their

success to pure luck or high perormancedoes not matter. Te men at the top didnt do italone. I luck explains why oil company protsare soaring, then the benets o that happy ukeought to be shared with employees who werealso in the right place at the right time. And ioil companies have perormed their way tohigh prots, then surely the tens o thousands oworkers at these companies played some role incontributing to this improved perormance.

Pay disparities between top managers and aver-

age workers in the oil industry extend evenwider than manager-worker pay disparities inthe overall economy. Last year, the top teenPump Proteers took home 518 times the payo average workers in the oil and gas industry.Te average disparity between U.S. CEO andaverage U.S. worker: 411-to-1.

Te top 15 Petroleum Proteers last year saw

Figure 7: Top 15 Oil CEO Pay and Oil Prices

Sources: Company Proxy Statements; Dow Jones, West Texas Intermediate Spot Oil Price, June 1, 2006.

$0

$10

$20

$30

$40

$50

$60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Top15USOilCEOPay($Millions) OilPricePerBarrel($)

Figure 8: Pay Disparities in Oil Companies

Sources: CEO: Top 15 U.S. Oil CEO average pay. Other occupations

from Bureau of Labor Statistics May 2005 National Industry-SpecicOccupational Employment and Wage Estimates NAICS 211000 - Oil

and Gas Extraction.

$22,240 $43,450 $107,990

$32,659,783

Contruction

Laborers

RotaryDrill

Operators

Petroleum

Engineer

CEO


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average raises o 50.2 percent over their 2004pay packages. In 2005, the annualized averagehourly earnings o production workers in the oiland gas industry increased by only 4.1 percentover 2004 levels.

Te lowest-paid workers (or which there areBLS employment level statistics) in the oil andgas industry today are the construction labor-ers. Among other things, these workers perormtasks involving physical labor at heavy construc-tion projects, tunnel and shat excavations,and demolition sites. Tey may also clean andprepare sites, dig trenches, set braces to supportthe sides o excavations, erect scaolding, cleanup rubble and debris, and remove asbestos, lead,and other hazardous waste materials.62 As riskyand laborious as these tasks are, these workers

averaged only $22,240 last year.63 One o theseconstruction laborers would have to work 4,279years to earn what the CEO o Valero Energy,William Greehey, last year earned in one year.

Rotary drill operators are also critical to the oilindustry. Tese are the workers who set up or

operate a variety o drills to remove petroleum products rom the earth and tond and remove core samples or testing during oil and gas exploration. Teaverage annual paycheck or a rotary drill operator stands at $43,450.64 Some1,932 o these paychecks would be needed to equal the paycheck that went to

CEO Ray Irani o Occidental Petroleum in 2005.

Highly educated petroleum engineers, who oversee drilling and develop improvedproduction methods, are among the better-paid workers in the sector, with anaverage annual salary o $107,990.65 Even at this occupational level, it would take645 such engineers to match the 2005 salary o ExxonMobils Lee Raymond.

Big Oil and Big Money

In our nations capital, no politically wired constituency swings more weightthan Big Oil. Since the 1990 election cycle, oil industry groups have unneledover $192 million to candidates and parties, 75 percent o which has gone to

Republicans, according to the independent Center or Responsive Politics.66

In 2004, the oil industry contributed $2,627,825 toward the 2004 election oGeorge Bush. Te next largest contributions went to John Kerry ($305,610) anda number o Southern senators who regularly look out or oil company interests.Among these senators: Kay Bailey Hutchison, a exas Republican who received$242,070 in Big Oil money, and David Vitter, a Louisiana Republican who ac-cepted $262,446 in Big Oil contributions.

Figure 9: Oil CEO Pay vs Oil/Gas Worker Pay(% change, 2004-2005)

Sources: Calculated by authors based on 2004/2005 Wall Street Journalexecutive compensation survey and company proxy statements. U.S.

Dept. of Labor Series CEU1021100006 NAICS 211Average Hourly

Earnings of Production Workers in Oil and Gas Extraction industry.

4.1%

50.2%

0%

10%

20%

30%

40%

50%

60%

Workers CEOs


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Tese political leaders have aithully advanced the cornerstones o the Big Oilpolitical agenda: the deregulation o the oil industry, the reduction o gasolinetaxes, the opening o the Alaska wilderness or new drilling, and the liting obans on o-shore drilling.

