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KESTENBAUM: There's this thing that comes up in the news a lot - CEO pay. The stories often include someone complaining that CEO pay is too high, sometimes pointing out that it would take an average worker two centuries to earn what a top-paid CEO makes in a single year.
JACOB GOLDSTEIN, BYLINE: Then there's somebody on the other side defending CEO pay. And that's usually about where the stories end - just people arguing back and forth about numbers.
KESTENBAUM: Today, we have an actual story about CEO pay - a story with a beginning, a middle and an end.
GOLDSTEIN: It's the stories of two guys - two outsiders - who tried to cut the pay of the CEO at a small pneumatic tool company on Long Island.
GOLDSTEIN: Hello and welcome to Planet Money. I'm Jacob Goldstein.
KESTENBAUM: And I'm David Kestenbaum.
GOLDSTEIN: Small note - this is a piece we just finished for This American Life. The version here is slightly nerdier - special for Planet Money.
KESTENBAUM: It takes an unusual person to wage a war against the CEO and his pay. The odds of success are just so low. And Tim Stabosz was definitely an outsider.
GOLDSTEIN: He lived in a small town - LaPorte, Indiana - in a small house. We went to visit. In the dining room, there's a broken Dungeons and Dragons pinball machine. Tim tried to fix it.
TIM STABOSZ: Here it is, yeah. It's sad. I made a boo-boo when I fried out the display. It was just a disaster (laughter).
KESTENBAUM: Upstairs there's a room filled with old and rare board games. Tim used to buy them at auction and resell them. My favorite was a game called War in the Pacific, which apparently nobody really plays. It's got 3,000 pieces and like 50 pages of rules. Tim made a little business out of this. He was good at picking the right games, buying them cheap and selling them for more.
GOLDSTEIN: Eventually, Tim tried his hand at the stock market. He used a computer to pick out stocks he thought were undervalued. He still has this computer today. And just so you have the right image in your head, it's the kind of computer you'd find sitting out on a sidewalk. It's got a floppy disk drive. It's actually connected to a dot matrix printer.
KESTENBAUM: It still works.
(SOUNDBITE OF DOT MATRIX PRINTER PRINTING)
KESTENBAUM: Over the years, Tim did well in the stock market, really well - well enough that he was never going to have to work a regular job again.
GOLDSTEIN: Sometime in the mid-'90s, Tim came across this one company. He'd end up investing hundreds of thousands of dollars in its stock. It was a small company based on Long Island called P and F Industries. It made pneumatic tools. You can actually buy them at Home Depot.
Have you ever use one of the tools?
STABOSZ: I don't believe so - no.
GOLDSTEIN: Tim just liked the company's numbers. It was a small company where you could understand everything about it. P and F seemed like a good deal. But over the years, something began to gnaw at him - the salary of the CEO, Richard Horowitz.
STABOSZ: Roughly one and a half million dollars a year total compensation.
GOLDSTEIN: Is that a lot?
STABOSZ: One and a half million is outrageous and outlandish.
KESTENBAUM: Tim looked around at similar companies - some in the same industry, some in the same geographic area - and he couldn't find anywhere the CEO was paid even half of what Horowitz made. Now, if you just own a few shares of a company's stock and you think the CEO is overpaid, there isn't much you can do. But if you own more, well, that's different. And by the fall of 2009, Tim owned 180,000 shares.
STABOSZ: I came to own 5 percent.
GOLDSTEIN: Five percent of the whole company?
STABOSZ: Five percent of the entire company.
GOLDSTEIN: His stake was worth more than a half a million dollars. And it turned out Tim had an ally in this fight - a guy with a little more experience, a guy who ran a hedge fund.
ANDREW SHAPIRO: I'm Andrew Shapiro. I'm president and portfolio manager of Lawndale Capital Management.
KESTENBAUM: Andrew also owned a big chunk of the company - about 8 percent. He and Tim didn't work together directly. They had very different styles. Andrew was a by-the-book investor, fond semi-obscure military allusions.
SHAPIRO: We deploy - with what we do, we deploy what I call the Powell doctrine of investments. And I try to take on targets where I can mount overwhelming force.
GOLDSTEIN: For years, Andrew had been arguing that the CEO was grossly overpaid. Over one tenure period, he says, Richard Horowitz took home $13.5 million. That's more than twice what the entire company made in profits over that time.
KESTENBAUM: Sometimes when people complain about CEO pay, they talk about it as if the money is coming out of the pockets of ordinary workers. That is not how Tim and Andrew see it. Every dollar the CEO gets is a dollar less profit - a dollar less for Tim and Andrew and all the other stockholders.
