How to Roll Back The Pay of the Boss
THE two most important business magazines in the United States have just published their annual review of executive salaries. Both articles start by citing examples of huge pay packages that appear unjustified. Forbes, for example, points to Time Warner's Steve Ross, who ``raked in $78 million last year at a time when the entertainment company is struggling in the red to work off a debt of $10 billion incurred in a merger that may or may not work out well.''
Excessive executive compensation gets the goat of Rudy Oswald, chief economist of the AFL-CIO. ``They have grabbed everything for themselves and deny it to their workers,'' he says.
It may be that not only organized labor is bothered by the high level of executive pay, which climbed 212 percent in the 1980s compared with 53 percent for the average factory worker, 73 percent for the engineer, and 95 percent for teachers.
``The growing sense of anger could do far more than merely tarnish the public image of a few companies,'' states the Business Week article. ``Some critics go so far as to predict an anti-business backlash that could rival Wall Street's fall from grace.''
Envy may be part of the public reaction to the average salary and bonus of $1,214,090 last year for chief executive officers of 365 of the largest corporations surveyed by Business Week. But there are also valid questions of equity and of business justification.
Is the average CEO of a major corporation really worth 85 times the pay of a typical American factory worker? In Japan, the boss gets only 17 times the pay of an ordinary worker. In Germany, the top CEOs get on average about 60 percent of the compensation of American execs. And the German bosses pay much higher taxes on their income.
Yet there is no evidence to indicate that US executives are better than their Japanese or German equivalents. Further, statisticians find it hard to link executive incentive plans to actual corporate performance.
Mr. Oswald maintains that US executives have obtained their high salaries through ``sheer raw power.'' They appoint the boards of directors which set the compensation of top executives. If a director is an insider (a company executive), that person is in effect setting his or her own pay. If an outsider, a director who was especially tough about keeping executive salaries down might not get asked to join another company's board.
Peter Drucker, a management expert from Clarement Graduate School in California, says boards have been ``very complacent'' about huge executive wages.
Should an effort be made to restrain executive salaries?
``I personally think that those pension funds which are major owners of corporate stock are going to have to move in on it,'' Mr. Drucker says.
However, pension funds and other ``outsiders'' owning large chunks of a corporate stock have difficulty influencing any company decisions, let alone selecting a board member.
Susan Teslik, executive director of the Council of Institutional Investors, says Drucker exaggerates the power of pension funds. Nonetheless, she would like her organization's members, 50 funds with some $300 billion in assets, to use their shareholder voting power to insist that corporations deal with the matter of executive compensation in a manner that limits executive pay. The compensation committee of a board should consist only of outsiders. Any compensation consultant should be hired by and repor t to only that committee. If such a system was not instituted in a company, the funds should attempt to vote out the directors.
The Securities and Exchange Commission, Ms. Teslik adds, should require that executive and director compensation be approved by shareholders. As it is, compensation is considered ``ordinary business'' and need only be settled by the board itself.
Richard Freeman, a Harvard University economist, would like to see a ``Ralph Nader-type organization'' keep the issue of executive pay in the limelight. Or, he suggests, workers who own shares in their company through pension plans or other plans should be able to name some directors. German workers already have a voice on corporate boards through a system dubbed ``codetermination.'' Executives, he says, carry too much weight in setting their own salaries.