Petroleum Proteer Proles

At the Top Again: William Greehey, Valero Energy2005 Compensation: $95,157,943

Five years ago, in 2001, Valero Energys William Greehey picked up a $5 millionbonus or completing a merger with Ultramar Diamond Shamrock, a key step inthe march that has made Valero the nations biggest oil rener. 67 Greehey elt noneed to be deensive about his bonus.

Tats the way it should be, he noted. When you do well, you should get paidor it.68

Greehey has continued to do well, at least personally. He ended 2002 as thehighest-paid executive o any publicly traded U.S. oil and gas company.69 Lastyear, he took home $95,157,943.

Te renery industry mergers that have greased Greeheys rise to the top haveso ar generated little relie or American consumers. Economies o scale soar dont seem to have materialized. What has materialized: a powerul politicalpush rom Greehey to set aside environmental protections. Greehey has madeover $89,000 in personal campaign contributions to Republicans and Demo-crats.70

We have been spending all o our money meeting the environmental require-ments, complains Greehey, who last year pocketed $83,538,994 more thanthe average or CEOs at other large U.S. companies. We really havent had themoney to spend on strategic projects.71

Satisfaction Guaranteed: Ray Irani, Occidental Petroleum2005 Compensation: $83,963,948

In 1990, Ray Irani became the Occidental Petroleum chie executive with anexceptionally sweet seven-year employment agreement that guaranteed him a$1.9 million annual salary, an annual bonus that equaled no less than 60 percento his salary, and an annual award o company shares worth no less than 101

percent o his salary.

On top o that, the agreement xed Iranis pension at 50 percent o the highesto his total annual nal salary, bonus, and ree share award, with a cost-o-livingrider to boot. Te company also picked up the tab or Iranis entire Caliorniastate income tax, which totaled more than $1 million some years.

Tis pay agreement would spur so much hostile comment that the Occidentalboard would eventually eel compelled to replace Iranis elaborate pay pact with


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a more modest package. Te new agreement would last only ve years and guar-antee only a $1.2 million salary, without guaranteed bonuses and ree shares.

But in negotiations with Irani, the board decided to throw in a special $97 mil-lion one-time payment. In eect, the new agreement actually gave Irani a raise.

In 2000, the plot would thicken. Te Occidental board and Irani would nego-tiate still another new employment agreement, this one or seven years.72 TeCorporate Library, an independent corporate watchdog group, would later giveOccidentals 2004 pay package or Irani an F rating.73

Where did all this Occidental wheeling and dealing leave Irani? In 2005, aterguring in the value o options exercised, Iranis total direct compensation was$83,963,948a whopping 623 percent above the average pay o CEOs at com-parably sized companies.

Irani ended 2005 as one o the highest-paid executives in Los Angeles county.o equal his 2005 take-home, an average petroleum engineer in the oil industry

would have to work 778 years, an average rotary drill operator 1,932 years, andan average construction laborer 3,775 years.

Platinum Parachutes: Lee Raymond, ExxonMobil2005 Compensation: $69,684,030

In 2005, ExxonMobil collected $36 billion in prot, the grandest annual prottotal ever recorded anywhere.

Last November, called beore Congress to explain the rising gas prices that ap-pear to have ueled these record prots, ExxonMobils Lee Raymond explained

that rising prices reect global supply and demand, nothing more.

We are all, Raymond assured Congress, in this together, everywhere in theworld.74

Were all in this together, except Raymond. As ExxonMobil CEO in 2005, hisbasic salary alone ran 63 times the average paycheck in the oil industry. Ray-monds $4 million salary last year amounted to a weekly take-home o $83,333.

But Raymond hardly had to content himsel with just salary in 2005. His overallpay or the year totaled $69,684,030.

Raymond retired rom ExxonMobil at the end o 2005, and his near $70million in compensation or the year seemed, at the time, a more than amplereward or his career o service to company shareholders. Company directorsdisagreed. Tis past April, news reports revealed that Raymond walked o intothe retirement sunset with a going-away pay package that sets a staggeringly newgolden parachute standard.

