If you listen to some of the candidates slugging it out in the 1996 presidential primaries, the men and women leading American companies are greedy, overpaid, heartless egomaniacs who are putting themselves first and America last.
They point to annual CEO compensation packages that, including salary, bonuses, stock options and long-term incentive award payouts, averaged $3.6 million at the 300 largest American corporations in 1995. Meanwhile, they say, median household income for the rest of us has actually fallen 0.1 percent since 1973.
Such perceptions resonate strongly with the hundreds of thousands of American workers who have been laid off and millions of others who feel they may be on the bubble at companies where CEOs are slicing and dicing to fatten the bottom line and increase shareholder value.
Such views may best be represented by U.S. Labor Secretary Robert Reich, who recently condemned America’s corporate brass for “ignoring their social responsibility” by treating American workers like “corporate ballast” and “disposable pieces of machinery” rather than as “assets to be developed.”
But it isn’t quite that simple.
Wall Street and corporate shareholders, who have watched stocks soar to new heights in the last year, will tell you that CEOs are doing what’s needed to increase profits and lead U.S. companies into the 21st Century–trimming the fat, eliminating redundancy, embracing new technology.
The CEOs themselves will tell you they are making the tough choices necessary to survive in the most competitive environment America’s businesses have ever seen–and, as a result, they are worth every penny and perk they can command.
“Business is not a social experiment,” former Scott Paper Chairman and CEO Albert Dunlap told Reich on ABC’s “Nightline” recently. “Businesses exist to be competitive … that’s what CEOs get paid for.”
That was not idle chatter. Dunlap fired 35 percent of Scott’s work force in 1994, merged the company with Kimberly-Clark and walked away with a golden parachute valued at $100 million. Before that, he had downsized seven other companies–a record that has earned him the nickname “Chainsaw Al.”
Conservative presidential candidate Pat Buchanan, the most vociferous critic of corporate behavior, calls executives like Dunlap “executioners” and “bloodless corporate butchers.”
Even Sen. Bob Dole, a stalwart supporter of big business, has jumped on the bandwagon, questioning the huge salaries being salted away by CEOs in an era of unprecedented downsizing.
“Corporate profits and (executive) salaries are setting records, but so are corporate layoffs,” Dole lamented in a recent speech.
The criticism is not only coming from conservatives, however. President Clinton, in his recent State of the Union address, told corporate leaders they should “share the benefits of the good years” with their workers and not simply stuff their own pockets.
“It’s a complicated situation,” said Carol Bowie, editor of Executive Compensation Reports, a biweekly newsletter devoted to reporting on compensation practices at 1,000 corporations. “We are in a strange economic age. Companies are shrinking. CEOs are selling off divisions and downsizing. But while this is happening, these top executives are becoming multimillionaires.”
So what are we to make of these CEOs and their fat pay envelopes? Are they worth the money? Or are they nothing more than modern robber barons who are pushing the nation to what critic Graef Crystal calls the “brink of a new revolution.”
“Mainstream CEOs are raking it in more than ever and the gap between them and the average worker is getting wider and wider,” said Crystal, who teaches a course for MBAs at the University of California at Berkeley that he has nicknamed “Greed 259-A.”
In a three-year study Crystal conducted of 300 top companies, CEOs earned 145 times more in 1992 than the average worker. In 1993 that figure had climbed to 170 times and by 1994 it was 187 times.
“Stuff like that really upsets Middle America,” Crystal said. “We are creating a wealthy and privileged corporate aristocracy at a time when a lot of people are losing their jobs or seeing their wages decline.
“If you extrapolate those numbers to the year 2010, the ratio will correspond to the gap that existed in France in 1789 between the aristocracy and everybody else,” Crystal added. “And we all know what happened to the aristocracy in France.”
Is Crystal exaggerating the situation? Is Buchanan right to tar all CEOs with the same brush? Or is Dunlap right in his view that businesses are not meant to be havens of compassionate social behavior.
The answer to those questions depends on one’s view of the corporate terrain. But one thing most executives and corporate critics agree on is that a day of reckoning is coming.
During a gathering of several hundred chief financial officers last week in Phoenix, nearly two-thirds said the backlash against CEOs who get rich while the average worker suffers is only going to grow.
