Executives Make Hay, but The Sun Is Not Shining

Recession pressures push more firms to link managers' pay to profits

OVERPAID chief executives? Not those at Independence Technologies Inc. here in Fremont, Calif.

Corporate policy keeps top pay at about two-and-a-half times the average employee's salary.

At Ben & Jerry's Homemade Inc. in Waterbury, Vt., top people get no more than seven times what the lowest-paid full-time person earns. Many Americans are annoyed at the huge salaries paid to chief executives. But some US businesses are preaching restraint. Sacrifice, they say, begins at the top.

"Everyone's critical to the success of this company," says Rob Michalak, a Ben & Jerry's spokesman. "One way we express that is through the compensation ratio."

Jeff Stern, vice president of Independence Technologies, says that "everyone from the shop floor to the executive suite is going to have to expect to take less out of the company."

President Bush sparked a wave of protest when he traveled to Japan last month, accompanied by chief executives of several US companies. While some of the businessmen had complained about Japanese business practices, critics noted that their pay far exceeded their Japanese rivals. One example: The heads of America's Big Three automakers pulled in $7 million in 1990 - four times the earnings of Japan's Big Three. Worse, the US executives' compensation continues to rise at a time when many of them are cutti ng jobs and production because of the recession.

America has a long history of paying big salaries to top business leaders - and complaining about it. When shareholders learned that Bethlehem Steel's president earned a $1.6 million bonus in 1929 (on top of his $12,000 salary), they took the company to court.

But the current flap runs deeper than envy.

When Americans began to wake up to the competitive threat from Japan a decade or so ago, many blamed the problem on overpaid blue-collar workers. In the mid-1980s, the blame shifted to middle managers; too many of them, the argument went. So companies, which had confronted their unions, began to strip out layers of middle management.

Now, public scrutiny has shifted upward. If the gap between US chief executives and workers has been historically wide, it is doubly so now. For every dollar the average chief executive earned in 1981, he or she received another $1.16 worth of stock, according to a survey by the compensation firm Towers Perrin. Last year, the top executive was getting $2.61 worth of stock for every dollar of salary.

AS American workers' earnings languished during the decade, senior-executive pay surged forward. The average US manufacturing worker earned $30,200 in 1990 - less than counterparts in Switzerland, Germany, Sweden, Canada, Japan, Belgium, and the Netherlands, according to Towers Perrin. US chief executives of industrial companies, meanwhile, earned $747,500 - nearly double the pay of any of their foreign peers and 25 times the pay of the average US manufacturing worker.

Reining in executive pay won't have a direct impact on US competitiveness, compensation experts agree. But it could boost employee morale and, indirectly, make a company stronger.

"Straightening out executive pay is not going to be the centerpiece of what it's going to take to make us globally strong," says Donald Hambrick, professor of business at Columbia University. "But it's symbolic. There has to be much more of a sense of shared fate" between executives and workers.

Before reformers can solve the problem, they will have to agree on what the problem is. Some compensation experts, such as the Hay Group, argue that US companies do not overpay their chief executives when compared with foreign firms of similar size.

Some in Congress want to place or encourage limits on the absolute size of the pay package. Rep. Martin Sabo (D) of Minnesota wants to eliminate tax deductions for the portion of chief executives' pay that exceeds 25 times the earnings of their lowest-paid worker. Sen. Carl Levin (D) of Michigan has offered a bill that makes it easier for shareholders to vote on the compensation package.

Others suggest the real problem is not the size of executive pay but its sensitivity to company fortunes.

"Where really spectacular performance exists and someone walks away with a check for several hundred thousand or several million dollars, people don't begrudge that," says Bob Gore, a Towers Perrin vice president. "What we need to do is try to have a better link between performance and pay."

Towers Perrin estimates that close to one-third of US companies have moved in this direction, making executive bonuses a fixed number of stock shares rather than a fixed amount of money in the form of stock. A few don't hand out bonuses at all unless the company exceeds some level of expected performance.

You've read  of  free articles. Subscribe to continue.
QR Code to Executives Make Hay, but The Sun Is Not Shining
Read this article in
QR Code to Subscription page
Start your subscription today