Heavy machinery manufacturer Caterpillar gave its CEO a 14 percent raise last year, in a $17.1 million package of cash, stock, and other compensation that is hard to justify in light of the famed brand’s actual performance.
CEO Douglas Oberhelman’s big raise came despite a decline in Caterpillar’s sales. The company justified its decision to Crain’s by pointing out that Oberhelman oversaw a good year for the company as measured on a per-share basis. Those accounting metrics benefited from the company’s decision last year to buy back a bunch of shares to make Caterpillar look better on a per-share basis, the Wall Street Journal notes.
Caterpillar is hardly unique in finding creative ways to justify paying CEOs. The rules for performance pay are broken across all industries. Fortune 500 CEOs are now paid hundreds of times what the typical worker makes, up from the healthier 30-to-1 ratio that was typical in the long middle-class boom that followed World War II.
Oberhelman has been paid nearly $18 million per year on average since assuming the company’s top office. The $17.1 million package for 2014 is a hefty percent raise from the $15 million Caterpillar paid Oberhelman in 2013. That year’s package was portrayed as a significant cut from his 2012 earnings of $22.4 million, but critics in 2013 argued that even that down year was still a severe overpayment for the CEO’s performance. The way the company’s performance-based compensation systems are designed, the CEO got a $2 million performance bonus for a year when sales fell by 16 percent.
The company is a perennial favorite when politicians and journalists need something to stand in for middle-American moxie and blue-collar striving. Profiles of both Caterpillar and Oberhelman tend to play up the firm’s roots in Peoria, Illinois, a town rendered synonymous with Real America by the cliched old test of an idea’s marketability: “Will it play in Peoria?”
Caterpillar earned its associations with American grit and ingenuity in its early decades of success, but its modern behavior is testament to the financialization of even the blue-collar segments of the U.S. economy. Modern-day Cat does what is best for the share price even if that means squashing its actual production workers in contract talks and moving their jobs across the state line if they object too loudly to the new treatment.
Identifying Caterpillar’s success with humble midwestern values is a lie, at this point in the company’s history. Oberhelman and his shareholders make gobs of money from a wink-nudge arrangement in Switzerland. A Swiss subsidiary claims to be the final destination for much of the cash that Cat brings in. Caterpillar paid $55 million to wish that Swiss branch into being about 80 years after its founder opened his first factory in Peoria.
The scheme has avoided $2.4 billion in U.S. tax payments since 2000.
The deal is also entirely legal, much like the highly technical profit-shifting arrangements that tech giants use to keep their profits away from the Internal Revenue Service. Caterpillar gets all the public relations gloss that comes with being from Peoria while ducking the taxes that fund roads and fire departments and houses that people can afford to buy in central Illinois.
Caterpillar’s Swiss swindle is especially useful to shareholders and people like Oberhelman whose pay is determined more by stock tickers than by what happens on the factory floor. The company’s stock price benefits from engineering a flow of company cash that leaves more overall value on the books, even if the books are Swiss and the stocks trade in Chicago.
Moves that hurt workers but benefit investors threaten to become a defining pattern in the American business world. Years of hostile takeovers in the 1980s and 1990s helped create a fascination with short-term indicators of shareholder value, as Steven Pearlstein explains, and that fascination is now part of the curriculum in business schools. Executive compensation shifted more and more from cash to stock, giving the people in charge of the largest firms in the U.S. economy a huge incentive to chase short-term on-paper value at the expense of the long-term, concrete business success. Because that shift benefits people wealthy enough to own stock at the expense of working people, the financialization of the American business world has naturally exacerbated inequality.
Opposing the sheer size or inequity of modern CEO compensation doesn’t do much to address the roots of the problem, no matter how loud the objections. Restoring the traditional link between work and economic mobility means reversing the financialization of companies like Caterpillar — causing them to focus on the long-term and consider interests that aren’t gauged in stock prices. Ideas for changing corporate behavior include greater profit-sharing for lower-level employees and closing tax loopholes that make stock-based CEO pay deductible.
Last year, such ideas featured prominently in the work of an international working group of left-of-center policymakers that some pundits expect will serve as the basis for Hillary Clinton’s economic platform in her run for the White House. If the 2016 cycle stops through Peoria, as so many previous politicians have done to use Caterpillar production facilities as a backdrop for speeches and glad-handing, the company may find itself cast in a very different kind of story about the American economy.