“There’s got to be an equality of sacrifice,” Jerome York, vice chairman of Tracinda Corp., told the gathering. “You can’t have the guys in the ivory tower eating filet mignon while the rank and file are getting pink slips. It’s crucially important for top executives to share the pain.”
The problem, says Lawrence Margel, former chief financial officer at Towers Perrin, is that the owners of the companies–the shareholders–are happy with the results and don’t mind paying big bucks to CEOs to make sure those results continue.
“A CEO’s loyalty today has to be to the shareholders, not to the employees,” said Margel. “That wasn’t always the case. There once was value in being more loyal to the employees and in having employees who put the company first because that created the right results.
“But today, employee loyalty is not creating the right results,” Margel said. “Today, the bottom line is the biggest driver. As a result, corporations are setting up compensation situations so that an executive’s innate greed will produce the proper result.”
But boards and their compensation committees aren’t simply throwing money at CEOs. Increasingly, CEO compensation is tied to a company’s performance.
When CEOs fail to deliver the goods to shareholders, their paychecks suffer.
Take Robert Allen, chairman of AT&T Corp., who recently announced he was laying off 40,000 workers.
Proxy materials filed with the Securities and Exchange Commission show that Allen’s total compensation dropped from $5.8 million in 1994 to $5.2 million in 1995. While his salary increased $44,000 to $1.15 million, Allen’s executive bonus was slashed to $1.52 million in 1995 from $2.25 million in 1994. He also took a cut in long-term incentive pay.
The reason? The company failed to meet a target that measures the return on investment, so a portion of Allen’s annual bonus relating to this target was reduced.
While it may be difficult to find anybody in America who feels sorry for Allen because he was hit with a $600,000 pay cut, it’s nevertheless a trend that Bowie says is growing and is making CEO pay “more rational.”
“Giving CEOs equity and tying their compensation to it focuses their attention on building up the value of that equity,” Bowie said.
But there is another reason behind the new mode of CEO compensation.
It has to do with recent changes in U.S. tax laws. In 1992, for example, Congress mandated the use of tables rather than complex text to show executive pay in proxy statements and required boards to list the factors used in making pay decisions.
In 1994, Section 162(m) of the tax code limited the annual deduction for pay not tied to performance to $1 million. This year, additional disclosures of stock-based pay will be required by the Financial Accounting Standards Board.
All of which means that traditional compensation packages will continue to move from salaries and predictable bonuses to performance-based bonuses, stock option grants and other benefits.
A survey of the top 200 Fortune public companies to be published this month by Executive Compensation Reports reveals that the growth of CEO bonuses dramatically outpaced increases in base salaries between 1992 and 1994.
The study shows that the 38 CEOs who made $1 million or more in salary received no increase in base salary between 1992 and 1994. However, over the same time span, those 38 CEOs racked up bonus increases that averaged 91.2 percent–a fact that reflects the growth of equity and profits of their companies.
Some companies, like Eastman Kodak, have even incorporated such non-financial measurements as customer and employee satisfaction in their executive compensation decisions.
For example, George Fisher, who moved from Motorola Inc. to Kodak in 1993, has a compensation package that is weighted by shareholder satisfaction (50 percent); customer satisfaction (30 percent); and employee satisfaction (20 percent).
But given Fisher’s $39.6 million “golden hello” package–the highest ever paid to nab a CEO, according to Crystal–anything Fisher earns or doesn’t earn while at the helm of Kodak seems almost inconsequential.
In addition to an annual salary of $2 million, Fisher received a $5 million signing bonus and an $8.3 million loan that will be forgiven if he stays at Kodak for five years. He also received a guaranteed minimum bonus of $1 million for 1994 and 1995 and a restricted stock grant worth $1.3 million.
On top of that, says Crystal, Fisher received an option on 1.3 million shares of Kodak stock that is worth $21 million.
But Fisher’s non-salaried compensation pales when compared with the package received in 1995 by Roberto Goizueta, chairman and CEO of Coca-Cola Co. In addition to salary and bonuses of $4.9 million, Goizueta had restricted stock holdings of 5.6 million shares worth $417 million at the end of the year.