Tis retirement packagea grab-bag o stock options, restricted stock awardsrom previous years, retirement-independent salary, and bonuses, plus a $1


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million consulting contract, security services, a car and driver, access to thecompany corporate jet, and $210,800 in country club ees75would add up tonearly $400 million.

He is a porker o the rst order, executive pay expert Grae Crystal noted aterthe news o Raymonds good ortune broke. Tose CEOs out there who are do-

ing better at the trough must be thrilled hes ying ghter cover or them.76

A Hefty Raise: CEO Clarence P. Cazalot, Jr., Marathon2005 Compensation: $37,940,885

By being in the right place at the right time to ride the wave o record oil andnatural gas prots, Marathon CEO Clarence Cazalot received a more than 780percent raise in 2005, with $37.9 million in total compensation. Tat haulmade him the 19th highest paid CEO in America.77

Like many o our petrol proteers, Cazalot is a major winner in the merger andacquisition derby. He used to work at exaco when it was acquired by Chevron.

Marathon acquired additional U.S. reneries, with the Ashland stake. Overseas,Marathon acquired CMS Energys assets in Equatorial Guinea in 2002. In 2003,it extended its reach to Russia by acquiring Khanty Mansiysk Oil Corporation.78More recently, Cazalot became one o the rst to take advantage o a thaw inU.S.-Libya relations by cutting a deal to return the companys production to theLibyan oil elds in what Cazalot called a historic day or Marathon.79

CEO oil baron Cazalot understands the importance o economic and politicalpower in the oil industry. He sits on the board o Baker Hughes, a supposedlycompeting oil company.80 He is one o the more active political donors in theoil business. Since 2002, he and his amily have given $88,708 to candidates.

ogether with his wie and children, he has given the maximum gits to exasSenator Kay Bailey Hutchinson, the candidate o preerence o petrol pirates onCapitol Hill. He has given $10,000 a year to the Republican National Com-mittee, but hedging his bets in the 2004 Presidential election, he also gave aone time contribution o $5,000 to the Democratic Senatorial Committee. Heunderstands the meaning o buy-partisan.81

Under the Radar: Mark G. Papa, EOG Resources2005 Compensation: $36,343,142

EOG Resources CEO Mark Papa doesnt get much attentionin national busi-ness circles. He may like things that way. Papa has neatly sidestepped acclaim

and controversyon his way to an annual take-home that last year exceeded theWall Street JournalCEO average by nearly $25 million.

EOG, ormerly known as Enron Oil & Gas, split o rom its notorious par-ent in 1999, two years beore Enron sel-destructed.82 Te company now ranksnumber two on the Houston Chronicles top 100 list o oil and gas producers,but, despite that loty ranking, Papa wasnt invited to the congressional hearingsexploring oil industry proteering.


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In 2005, Papas $36,343,142 in total compensation outpaced average oil in-dustry worker take-home by 576 times. Rising energy prices, he once acknowl-edged, make his job considerably easier. Just a dime annual increase in naturalgas prices, Papa observed beore the current run-up in energy prices, translatesinto an 18 cents-per-share increase in his companys cash ow. 83

The Free Market Forever: G. Steven Farris, Apache2005 Compensation: $13,645,217

G. Steven Farris, the CEO o the Apache Corporation, worries about the vastmerger wave that has consolidated control o Americas natural gas in the handso a precious ew super-sized companies.

In 2002, with these ew companies controlling 80 percent o the gas that owsthrough U.S. pipelines, Farris warned about the potential or market-powerabuse, the ability o big-time players to distort the natural give-and-take o ree-market supply and demand.84

But Farris has so ar ailed to issue any warnings about the big-time players whocan distort supply and demand in executive pay. oday, all across CorporateAmerica, the company compensation committees responsible or determiningCEO compensation consist, to a large extent, o current, soon-to-be, and ormerCEOs rom other companies, powerul people who have a vested interest to set-ting executive pay at levels as high as possible.

