Too many corporate executives are paid too much money. Marie Antoinette would have been embarrassed by what one writer refers to as ”pay stubs of the rich and corporate.” Business Week, hardly the voice of the masses, is using words like ”mind-numbing,” ”huge floods of cash,” ”obscene” and ”out of control” to describe current levels of compensation. The figures look like phone numbers. Never, at any time in the history of this country, has there been such a disparity between the pay of the person at the top of the company and the person at the bottom. Never have so few done so little to get so much from so many.
I am not objecting to the idea of earning a lot of money. What I am objecting to is giving people a lot of money even when they don`t earn it. As Michael Jensen and Kevin Murphy note, the problem is not how much CEOs are paid, but how they are paid. It`s a very small group at the top of the pay scale. It pretty much boils down to investment bankers, movie stars, rock singers, professional athletes and corporate CEOs. Of that group only CEOs are not pay-for-performance, and it is not coincidental that only CEOs pick the people who set their salary.
If Bruce Wasserstein, Jack Nicholson, Janet Jackson or Darryl Strawberry fail to perform, their salaries can go down to zero. But when a CEO does badly, his pay almost never goes down. Indeed, it often goes up. When the company does well, the board raises the CEO`s pay. The justification is
”because he deserves it.” When the company does badly, the board still raises his pay-and the justification is usually ”to make sure he stays” or
”because he has to make difficult decisions.”
The result is a system without accountability. And that is a problem because it impedes competitiveness. It does so in two ways, both potentially devastating. First, it undermines the incentives for all employees of the company, from the CEO to the guy on the assembly line. European and Japanese CEOs seldom earn more than 15 times the pay of the average employee, while American CEOs are often paid as much as 100 times the average worker. According to Business Week, UAL Chairman Steve Wolf ”collected $18.3 million in salary, bonus and stock-based incentive plans-a tidy sum for heading up a company whose profits fell by 71 percent in 1990. . . . That`s 1,200 times what a new flight attendant earned . . . in each of the last five years-a period when none of them got a raise.”
How do you motivate an employee to perform, how do you encourage an employee to feel like part of a team, when the CEO`s compensation has no connection to shareholder or employee returns? How do you motivate a CEO to perform when the portion of his pay that is, at least in theory, based on performance, is a marginal fraction of a base in the seven figures? What credibility does a CEO have in seeking wage concessions from the union or closing down plants or relocating operations offshore when his pay is at these levels? What incentives do the CEO or the employees have to keep costs down, to expand markets, to develop new products and services, when it has no impact, upside or downside, on their compensation?
These pay systems affect not just the competitiveness of our products but the competitiveness of our investment securities as well. We are living in a time of global markets. If you had the world to choose from, would you invest in a company whose CEO was paid according to how much value he creates for shareholders or one where he gets paid without any regard to shareholder value? We are raising the cost of capital to levels that are prohibitively high with these kinds of compensation schemes and crippling our
competitiveness by doing so.
Compensation committees often include inside directors, sometimes the CEO himself. The compensation consultants are also selected and paid by the company, not the board. It is not surprising, then, under this cozy system any ”performance” benchmarks that must be met to trigger the highest level of pay are set at a level that makes them a self-fulfilling prophecy.
Perhaps the dirtiest secret of the compensation system is director pay, which has itself skyrocketed in the last decade. Annual pay of up to $78,000
(plus pension) might not sound like too much, unless you consider that it is for what, by the directors` own estimate, comes to about 92 hours a year. That is just over two weeks` work, or $847 an hour, and that is just a few dollars an hour less than Steve Wolf receives from UAL. The CEOs of Goodyear and Rubbermaid and the chief operating officers of Cummins Engine and Inland Steel sit on each other`s boards and on each other`s compensation committees, for example. But that specific relationship is not really the issue, as every corporate officer has an interest in high pay for other corporate officers; it gives him ammunition for negotiating with his own board. Meanwhile, the people who pay the CEO`s salary and (at least in theory) elect the board, the shareholders, are not sufficiently involved. Shareholders only get to vote on stock options, no other aspect of compensation. Their information is limited and difficult to use, and their oversight is even more limited and difficult to use.
We need consistent and complete disclosure of compensation. Shareholders have to be able to compare apples and apples. I`d like to see disclosure of the complete dollar amount of all compensation the top five officers and the directors received in the past year (including present value of stock options, pension plans and other extras), plus a figure for what they will make in five years if they meet all goals and benchmarks. Second, compensation committees should be made up of independent outside directors who have their own consultants.
In 1930, Babe Ruth was asked to justify why his $80,000 salary was more than the $60,000 that President Herbert Hoover received that year. Ruth`s unforgettable answer: ”I had a better year.” Boards of directors who now approve compensation plans that have no more relation to performance than those of the kings who annually received their weight in gold should listen to the Babe. And if they don`t, shareholders should do what Babe`s umpire might recommend, ”Throw the bums out.”
