Still high in a slowdown, executive pay draws looks

Business has slowed. Layoffs mount. But executive pay continues to soar - at least so far.

Business Week's annual survey finds that chief executive officers at 365 of the largest US companies got compensation last year averaging $13.1 million - up 6.3 percent from 1999.

Resistance to what Business Week calls a "gravy train," however, appears to be building.

"There's a perception among some larger institutional shareholders that things have gone amok," notes Scott Fenn, president of Investor Responsibility Research Center in Washington.

And managers of huge blocs of corporate stock can often get attention in corporate boardrooms.

Why are the top bosses getting an estimated 485 times the pay of a typical factory worker? That's up from 475 times in 1999 and a mere 42 times in 1980.

One reason may be what experts call the "Lake Wobegon effect." Corporate boards tend to reckon that "all CEOs are above average" - a play on Garrison Keillor's famous line in his public radio show, Prairie Home Companion, that all the town's children are "above average."

Consultants provide boards with surveys of corporate CEO compensation. Since directors are reluctant to regard their CEOs as below average, the compensation committees of boards tend to set pay at an above-average level. The result: Pay levels get ratcheted up.

Defenders of lavish CEO pay argue there is such a strong demand for experienced CEOs that the free market forces their pay up. They further maintain most boards structure pay packages to reflect an executive's performance. They get paid more if their companies and their stock do well. So companies with high-paid CEOs usually generate great wealth for their shareholders.

But a new study suggests a good way to make money in the stock market would be to "sell short" stock of the 10 companies with the highest-paid CEOs for 2000. (Short sales are a financial technique to make profits from a declining stock.)

The supposed cream-of-the crop executives did surprisingly poorly for their shareholders in 1999, says Scott Klinger, author of this report by a Boston-based organization, United for a Fair Economy.

If an investor had put $1,000 apiece at the end of 1999 into the stock of those companies with the 10 highest-paid CEOs, by year-end 2000 the investment would have shrunk to $8,132. If $10,000 had been put into the Standard & Poor's 500 stocks, it would have been worth $9,090.

If, since 1993, an investor had put $10,000 into the company with the top-paid CEO in the previous year and reallocated the money the same way each year, a $10,000 investment would be worth $3,585 at the end of 2000. Invested in the S&P 500, it would be $32,30l.

To Mr. Klinger, these findings suggest that the theory that one person, the CEO, is responsible for creating most of a corporation's value is dead wrong. "It takes many employees to make a corporation profitable."

With profits down, corporate boards may make more effort to tame executive compensation.

And executives are making greater efforts to avoid pay cuts.

Some CEOs, seeing their options "under water" or worthless because of falling stock prices, are seeking more pay in cash or in restricted stock.

Restricted stock, given to an executive after a few years of service, is likely to be worth at least something, even if the firm's stock tanks.

Another technique is to reprice stock options below market value. Under accounting rules, though, a company must record this change as a cost on its books.

Institutional investors also regard this practice as improper. They can't reprice the stock in their own portfolios when the market sinks, notes Mr. Fenn.

"When executives are paid more than they need to be, it comes out of shareholders' pockets," he says.

The largest pension-fund manager in the nation, TIAA-CREF, with some $300 billion in mostly teachers' pension money, has built a staff of nine devoted to raising corporate-governance issues with companies.

It presses their boards to appoint compensation committees that are more independent and less cozy with CEOs. It urges boards to base CEO pay on performance compared with competitors, not just the stock price.

Whether actions to limit CEO pay will have much effect remains an open question. Most CEOs still have great clout on boards.

Moreover, CEOs no longer seem embarrassed when extreme compensation puts them on top or near the top of business-magazine lists. Last year's top pay, $293 million, went to John Reed, who retired at Citigroup.

"These guys don't mind anymore," says Fenn.

(c) Copyright 2001. The Christian Science Monitor

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