Last year, Farris pulled in $13,645,217, a 155 percent increase in pay rom his$5,351,875 in 2004. Te compensation committee that made this generous payboost possible included a current CEO and Chairman (A.D. Frazier Jr., DankaBusiness Systems PLC), a ormer CEO (George D. Lawrence, Phoenix Resource

Companiesacquired by Apache in 1996), and a retired chie operating ofcer(Frederick M. Bohen, Rockeeller University).85

Average production workers in the oil and gas industry dont have the option ohaving other production workers set their pay. Tat may explain why their payincreased only 4.1 percent last year. Petroleum engineers, who currently averagea healthy $107,990, would have to labor 126 years to equal the 2005 take-homeo Apaches Farris.


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What Can be Done to Control PetrolProteering?

What is good or ExxonMobil and Lee Raymondand all the other giants othe contemporary American oil and gas industryhas notbeen good or averageAmericans. Energy executives have walked o with record prots and over-

stued wallets. We ace sticker shock every time we ll up.

But what can be done about petrol proteering? In the overall conclusion to thisreport, we will examine specic proposals to address excessive executive pay. Here,in this section, we examine solutions more targeted to the oil and gas industry.

Not Price GougingJust Prot Protectionism

Oil and gas companies, the Federal rade Commission has ruled, cannot beguilty o price gouging i the prices they set reect real costs or national orinternational market trends.86

Tese national and international market trends have certainly been kind toAmericas energy giants and their top executives. In 2005, the industry nettedover $140 billion, with over three-quarters o that76 percent, to be exactgoing to the ve biggest integrated oil companies. 87

Te market clout o these ve companies makes marketplace competition, theclassic antidote to excessively high prices, a nonstarter in the energy industry.With so much control in so ew corporate hands, Americas energy giants canestablish their own market trends.

American consumers, or their part, have little choice. Without sufcient access

to real energy alternatives, consumers who have to heat their homes and drive toworkwhatever the costwill pay almost any price.

Buyers may have little or no choice, but producers certainly do. According tothe Energy Inormation Administration, oil company reneries are currentlyoperating at only an average 86 percent capacity. Overall gasoline productionaverages 24 million ewer gallons per day than one year ago.

Oil companies, as an explanation, plead poverty. Tey must operate, we are told,under nancial constraints.

It is difcult to imagine how the oil industry could be nancially constrained

rom increasing its commitment to domestic rening capacity, responds Rep.Joe Barton, the chairman o the House Energy and Commerce Committee,when the three largest U.S. integrated oil companies alone have cash reserves inexcess o $40 billion.88

Te top three U.S. oil companies reported rst quarter prots in 2006 o $15.7billion, earnings up 17 percent over the rst quarter last year. ExxonMobil, de-spite earning a record $36 billion in 2005, has invested only $3.3 billion towardsystems improvements over the last ve years.89


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ExxonMobils second quarter 2006 prots were $10.36 billion, 36 percenthigher than a year ago. Tis gain is the second largest quarterly prot recordedby a publicly traded U.S. company. ConocoPhillips registered a 65 percent gainto $5.18 billion.90 Chevron saw their second quarterly earnings rise 11 percentover last year, to $4.35 billion. Even though this was a record or the company,Wall Street wanted more and the stock price dipped 3 percent on the day ater

the announcement.91

Awash in prots, ush with overpaid executives, oil companies can aord to domore to lower oil prices. Much more.

Environmental Nonperformance

Te problem with record oil company prots and CEO pay doesnt end withprices at the pump. We need to examine these prot and pay numbers in amuch broader global context.

Oil companies have become a massive source o the greenhouse gas emissions

that have unleashed a planet-wide climate crisis. Each o todays giant oil rmshas it within their power to shit massive nancial resources toward a cleanenergy uture. Yet only two have taken even small steps in this direction (BP andShell), while the others, most notably ExxonMobil, still challenge the sciencebehind climate change. Our nations biggest oil CEOs have lobbied hard orenergy legislation that emphasizes drilling in the ragile Alaskan tundra over uelefciency and clean energy alternatives.

Oil CEOs, over recent years, have perormed well or their shareholders. Teyhave perormed poorly or the planet. Te pay windalls that continue to cometheir way only give them an incentive to continue this poorand incredibly

recklessperormance.