SHAPIRO: The overpaid CEO is taking money out of the shareowner's pocket.
GOLDSTEIN: You're not in it because hey, wouldn't it feel great if CEOs weren't paid so much more than everyone else?
SHAPIRO: I am doing this to make a return on our capital.
KESTENBAUM: If you think CEOs are overpaid rich guys, your best hope may be other rich guys, people like Tim and Andrew with enough money to buy up a bunch of stock and try to cut the CEO's pay in hopes of becoming even richer themselves.
GOLDSTEIN: We of course wanted to know what the CEO, Richard Horowitz, had to say about all this. We tried to get him. We had a bunch of talks with the company's lawyer. In the end, Horowitz declined to be interviewed. But because this is a public company, there are plenty of recordings of him. Public companies have what are called quarterly earnings calls for investors - really anyone who wants to listen.
(SOUNDBITE OF PHONE CALL)
UNIDENTIFIED OPERATOR: Good day everyone. Thank you all for holding. Today's conference will begin with a presentation and then a question...
GOLDSTEIN: The operator starts the call. And then here is the man himself - Richard Horowitz.
(SOUNDBITE OF PHONE CALL)
RICHARD HOROWITZ: Firstly, I'm pleased to report that the company's revenue from continuing operations was $14,164,000.
GOLDSTEIN: I've listened to a lot of earnings calls like this over the years. Usually, they are incredibly dull. Analysts from big banks asking super specific things about the company's balance sheet. But remember, P and F is a small company. And on some of these calls, there are only two people phoning in with questions - two people who feel the CEO is grossly overpaid. Andrew and Tim - they get to ask the CEO whatever they want.
KESTENBAUM: Here's one exchange.
(SOUNDBITE OF PHONE CALL)
UNIDENTIFIED OPERATOR: Our next question is from Timothy Stabosz. Your line is open.
KESTENBAUM: Tim is asking about this key thing that's used to determine a CEO's salary. It's called a compensation study. It looks at what CEOs at comparable companies are earning. P and F Industries had hired an external firm to do one of these reports, and Tim wanted details.
(SOUNDBITE OF PHONE CALL)
STABOSZ: So we're still waiting on a report from that outside firm, right?
HOROWITZ: I can't tell you. I don't know what the comp committee - I mean, I can't answer that question. I don't have the knowledge to answer that question.
HOROWITZ: I'm not being evasive. I just don't know the answer, Tim. I'm sorry.
STABOSZ: OK, but you know that there's a firm that's - we've certainly announced that there's a firm that's doing an analysis, right?
HOROWITZ: I can't - I don't know.
STABOSZ: Does anyone in that room know?
HOROWITZ: It's not - it's not the appropriate...
STABOSZ: Does the attorney - does the attorney of the company know?
HOROWITZ: Tim, I can't comment any further. And this is a Q2 conference call.
GOLDSTEIN: Q2 means second quarter.
(SOUNDBITE OF PHONE CALL)
HOROWITZ: We're talking about the results of Q2.
HOROWITZ: Please, please, please, Tim and Andrew - anybody else - please let's keep the comments to the Q2, count the numbers. Thank you.
STABOSZ: Well, that's fine, but executive salaries are relevant to the future profitability and what not.
HOROWITZ: I can't comment any further, Tim. Any other questions about the Q2?
STABOSZ: Well, it would have been helpful if you would have simply said we're not going to talk about executive compensation, period, because that's what you're essentially saying, right?
HOROWITZ: Any other questions about Q2, Tim?
STABOSZ: I'll get back in queue. I'm frustrated right now, Richard.
HOROWITZ: OK, you'll handle it.
UNIDENTIFIED OPERATOR: Thank you. Our next question is from Andrew Shapiro. Your line is open.
GOLDSTEIN: There are a lot of calls like this.
KESTENBAUM: A CEO's salary is set by a company's board of directors. And Shapiro suspected Richard Horowitz had packed the board with his cronies, people who paid him more than he deserved. So Andrew hired a private detective and did some digging himself. He discovered that, in fact, several board members played golf at the same country club as the CEO.
SHAPIRO: The Glen Oaks Country Club of Westbury, New York - Glen Oaks Country Club of Old Westbury, New York.
GOLDSTEIN: Nothing illegal or maybe even surprising about these guys belonging to the same country club.
KESTENBAUM: Still, what would General Colin Powell do? He'd get them off the board.
