Does Greed Fuel Stupidity in Corporate America?

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted July 10, 2008.

Smart, talented, ambitious people have a lot to offer. They also expect a lot. They expect our society's best and biggest rewards, and the bigger the reward, the harder they'll work to grab it. That's fine -- to a point. We certainly do want to see our "best and brightest" putting out, contributing as much as they can to endeavors that create wealth and advance the common good.

But if the rewards our society offers the smart and talented become too big, the smart can tend to start doing dumb things. The more outrageously large the reward, the more outrageous the dumb -- and socially damaging -- behavior.

Smart societies understand this dynamic and work, through tax laws and cultural norms, to keep rewards within reason. Here in the United States, we used to have many such laws and norms. We no longer do. We have swept away the restraints that once kept our society's rewards relatively reasonable.

And now we're paying the price. Our smart and talented today regularly do dumb things -- and cause great damage.

Our latest exhibit A: the career of Richard E. Dauch, Corporate America's latest superstar executive turned scourge of the late great American middle class.

Dauch currently serves as the CEO of American Axle and Manufacturing, an auto parts giant carved out of General Motors 14 years ago. Late this past May, after threatening to outsource "all of our business to other locations around the world," Dauch forced 3,600 striking workers at his company's five original American plants to accept a contract that cuts wages from $28 an hour down to as low as $14.35 and slices the company's U.S. workforce by half.

One month later, in June, Dauch pocketed his reward: a $8.5 million bonus from the American Axle board of directors for his "leadership role" in "the structural transformation achieved under our new labor agreements."

Dauch has now collected, over the last decade, over $258 million in compensation from American Axle -- and, in the process, tossed thousands of U.S. worker families out of the middle class.

Auto workers, ironically, once symbolized that middle class, and for good reason. Precedent-setting union contracts at GM and other U.S. automakers after World War II helped give birth to the first mass middle class in world history.

And the executives who signed those contracts? They did well, too, but not too well. In 1950, for instance, General Motors president Charlie Wilson pulled in $586,100 in income, a bit over $5 million in current dollars. Today, someone at that $5 million level will usually clear, after taxes, around $4 million. Wilson cleared the equivalent of only $1.25 million. He paid nearly three-quarters of his income in taxes.

Mid-20th century America, in effect, frowned on excessive incomes at the nation's economic summit. The result: America's biggest companies, back then, manufactured cars, not mega millionaires.

A young Richard Dauch would start his auto industry career in this mid-20th century manufacturing culture -- and thrive in it. The talented Dauch shot up the General Motors organizational charts. In 1965, GM named him a production foreman at the company's Flint assembly plant. Three years later, he was supervising all the plant's production. By 1976, Dauch was running all manufacturing for VW of America.

The rising young executive would go to similar heavy-duty responsibilities at Chrysler. By the mid-1980s, Dauch had established a reputation as one of the top managers in the entire American auto industry.

But that industry was now operating within an economy that had fundamentally changed. By the 1980s, the restraints on the size of the rewards the economy had to offer had begun eroding. The top tax on income over $400,000 -- 91 percent in the Eisenhower years -- would be 28 percent by 1986. Big money could now be made -- and kept -- and Corporate America's smart, talented, and ambitious were pushing the envelope to make it.

Corporate America's most ambitious operators were soon raking in more millions in a year than old-time executives like Charlie Wilson ever made in a career. And they were raking in these millions not by making and selling goods, but by making and selling companies. The action -- and the rewards -- had shifted. Dauch would shift, too.

In 1994, Dauch and another former General Motors executive rounded up a group of investors, bought up five mismanaged GM parts plans, and started up shop as a privately held company known as American Axle and Manufacturing.

Typically, in a buyout situation like this, the new owners follow some variation on what has come to be called the strip-and-flip script. They proceed to gin up profits at their new holding by any means necessary, then take their plaything public on the stock exchange and make a killing selling shares of their new company's stock.

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Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.