Steps Toward Change

A. Rebate Oil Windfall Prots

Oil industry windall prots currently end up lining the pockets o top oilexecutives. Tey could instead be earmarked or public energy conservationprojects and eorts to reduce energy costs or the poor.

A number o lawmakers in Congress have already made such proposals. SenatorByron Dorgan (D-ND) has proposed that a 50 percent tax be applied to prots

earned by major U.S. oil companies on the sale o crude oil above $40 per barrel.o encourage the reinvestment o oil prots, this proposal would exempt invest-ments in the exploration and development o new sources o oil and gas, in theproduction o renewable uels, or in increases or domestic renery capacity.92

Congressional House member Dennis Kucinich (D-OH) has a similar taxproposal that would generate unds or a tax credit or the purchase o efcientpassenger vehicles and mass transit.93


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B. Eliminate Taxpayer Subsidies for the Oil Industry

Te oil industry, a most mature industry, doesnt need government tax breaksand subsidies. But that doesnt stop oil lobbyists rom pressing Congress tochannel Big Oil billions o dollars in subsidies and tax breaks each year. Tiscorporate welare encompasses both massive tax breaks and the use o public

lands to extract oil at below-market prices.

1) Tax Breaks for Oil and Gas

axpayers have actually subsidized excessive CEO pay in the oil industrythrough tax breaks and other corporate welare. Te independent axpayersor Common Sense has identied 16 subsidies or the ossil uel industry total-ing $5 billion a year.94

All these could be saely eliminated.

2) Subsidized Use of Public Lands for Oil Companies

Congress should not allow oil companies to extract oil rom public lands atbelow-market prices. Over the next ve years, according to the Department oInterior, energy companies will likely remove $65 billion in oil and gas romederal lands without paying a ull royalty.95

Senator Dianne Feinstein (D-CA) has proposed legislation that requires oilcompanies to pay higher royalties rom oil extracted rom public land duringemergency periods o high oil and gas prices. Her legislation would require theSecretary o the Interior to renegotiate existing oil and gas leases.

C. Institute Rigorous Anti-Trust Measures in the Oil and Gas Industry

Tere has been tremendous concentration in the oil industry, with over 23 ma-jor mergers in the last decade (see timeline on p. 28). Not since the 1911 anti-trust break-up o John D. Rockeellers Standard Oil Company has the countrywitnessed such a concentration o petroleum power.

It is time the Congress took a very serious look at modiying the anti-trustlaws, said Senator Arlen Specter (R-PA), who convened a Judiciary Committeehearing on the consolidation o the oil industry in February 2006. A bi-partisangroup o Senators has introduced several pieces o legislation aimed at prevent-ing anti-competitive mergers and strengthening anti-trust intervention in the oil

and gas industry.96

Senator Specter and other Senate leaders have pointed to the ways in whichrapid consolidation has created a collusive environment in the industry andhas acilitated the withholding o supply and inormation sharing by industryparticipants. According to Specter, this consolidation conerred market poweron remaining players, and with it, the opportunity to increase prices. As we havelearned in the [Judiciary] Committee, there is some evidence that consolidationin the industry has increased wholesale gasoline prices.97


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D. Separate Oil and State

At a more basic level, no meaningul progress will bemade on the initiatives described above until we sepa-rate oil and state.

Te overwhelming inuence o Big Oil donations hasblocked eorts to implement legislation promotingenergy alternatives and rein in executive excess. In Cali-ornia, or instance, Big Oil companies like Chevron,ConocoPhillips, and Occidental Petroleum have suc-cessully stalled or killed a number o bills that addresspricing issues, rening capacity, and alternative energysolutions.98

Viable technologies or alternative energy have becomereadily available,99 but our politicians continue to useour tax money to subsidize Big Oil.100 Te 2005 Energy

Bill alone handed over $6 billion to the oil industry intax breaks or oil exploration, reduced royalty pay-ments, and direct subsidies.101

Meanwhile, the annual budget or the National Renew-able Energy Laboratory, the countrys primary researchand development acility or renewable energy tech-nologies, stood at just $174 million in scal year 2006,$28 million less than or scal 2005.102

A new coalition, Oil Change International, is calling

on legislators to wean themselves rom oil industrycontributions and vote or policies that will truly movethe U.S. toward oil independence and clean energy. BigOil, notes Oil Change International, constitutes themost basic political barrier to a clean energy transi-tion.103