GOLDSTEIN: Getting someone new on a company's board turns out to be very difficult. This next wonky little detail is not the kind of thing that fits on a protest sign, but it's the thing that really matters. Board members are elected. All the shareholders get to vote. But the thing is it's hard to get candidates on the ballot.
KESTENBAUM: Any shareholder can nominate someone, but the board decides whether that person should be listed on the ballot. It would be like if the members of Congress got to decide who got to run for Congress.
GOLDSTEIN: There are ways around this. You can try to change a company's bylaws, or you can wage something called a proxy fight. But that's expensive and even more difficult.
KESTENBAUM: So both Tim and Andrew took that first approach - nominate someone for the board and hope the board takes their suggestion. Andrew, in his by-the-book way, offered up some names.
GOLDSTEIN: And Tim - Tim took a more unconventional approach. Here's the letter he wrote and filed with SEC. We had him read it.
STABOSZ: (Reading) Person went to Article 3 Section 12 of P and F's bylaws. Please be advised that at the next meeting of stockholders at which directors will be elected, I intend to nominate myself for election as a director.
GOLDSTEIN: Tim was trying to get himself on the board. He'd never been on a board, but this was like a board game - there were a set of rules and they allowed for this. So why not?
STABOSZ: Very truly yours, Timothy John Stabosz, private investor.
GOLDSTEIN: Is that a kind of outrageous thing to do?
STABOSZ: You know, I was so incensed, I figured why not? Why not see how they respond, request that they put me on the board and see how they handle it.
KESTENBAUM: Tim and Andrew went to the company's annual meeting on Long Island to try to convince the board to put their candidates on the ballot. It was the first time Andrew Shapiro and Richard Horowitz, the CEO, had met in person.
SHAPIRO: It actually was quite crowded. Every seat in the table was full and there was the paid-for advisers standing around the periphery of the table outside - you know, in the room but along the wall.
GOLDSTEIN: Where was the CEO?
SHAPIRO: Oh, he's sitting directly across the table from me.
GOLDSTEIN: Oh. It must be awkward. What's it like?
SHAPIRO: Oh, it's not awkward or not - you know, I go into these rooms with the distinct view that I am an owner of this business and you members of the Board of Directors are my agents and you work for me. You don't work for Mr. Horowitz. You don't work for management. Management works for you, the board. And the board, you work for me and all of the other shareholders.
KESTENBAUM: The board did not seem immediately swayed by this argument. And it's easy to imagine how this whole thing might feel on the other side. If you're say, Richard Horowitz, the CEO, you've got two guys who have never even worked in the tool business telling you how they think the business that your father built up should be run and how much you should be paid and who should be on your board.
KESTENBAUM: For Tim Stabosz, what had started out as a rational investment, something just based on numbers, had become emotional, had become something hard to let go of. At some point in this whole fight, Tim's letters to the company took on a different tone. He got rid of the lawyer who'd been vetting them. Some of the letters start to have words in all caps. Some start to feel weirdly intimate. One is addressed just to Richard and uses phrases like, I was at the end of my rope, and, goodness knows I tried a different course.
GOLDSTEIN: And then in the summer of 2010, more than a decade after Tim first bought stock in P and F Industries, something finally went his way. There was a change on the board. The two guys who played golf at the same country club as the CEO stepped down from the committee that set the CEO's pay.
KESTENBAUM: Also, one of the people Andrew had recommended for the board got put on the ballot and elected.
GOLDSTEIN: And a year and a half later - if you haven't noticed, this is an incredibly long process - it finally happened, the thing that almost never happens. The board of P and F did what Andrew and Tim wanted. They cut Richard Horowitz's base salary, by a lot - from $975,000 to $650,000 - a cut of over $300,000.
KESTENBAUM: It actually made the news. At least, a little corner of the news - an article in a publication called Institutional Investor. An expert in that article said it was the first time he'd ever seen shareholders get a board to cut the pay of a sitting CEO.
GOLDSTEIN: Tim Stabosz of course was elated about the pay cut.
STABOSZ: Well, it felt fantastic. It felt great. It felt like I had served to affect this change, that I was an agent of change.
GOLDSTEIN: Were you like, me from Laporte, Indiana, typing my little angry letters, you know, used to be selling board games, I just got a CEO's salary cut by $320,000?
STABOSZ: Yeah. Yeah, that's how it felt at the time.
KESTENBAUM: That feeling did not last. It turns out, that new contract also made it easier for Richard Horowitz to get a bigger bonus. And 2012, even though Horowitz's base pay had been cut, he actually ended up making more money than he had the previous year.
