Treasury Secretary John Snow traveled to New York last week to deliver a pointed message to business: Corporate America has failed to "fully and appropriately" address the issue of CEO compensation that's highly disproportionate to employee salaries.Skip to next paragraph
Subscribe Today to the Monitor
A former CEO himself, Mr. Snow's warning echoes a similar one issued recently by ace investor Warren Buffett, who said reducing high CEO pay levels is the acid test for corporate reform. "It would be a travesty if the bloated pay of recent years became a base line for current compensation," Mr. Buffett said.
Correcting the executive-suite excesses of the 1990s should be an urgent priority. So far, the business community is falling short on this issue.
The Treasury secretary is rightly concerned that some executives - abetted by overly compliant corporate boards - will simply receive new types of compensation, other than stock options, that still add up to an unjustifiable total package.
The concept of long-term corporate stewardship must undergird any compensation-reform plan. Managers have a duty to build up corporate wealth on shareholders' behalf. "If shareholder interests cannot justify a compensation plan, it should be dropped," Snow warned.
There is no simplistic formula - or government regulation - for determining what is reasonable compensation for running a complex enterprise. But the rewards for CEOs have escalated wildly to levels that threaten public confidence. In 1980, average CEO pay at the biggest companies was about 40 times that of an average production worker. Business Week estimates that last year that figure was more than 200 times average employee pay.
Despite the furor over such irrational extravagance, CEO pay rose again last year, albeit at a slower clip than the 38 percent annual growth posted in the 1990s. Median pay for CEOs at major firms rose 5.9 percent in 2002, to $3.7 million, Business Week says. Self-restraint was not always the reason: A bear market reduced both bonuses and CEO stock options.
In those cases where corporate boards don't reform pay practices to protect shareholder interests, two corrective options are available. The Securities and Exchange Commission recently issued rules making it easier for individual shareholders to nominate and elect corporate directors. But that is still a complex and time-consuming process. A more feasible option is for big stockholders - such as mutual funds and pension managers - to withhold votes for directors who tolerate greedy pay plans.
The benefits of a market-driven economy are too great to allow selfish behavior to weaken public support.