We may also benet rom the example put orward byBPs Lord Browne in banning company political contri-butions anywhere in the world.104

Major Oil and Gas Merger imeline

1996:

Exxon acquires Nalco Energy

1997:

Baker Hughes acquires Petrolite1998:

BP acquires AmocoHalliburton acquires Dresser IndustriesMarathon Oil joint ventures with Ashland, Inc. (MAP)

Baker Hughes acquires Western Atlas

1999:

Exxon acquires MobilDevon acquires Pennz Energy

Kerr-McGee acquires Oryx Energy

2000:

Phillips joint ventures with ChevronOccidental Petroleum acquires Altura EnergyAnadarko Petroleum acquires Union Pacic Resources

2001:

Chevron acquires Texaco

Phillips acquires Tosco Corp.Conoco acquires Gulf Canada Resources Ltd.

Valero acquires Ultramar Diamond Shamrock Corp.Marathon Oil acquires PennacoAnadarko acquires Berkley Petroleum Corp.

Amerada Hess acquires Triton Energy

2002:

Conoco acquires Phillips Petroleum

2003:

Devon acquires Ocean EnergyMarathon Oil acquires Khanty Mansiysk Oil Corpora-

tion

2004:

Valero acquires El Pasos Aruba renery

2005:

Valero acquires Premcor, Inc.

Marathon becomes 100% owner of MAPChevron acquired Unocal

2006:

ConocoPhillips acquires Burlington Resources

Anardako acquires Kerr-McGee and Western GasResources


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E. Make CEO Option Pay Accurately Reect True Performance

Stock option rewards or top oil company executives should reect responsibleperormance, including perormance on mitigating climate change, not just oilbarrel price increases completely unrelated to an executives own perormance.

Option plans, i appropriately designed, can lter out stock price increasesunrelated to an executives personal perormance. Using benchmarks or indices,as opposed to simply the absolute share price, can more closely ulll the goal ousing options as incentives or executive perormance.105 Unortunately, in 2001,only 5 percent o the 250 largest U.S. public rms designed their stock optionreward plans this way.106


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IV. CEO Pay: A Decade and a Half

in Review

Tis section updates popular statistics eatured in our report every year.

CEO v. Worker Pay DataIn 2005, average total compensation or CEOs o 350 leading U.S. corporationswas $11.6 million, down slightly rom $11.8 million in 2004.107 Te ratio oCEO pay to average worker pay was 411-to-1 in 2005. While this is still smallerthan the 2000 peak o 525-to-1, it is nearly 10 times as large as the 1980 ratio o42-to-1.108

otal executive compensation is dened throughout this report as salary, bo-nuses, restricted stock awarded, payouts on other long-term incentives, and thevalue o options exercised in a given year; we do not include the estimated valueo stock options awarded.

CEO Pay Outstrips Other EconomicIndicators

Although average executive compensation dropped slightly in 2005, it is stillup almost 300 percent since 1990, ater adjusting or ination. By contrast, theaverage worker has scraped along with less than 5 percent in pay raises over 16years. Minimum wage workers have ared even worse. Teir pay has dropped byover 9 percent in real terms since 1990. CEO pay has also risen at a much asterrate than the stock market or corporate prots.

Figure 10: Average CEO to Average Worker Pay Ratio, 1990-2005

Source: see box on following page.

107132

201 195

142

180

269

348

455

516 525

428

281 301

431

411

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


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Data Sources for This Section:

Total executive compensation: 2005 data based on Wall Street Journalsurvey, April 10, 2006; all other years basedon similar sample in Business Week annual compensation surveys (now discontinued). Includes: salary, bonus, re-stricted stock, payouts on other long-term incentives, and the value of options exercised.

S&P 500 Index: Economic Report of the President, 2006 Table B-96; 1997, 2000 Table B-93; average of daily closingprices.

Corporate Prots: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Ac-counts, Table 6.16, with inventory valuation and capital consumption adjustments.

Average worker pay: Based on U.S. Department of Labor, Bureau of Labor Statistics, Employment, Hours, andEarnings from the Current Employment Statistics Survey (average hourly earnings of production workers x average

weekly hours of production workers x 52).