GOLDSTEIN: And then earlier this year, Richard Horowitz got a raise. The board boosted his base pay by $50,000.
STABOSZ: And they also raised the bonus percentages so he'd be able to earn even more on the bonus.
GOLDSTEIN: The company only let us talk to one person on its side of things, but it was someone we definitely wanted to hear from - the board member that Andrew Shapiro had recommended. We met him one afternoon at a business club at a top of a tall building in Philadelphia. His name is Howard Brownstein and he told us he thinks Richard Horowitz's pay is reasonable.
HOWARD BROWNSTEIN: Yeah, I would say to you that based on the work that the comp committee did as they reported to us and as we listened to it, that the compensation is within the realm of reasonableness for our company and how it's doing and the money we make for the shareholders.
KESTENBAUM: We asked Brownstein about that compensation study that Tim asked about on the conference call, the study that compares Richard Horowitz's pay to CEOs of other companies. And we read Brownstein this letter Tim wrote asking the board to release details from the report. Asked is probably wrong word. Tim writes, (reading) I demand, in all caps. And then at the end also in caps, (reading) I have waited long enough. I am done waiting.
BROWNSTEIN: Well, you know, Mr. Stabosz obviously has been able to find the caps lock key on his typewriter. Look, generally in my world when somebody demands something it's because they have a legal right to it. He may say he demands it, but the fact is he doesn't have a right to it. So what he really is - what he really meant when he said, I demand it, is I really really want it.
I get it. It's OK. You can't have it. Next.
GOLDSTEIN: He's one of the owners of the company, right?
BROWNSTEIN: Sure he is. But the owners of the company only have the rights that they have, the rights the law gives them. It doesn't give them more than that.
GOLDSTEIN: Since P and F wouldn't release that study, we asked a company to analyze the CEO compensation to take a look. The company is called Equilar. They do a lot of work for companies who are trying to figure out how much to pay their CEOs.
KESTENBAUM: Here's what Equilar found - among roughly 200 companies of similar size, Richard Horowitz's pay ranked near the very top, in the top 7 percent. More than twice the average. Equilar also looked at a smaller group of companies that, like P and F, are in what's called the industrial goods sector.
KESTENBAUM: There were 13 companies in that group. The top-paid CEO was Richard Horowitz.
GOLDSTEIN: In other words according to the study, Richard Horowitz is one of the highest-paid or the highest-paid CEO for what he does.
KESTENBAUM: Tim Stabosz lost. But he had owned shares in P and F for most of his adult life. And when you've been in something that long, it can be hard to know when to walk away.
GOLDSTEIN: What happens next? You going to keep at this?
STABOSZ: That's a good question. I hadn't thought about that. Yeah, yeah I want the company to know that I'm not going anywhere.
GOLDSTEIN: Do you ever think about giving up?
STABOSZ: Well, I mean I'm trying to think what giving up means.
GOLDSTEIN: I can tell you what giving up looks like. After we talked to Tim this summer, he had a momentary cash crunch. He had to sell all his shares. The company bought them from him and as part of the deal, Tim promised not to buy any shares of P and F Industries for three years.
KESTENBAUM: It turns out it's really hard to cut a CEO's pay, even if you own 5 percent of the company. Now he has even less power to do anything about it. Now Tim Stabosz is just like everybody else.
(SOUNDBITE OF SONG, "MONEY ON MY MIND")
SAM SMITH: (Singing) I don't have money on my mind, money on my mind. I do it for I do it for the love. I don't have money on my mind, money on my mind. I do it for I do it for the love.
GOLDSTEIN: Let us know what you think of the show. You can email us at PLANET MONEY at npr.org.
KESTENBAUM: We'd like to thank the staff at "This American Life," especially Sean Cole, who produced the story. And also Caitlin Kennedy here at PLANET MONEY handled the remix for the podcast.
GOLDSTEIN: We want to leave you with one other little detail. In Tim Stabosz's dining room, right next to the broken "Dungeons And Dragons" pinball machine, there was a piano that did work. We asked him to play us something and offered us this - it's by largely forgotten composer Louis Moreau Gottschalk. Tim said he'd play us just the hard part.
(SOUNDBITE OF LOUIS MOREAU GOTTSCHALK SONG)
STABOSZ: (Playing piano).
KESTENBAUM: I'm David Kestenbaum.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
(SOUNDBITE OF LOUIS MOREAU GOTTSCHALK SONG)
STABOSZ: (Playing piano).
STABOSZ: God, I love that. God, that is just like, just incredible.
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