As everyone knows, CEOs–and a few other top executives–have been on a financial joy ride. From 1992 to 2001, the top five executives of the largest 1,500 U.S. companies made $67 billion in stock- option profits, report Joseph Blasi, Douglas Kruse and Aaron Bernstein, authors of “The Company of Owners: The Truth About Stock Options.” Even if these gains were skewed toward a small group, typical compensation exploded. From 1993 to 2002, the median cash portion (annual salary, plus bonus) of CEO pay packages at 350 companies rose 53 percent to $1.8 million, says Mercer Human Resource Consulting. Including the value of long-term “incentives” (mainly stock options and stock awards), median CEO pay tripled, from $2 million in 1993 to $6 million in 2002. Over the same period, compensation for all workers rose only a third (all figures unadjusted for inflation).
Sprinkling so much money over so few people has created a sense of entitlement. The upper echelons of Corporate America have come to believe that they shouldn’t simply do well. They deserve to become rich, perhaps fabulously so. Now, a flourishing capitalist system ought to bestow great fortunes on people who create huge enterprises or revive flagging old ones. But great fortunes should not routinely go to people who merely preside successfully over existing firms. The CEO conceit is that everyone near the top of the corporate staircase should become a multimillionaire several times over.
What this produces is a self-justifying set of rules and practices, reinforced by a growing insensitivity to appearances. Last week American Airlines was the latest company to suffer from this mind-set. The airline flirted with bankruptcy after disclosures that its top executives had received special pension protections, even while pilots, mechanics and flight attend-ants were agreeing to take pay and benefit cuts averaging about 23 percent. The contrast was too much for many workers. Flight attendants suspended their concessions and CEO Donald Carty was forced to resign.
Of course, let’s be fair to CEOs. Though popular, CEO bashing is sometimes scapegoating–blaming all CEOs for the mistakes or sins of a few. Even Carty proposed cutting his base salary 33 percent to $543,453. But CEOs and corporate elites have partly brought this on themselves by not confronting the excesses of executive compensation. Ordinary people may not grasp the technicalities of accounting irregularities. But everyone understands pay.
Some will say that CEO pay is now being curbed. True, annual surveys by the business press (The Wall Street Journal, BusinessWeek and Fortune) show modest changes. A few CEOs are working for $1 or no salary; this surely reflects their existing wealth. The Mercer survey, done for the Journal, found that 50 CEOs out of 350 received no cash bonus for 2002. Given sagging profits and stock prices–and all the bad publicity–it would have been astonishing if nothing had changed. But the changes are mostly cosmetic and don’t question or threaten the underlying nature of the CEO entitlement system.
CEOs justify their compensation by saying they get what “the market” dictates, just like everyone else. Rubbish. Their market is highly artificial. CEOs match their pay with that of other CEOs, as revealed by surveys. But this comparison isn’t especially relevant because other CEO jobs aren’t open. A CEO dismissed today can’t easily get a comparable job tomorrow. Compensation levels are what economists call “administered prices,” set by corporate directors who are usually top executives or retired executives. The result is an artificial welfare system designed to ensure that even mediocre top executives do well–and everyone else receives repeated chances to make a fortune.
Corporate executives ought to be well paid. But wrong “incentives” are destructive. If underinvested in company stock, executives may have little interest in improving efficiency and profitability. But if overinvested, they may be tempted to stretch accounting rules to puff up profits and stock prices. Today’s oversize compensation packages often hinder–as American Airlines reminds–everyday management by demoralizing workers.
What’s the right compensation? This is not an easy question. But it’s one that top executives should openly address. Defending what you’re doing, in public and on paper, is a powerful moral and intellectual discipline. Until that happens, we’ll find that pay follows two poor guides: executive greed and, once public anger produces new laws, popular prejudice.
