Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, January 26, 1992 TAG: 9201240094
SECTION: BUSINESS PAGE: B1 EDITION: METRO
SOURCE: STEVE LOHR THE NEW YORK TIMES
DATELINE: LENGTH: Long
BIG PAY FOR BOSSES GOES BEYOND GREED
The heft of an executive's pay packet used to be a matter of only passing interest outside the corporate community. The highest-paid executives, ranked in business magazines each spring, were seasonal celebrities at best, envied by their peers, attacked by corporate gadflies.But, suddenly, executive pay has become a national issue.
The slumping economy, layoffs, an election year and President Bush's decision to take a retinue of highly paid executives on his recent trip to Japan, where company chiefs are paid far less, have focused a harsh spotlight on corporate pay.
"Executive pay is the real hot-button issue for institutional investors," said James Heard, president of Institutional Shareholder Services, an adviser to big investors. "It's typical of what's wrong with American management and why the U.S. is not more competitive economically."
The multimillion-dollar paychecks of executives, critics say, are to the ailing American economy what Imelda Marcos' 3,000 pairs of shoes were to the troubles of the Philippines: a powerful symbol and a symptom of deeper problems.
Among the executives whose salary and stock options critics like to point to are Steven Ross and N.J. Nicholas Jr., co-chief executives of Time Warner Inc., who together made $99.6 million in 1990; Paul Fireman of Reebok International Ltd., $33.3 million; Leon Hirsch of U.S. Surgical Corp., $15 million; Rand Araskog of ITT Corp., $11.5 million; and Michael Eisner of Walt Disney Co., $11.2 million.
The justification for high executive pay is that some corporate leaders deserve their rewards as much as sports and entertainment stars. And most management experts agree that some chief executives deserve astronomical pay, especially if they start a company or save one. Eisner, for example, is often cited in the savior category for his tenure as chief executive the troubled Disney company.
But skeptics say the genuine corporate superstars are few. And big investors, management consultants and economists say the real issues are that the high pay of executives too often bears no relation to the performance of the companies they run.
Rather, critics note, pay levels are set by board members and compensation advisers hand-picked by the chief executives.
The criticism of executive pay points to a larger issue: American corporations are too often managed by executives who are not directly accountable to shareholders but to the directors whom they typically select. That lack of accountability, the critics say, makes American companies insular and less competitive internationally.
There are already bills before Congress that would change the way executive pay is determined or restrict it. Sen. Carl Levin, D-Mich., has proposed opening the pay-setting process to shareholder votes. A more radical bill from Rep. Martin Sabo, D-Minn., would increase taxes on any company that chooses to pay its executives more than 25 times the company's lowest-paid worker. Senate hearings on executive pay are scheduled for later this month.
Most experts say the congressional efforts are helpful in bringing national attention to the issue, but pressure from large institutional shareholders, the main owners of Corporate America, is the more appropriate way to change the way executives are paid and companies are run.
Some big investors, like the California Public Employees Retirement System, the largest public pension fund in America, with assets of $68 billion, are now meeting with the chief executives of selected companies about their pay policies.
The gap between executive pay and performance will likely be highlighted in the next few months, when the results for 1991 are sent to shareholders in proxy statements.
Last year, corporate profits fell an estimated 21 percent, and starting in October, worker cutbacks reached a rate of 2,600 a day. But because interest rates fell and money flowed into the stock market, corporate share prices rose 26 percent over the year. And a big chunk of executive pay in the United States comes in the form of share grants and stock options, the right to purchase shares at a given price over a few years' time.
How the non-cash compensation is valued is a subject of debate, and executives like Ross and Nicholas of Time Warner say estimates of their pay are greatly overstated as a result.
Still the sharp rise in the stock market last year will mean a big jump in total compensation for executives during tough times.
According to an estimate by Stephen O'Byrne of Towers Perrin, a consulting firm, the stock market surge last year means a gain of $2.63 million for the average chief executive in the 100 largest corporations in America, based on the appreciation of shares and options they held at the start of 1991. That gain comes on top of the average cash payment at $1.3 million each for these chief executives, assuming that cash pay will remain about the same as in 1990.
In short, chief executives on average could triple their basic salaries, to nearly $4 million, simply because of the stock market. To be sure, executives may not have cashed in those shares and options last year. But it is a big gain all the same.
"These chief executives are giving all their critics a very big target," said Robert Monks, president of Institutional Shareholder Partners, an advisory service for big investors.
There have been a couple of successful assaults on pay policies in recent months. In September, for example, ITT Corp. announced that it would change the way it compensates senior executives to link pay more closely to corporate performance, including the stock price. The shift followed protests from the United Shareholders Association, an advocacy group, and the California pension fund over the $11.5 million ITT's Araskog received in pay in 1990, even though the company had a lackluster year.
Earlier this month, UAL Corp. yielded to pressure and announced that it would fully disclose details of how its cash and stock payments to executives were determined and what outside compensation consultant was hired.
The change came after pressure from United Shareholders and others because the company's chief executive, Stephen Wolf, profited handsomely in 1990, mainly from selling stock and exercising options in the brief period when talks of a buyout for United Airlines, UAL's principal subsidiary, pushed up the price of UAL shares. The deal fell through, the stock plummeted and UAL's profits were down 70 percent for the year, but Wolf sold stock and options he had accumulated over the previous few years and pocketed $14.7 million in 1990.
United Shareholders plans to press other companies to open their executive pay policies through increased public disclosure.
"More sunshine on the process of how pay is set puts their feet to the fire," said Ralph Whitworth, president of United Shareholders, "because the process to a large degree drives the formula."
One provision sought by shareholders' groups and institutional investors is that executives should not be able to exercise their stock options unless the company's share price has risen a set amount, usually 25 percent or more, over five years, insuring that rewards are linked to long-term performance and not swings in the stock market.
The executives in charge of America's largest companies are more highly paid than their counterparts overseas. During 1990, Graef Crystal, a professor at the University of California at Berkeley, estimates that chief executives of America's biggest companies typically made $3.2 million. In contrast, big-company chief executives in Britain made $1.1 million; in Germany, $800,000, and in Japan, $525,000.
The gaps are partly explained by different business practices and cultures. In Japan, for example, one reason for the modest paychecks is that there is so little labor mobility, because job-hopping is deemed unacceptable behavior. In addition, Japanese chiefs are given costly club memberships and other rewards that are lavish by any standard.
But much of the gap between executive pay in the United States and most other nations is explained by the American practice of showering executives with stock options, which cost companies very little because of accounting conventions in the United States. Of the $3.2 million typical pay in 1990, half the total was the estimated value of non-cash compensation like stock options.
"Stock options are way too cheap for American companies, and they have been given out like crazy," Crystal said. The accounting treatment of stock options is being examined by Congress and the Financial Accounting Standards Board, the rule-making body for the accounting profession.
Whatever the reasons, executive pay soared in recent years while the inflation-adjusted wages of manufacturing workers declined by roughly 10 percent in the last decade. The income gap between top executives and workers has doubled over the last 15 years.
"Just as the 1980s were the decade of conspicuous consumption, it was also the decade of conspicuous compensation for executives," said Paula Hans Todd, a principal of Towers Perrin. "But the pressures for some kind of restraint are building, and we're going to see the effects."