Minimum wage: Lowest mandated federal minimum wage, nominal; U.S. Dept. of Labor, Employment Standards

Administration, Wage and Hour Division.

Adjustment for ination: BLS, Average Annual CPI-U, all urban consumers, all items.

Figure 11: Cumulative Percent Change in Economic Indicators, from 1990 (in 2005 dollars)

Source: see box below.

298.2%

409.2%

AverageCEOpay

4.3%

326.6%

260.8%

106.7%

-9.3%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

S&P500

Index

CorporateProfits

AverageWorkerPay

MinimumWage


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o put the CEO-worker pay gap in perspective, we calculated how much aver-age production worker pay would be worth today i it had grown at the samerate as CEO pay. In 2005, the average worker would have made $108,138, com-pared to the actual average o $28,314. Similarly, i the ederal minimum wagehad grown at the same rate as CEO pay, it would have been $22.61 in 2005,instead o $5.15.

Figure 12: Value of CEO Pay and Average Production Worker Pay,1990-2005 (in 2005 dollars)

Figure 13: Value of CEO Pay and the Minimum Wage, 1990-2005 (in 2005 dollars)

$28,315

$108,138

$138,278

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

1990 1992 1994 1996 1998 2000 2002 2004

WorkerPayifithadrisenatthe

samerateasCEOPay

ActualWorkerPay

$5.15

$28.91

$22.61

$0

$5

$10

$15

$20

$25

$30

$35

1990 1992 1994 1996 1998 2000 2002 2004

Actual Minimum Wage

Minimum Wage if it

had risen at the same

rate as CEO Pay


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V. Reforming CEO Pay

Everyone should have an interest in controlling this explosion in execu-tive pay. Te wealth o America has been built through the returns o ourpublic corporations, and i those returns are being redirected to companymanagements, then the people who get the short end o the stick are the

people who hope to retire someday.Frederick E. Rowe Jr., chairman, exas Pension Review Board109

For almost two decades, the issue o excessive executive compensation has beensimmering in the media and public consciousness. Hardly a week goes by with-out some iconoclastic business leader or media gure railing against the excesseso overpay or getting exercised about runaway stock options.

Nearly ten years ago, in 1997, Business Weekdeclared executive pay out ocontrol. A year later, the magazine complained: Pay or perormance? Forget it.Tese days, CEOs are assured o getting richhowever the company does.110

oday, almost a decade later, nothing has changed, except perhaps the number opeople complaining. Even corporate board members, the very people who set exec-utive pay levels, now think things have gone overboard. A recent survey by Pricewa-terhouseCoopers, published in Corporate Board Membermagazine, ound that 70percent o corporate directors consider executive compensation excessive, thoughnot necessarily, o course, at the particular company they happen to govern.111

Can some semblance o compensation common sense be restored to Americasexecutive suites? Reormers have advanced an array o proposals that address ex-ecutive pay excess, either through new statutes, improved regulations, or institu-tional change within corporations. Te most commonly debated proposals aim

to put into place:

rules that requiregreater transparency and disclosurein all mattersexecutive pay-related. Te Security and Exchange Commission, theederal agency that regulates publicly traded corporations, earlierthis summer pronounced new regulations that should substantiallyincrease the data about executive pay available to investors.

corporate governance reorms that encouragegreater corporate boardindependenceand eliminate conicts o interest on board compensa-tion committees.

regulations that increase shareholder powerin corporate decision mak-ing, in everything rom board elections to compensation setting.

Tese proposed disclosure and governance reorms would certainly have animpact on the nations executive pay landscape. But this report recommends armore basic changes to address the economic insecurity and chaos that CEO payexcess engenders. Tese recommended changes would:

give shareholders and communities the clout they need to recapture


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illegitimate executive compensation.

eliminate the dierent ways taxpayers, communities, and workers areeectively subsidizing excessive executive pay.

Most undamentally, we need to recognize that all Americans, not just share-

holders, have a real stake in how corporations are run and CEOs are paid. And imore people than just traditional shareholders have a stake in corporate gover-nance, then our corporate govern

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