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High exec pay irks workers

David R. Francis
The Christian Science Monitor

It isn’t hard to poke fun at fat corporate executive pay. The cover on a recent issue of Fortune magazine shows a pin-stripe-suited man, clearly an executive, with a pig’s head. “Oink,” says a subhead.

Another example: a study by the group United for a Fair Economy, finds that the typical salary for chief executive officers at the nation’s largest defense firms doubled to $6 million from 2001 to 2002. The study’s title: “More Bucks for the Bang.”

It also finds a “strong correlation” between campaign contributions from defense companies and the value of contracts they won from Uncle Sam.

What is harder to figure out is why all the outrage over excessive executive pay has prompted relatively few compensation committees of corporate boards to reduce CEO pay.

Business Week calculates that the average compensation of 365 top CEOs fell 33 percent last year to $7.4 million, the same level as in 1996. That drop reflects the three-year decline in stock prices.

But median compensation, or what the middle-of-the-road CEO got, actually rose by 5.9 percent to $3.7 million. That’s twice the pay hike that the average worker got last year. In other words, most compensation committees were still giving CEOs handsome pay hikes.

An AFL-CIO analysis comes up with an average CEO compensation package of $10.8 million. This labor federation calculation includes the value of new stock options granted to executives. Business Week’s figures include only the value of options exercised, that is, turned into actual stock.

Using Business Week’s numbers, average CEO compensation was 42 times that of the average worker in 1980, 85 times by 1990, 531 times in 2000, and 431 times in 2001.

Last year, the average worker was paid $26,267, while the average CEO received 282 times that amount.

Such comparisons can get companies in trouble. At American Airlines, workers and union leaders were outraged last week after learning that while they were asked to accept $1.8 billion in annual wage cuts, the company gave seven executives lucrative retention bonuses if they stayed until January 2005. And last October, the airline made a $41 million pretax payment to a trust fund to protect the pensions of 45 executives in the event of bankruptcy.

Critics call such deals “stealth wealth.” They are less known to the public.

In American Airlines’ case, the special perks cost CEO Donald Carty his job. He resigned Thursday. The next day, flight attendants agreed to concessions expected to save the company from bankruptcy.

During the 1990s, the dramatic rise in executive pay was justified on the basis of pay for performance. Stock prices were rising. Shareholders were getting rich as well.

But the stock market collapse has “shattered” that rationale, says Chris Hartman, research director at UFE.

Though the value of options fell, he says, corporate boards tried to offset those losses with pay hikes, stealth wealth (fancy pensions), or other means.

Meanwhile, shareholders have seen about $8 trillion of their paper wealth disappear since March 2000.

But some say the market for executives is similar to that of professional athletes. As a result, boards have to bid more for good executives.

Critics regard this argument as nonsense. “CEOs control their own pay,” says Hartman. They usually chair corporate boards and appoint members of the compensation committee. Board members, even those described as independent, are often from the same well-to-do class and thus sympathetic to CEO pay requests.

For guidance, compensation committees usually look at CEO pay surveys compiled by consultants. One such group, Towers Perrin of New York, in a study of last year’s pay numbers saw “a moderation of the so-called Lake Woebegon effect, where every company’s board wants to consider their CEO to be above average.”