Posted on 09/02/2002 11:43:24 AM PDT by NMC EXP
Sadly, during the past year we have read a great deal about the failings of some American business executives, as well as their propensity to pay themselves outlandishly.
Jack Welch, former head of General Electric, negotiated a $122.5-million retirement package for himself. The chairman and the then-president and chief financial officer of Enron created pay arrangements for themselves that eventually led to Enron's bankruptcy. The former head of Qwest was paid over $24 million at a time that its stock price had been plummeting for months.
Is there any rhyme or reason for these executive pay packages? I seriously doubt it.
Chief-executive pay has grown far beyond that of almost all other major occupational categories. Derek Bok, former president of Harvard University, in "The Cost of Talent," argued convincingly that CEO pay advanced in the 1980s at a rate far in excess of that of earlier decades of the 20th century.
Graef Crystal, a former executive pay consultant, showed "In Search of Greed" how American CEOs were considerably overpaid compared to their counterparts in Japan and Western Europe. He documented how specific American CEOs had created pay packages that could not be warranted by the profitability of their firms or the stock price of the companies they headed.
Crystal and others have published the results of year-to-year changes in top-executive pay that, with rare exceptions, show that far less than 50 percent of CEO pay increases can be attributed to improved performance by their companies.
According to a recent issue of The Christian Science Monitor, CEO total compensation increased 488 percent between 1990 and 2001, while profits of American corporations increased by 88 percent.
In 1960, the average large-company CEO was paid 40 times the amount given the average employee in his organization. Twenty years later, it was 60 times. In 2001, it was reported that the entire pay package (salary, bonus and various stock options) of such CEOs was over 500 times that of the average employee pay. This is in contrast to the fact that between 1973 and 1995, the wages and salaries of the rest of the labor force had not held their own in terms of real pay when factoring in the higher cost of living over that period.
I recall using the reported pay of the then-CEO of General Motors in the late 1960s in a class illustration. This was at a time that GM had over 50 percent of the American auto market, and was judged as one of the very best-run American and world companies. The person's pay consisted of $400,000 in salary and the same amount in bonus. It is unlikely that stock options at the time were a significant part of the pay package as they are now.
The way corporate executives of large companies are paid is fraught with lack of transparency; conflict of interest among many board members who themselves are executives or recently retired CEOs; use of agents by CEOs to negotiate in their self-interest; and undue influence of CEOs on executive-compensation consultants, among other problems.
I taught compensation for many years. By the late 1980s, I had developed doubts regarding how American CEOs were paid, or should I say paid themselves. In the intervening years, the system has just gotten worse. I doubt that any fair-minded person could justify the CEO compensation system in large American corporations today in terms of seniority, experience, performance, or any other rational measure. It is time to call a halt.
What could be done to provide some credibility to the way top management is paid? Here are some possibilities:
• Americans should have a healthy skepticism toward what CEOs say about their worth to their company and nation.
• Total compensation of American CEOs should bear closer semblance to that of CEOs in Japan and Western Europe.
• Newly promoted or chosen CEOs should be paid at or toward the bottom of the range of CEO pay based on size, industry and other rational criteria, rather than at or above the mid-point of that range, as often happens.
• An independent task force should be appointed by the appropriate agency or Congress to recommend ways to clean up the system by improving transparency of the executive-pay process, maintaining independence of the board of directors, and making necessary changes in tax laws to negate the tendencies toward self-interest of many CEOs, their tax lawyers, accountants and lobbyists.
• There should be a hard look at the negative impact of stock options, and paying CEOs during years after they retire — other than their earned pension and health-care coverage. Finally, American corporations should not lend their CEOs money to buy stock options for themselves or for other uses.
I am convinced that neither the CEOs nor big business will clean up their act on their own. It is critical that the board of directors not only be dominated by outside members — particularly those assigned to the audit, nominating and executive-compensation committees — but these committees should meet at times when the CEO and his designees are not present. This can best be accomplished through federal legislation.
Furthermore, boards of directors need to reduce the level of the "sweet" executive compensation packages that have been created in recent years. Because I doubt they'll do this without outside pressure, government needs to assume its legitimate regulatory role.
Richard Peterson is an emeritus business professor at the University of Washington.
Eliminating the incestous relationship of overlapping boards of directors would be an improvement.
Eliminating the incestous relationship of overlapping boards of directors would be an improvement.
I think this is the problem in a nutshell. Some enterprising reporter (if they aren't all extinct) could probably earn a reputation simply by researching and publishing the comprehensive linkages of who serves on what boards.
Maybe Americans are too lazy to care about such stuff any more but I think such a study would be an eye-opener. It's purely a case of 'you scratch my back and I'll scratch yours' -- shareholders be damned.
Boards of directors have definitely failed to represent the best interests of the stockholders in this matter.
Add to that industry "analysts" who've become merely shills for the brokerage firms...
And the institutional investors and mutual fund managers who just gave their financial cronies a knowing wink.
The problem here is two-fold. First, the journalist does not understand capitalism. In capitalism the consumer is king. What he buys and uses determines success or failure in the system. CEO'S, if successful, are paid more than successful journalists because consumers pay more for GE products than they will for newspapers. Parenthetically, Ludwig Von Mises in The Anti-Capitalist Mentality published more than 50 years ago correctly identified the problem journalists and academics have in respect to CEO pay -- they are envious and would rather destroy the object of their envy than admit that consumers pay more for CEO'S than Journalists because they want what the CEO'S deliver more than what the journalists deliver.
The second problem is the Journalist forgot to mention that in 1993 their chosen one --President Clinton--asked for and got a provision in the tax code which says that corporations may not expense for IRS purposes more than $1,000,000 of CEO salary. What the boards of directors then did was pay the CEOS in stock options at the exact same time (1994-2001)the stock market went up, and up, and up in the largest bubble ever. This meant those CEO'S getting stock options made a killing on the increased stock price. Currrently, you won't find many CEOS counting on a big bonus this year.
Most assuredly, sometimes board of directors are small group, croney affairs and pay their CEO too much. The share holders can always correct this by firing the board of directors.
Draconian measures to control executive pay are the hall mark of envy, ignorance and an inability to either understand or accept how capitalism works.
Seems to me that the solution is for investors to not invest in companies where they think the CEO's are overpaid compared to what they do.
On the other hand I'm not sure what investors can do about companies in states that don't have right to work laws and union members are grossly overpaid.
This professor ought to be more candid and admit that he's advocating communism.
Michael Ovitz, on the other hand, was FIRED from Disney and walked away with $90 million, due to the tender attentions of Eisner.
Until people realize the CEOs are stealing these funds from shareholders, nothing will be done.
It's a little-known fact that only corporate CEOs have "tendencies toward" self-interest. The rest of us are - without exception - altruistic.
Bingo!!!
Good one, sink!
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