The Executive Compensation Debate -- Part II
With Steven Pearlstein
Washington Post Financial Staff Writer
Wednesday, April 30, 2003; 11 A.M. ET
In his column today, Washington Post columnist Steven Pearlstein revisits the CEO compensation debate, answering critics of his April 16 column with this conclusion: "Executive compensation has become a racket and a con game -- one that is economically distortive, morally bankrupt and socially divisive. It tops the list of the corporate reform agenda. And until it is fixed, faith in American capitalism cannot be restored."
Pearlstein also engaged in a lively online discussion of the topic on the 16th, in which he made clear his view that government solutions are not the answer: "The last time we tried, setting limits on deductibility of riskless pay like salary, companies responded by loading up the pay packages with stock options which were deductible because pay was at risk. ... Call me an optimist -- and a skeptic about this type of government micro-regulation" (Read the full chat).
A Transcript of the Discussion Follows:
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Washington, D.C.: Are there any recent signs of sanity regarding executive pay packages? I simply fail to understand why anyone making millions a year even needs a pension. Meanwhile everyone else is being asked to take a cut, do without or get downsized. Case in point: American Airlines CEO protecting his own salary and pension while asking others to sacrifice portions of theirs.
Steven Pearlstein: Yes, there are signs of sanity, as the American Airlines case suggests. What's really amazing, I think, is how clueless the execs are about the public anger over this issue. They tend to dismiss it as mindless populism fanned by the press and a few gadflies. And that is really one of the more deleterious effects of these pay packages: they insulate executives from any of the financial pressures and risks that everyone else in the world has to deal with.
Washington, DC: I have a few plans to restore confidence:
- CEO salaries will now be tied to the lowest paid employees salary.
- Layoffs will be accompanied by directions to the CEO's home, with an invitation to "stay as long as you need until you find another job."
- Layoffs can only happen after management salary reductions take
- Management is liable for the actions of the company.
- Employees can lay off the Board and management as a way to cut company costs.
What do you think? Can I become a management consultant? I think these simple rules would go a long way toward making our country strong again.
Steven Pearlstein: Those are interesting ideas but I have to say I don't agree with any of them. It is a mistake, I think, to tie layoffs to executive compensation issues. It could be that layoffs are needed to make a company productive and efficient and chief executives shouldn't be penalized for doing them if that is the case. Obviously, there are ways to handle layoffs in a humane way and companies that have a reputation for abusing workers will, in the end, not be able to attract good talent. But be careful about confusing the two issues. Same with pay at the bottom. Again, there are lots of good issues there but there are larger forces at work in the economy that are driving wages toward more inequality. I'd focus on whether the people at the bottom are getting a living wage and whether their pay is increasing to reflecting the full measure of their rising productivity. Looking at this issue in terms of a zero sum game, where the chief executive's pay comes out of the pockets of the workers, is economically not a valid way to think about things. Sorry.
Washington, D.C.: Regarding the criminal acts of the executives of Enron, WorldCom and others, when are we going to see some justice meted out? I think the executives responsible should have every cent they own confiscated as partial payment to those they ruined. In addition, no more 'white-collar' prisons -- these guys did more damage to more people than most prisoners serving time in maximum security.
Steven Pearlstein: Look for some Enron indictments or pleas tomorrow, I'm told by my colleague Peter Behr. Stay tuned.
Mt. Lebanon, Pa.: Can bankruptcy judges sanction CEOs -- let's say, Carty ex-Pasha of AMR -- who loot the company at the last moment in order to hand out lavish luxuries to the swells at the top just before the company flames out and plows into the ground? To these tired old eyes that kind of scumbaggery -- cheating investors, creditors, taxpayers, and the general public -- looks exactly like fraud. Is it? If so, how come there aren't any U.S. Justice Department lawyers who know it's criminal activity? Thanks much.
Steven Pearlstein: Yes, bankruptcy judges do have the power to reach back a certain length of time to recover assets that have been looted from a corporation. But be careful about overstating the case. Carty thought he had a real problem in retaining key executives who were threatening to retire at a difficult time for the company. It wasn't totally irrational to try to put a golden handcuff on them, even though such an arrangement would be viewed as unfair. The problem was the lavishness of it and hiding it and failing to see why all the other workers might want a similar inducement for sticking it out. The truth is that former airline executives are a dime a dozen these days with little prospect of getting hired by other airlines, so I'm not sure why Carty didn't simply call their bluff and invite them to jump ship if they felt they had to.
Columbus, Ohio: Isn't the crux of the CEO salary problem that this executive pay does not correlate with company performance? Statisticians have been charting this phenomena for years. Why do we tie their pay to stock performance and the existing "market" for CEOs in lieu of how healthy and qualified the company actually is?
Steven Pearlstein: No the crux of the problem is not tying pay to performance. There are all sorts of elaborate mechanisms now that attempt to do just that, and it is on the basis of these performance-based schemes that the compensation committees justify their pay packages. We can argue about how well they work and whether they aren't "heads I win, tails I win big" arrangements, but at least they head in the right direction. No, the real problem is simply the overall levels of compensation -- how many stock options, how many shares of restricted stock, how much life insurance, how big a pension, how big a bonus. The corporate types won't talk about that other than to say that it is what the market demands, which is hokum. I can assure you Gary Forsee could have been convinced to take what he called his "dream job" for less than $25 million. Nobody on the Sprint board, however, made him make that difficult choice.
Olney, Md.: What do you think of the concept of executive pay being tied to the pay of the lowest-paid employee of the company? I have often heard people talk of a factor of 30 to 50, so that the wages of the lowest-paid employees would have to be raised in order to raise executive compensation. (This assumes that if you give raises to the lowest-paid tier, you will have to give everyone above them comparable if not equal increases, or else you'd have a lot of "leapfrogging" at the lower salary levels.)
It seems that companies will probably never do this voluntarily except for the rare company whose image relies on such beneficence, such as Ben & Jerry's. Could it become a requirement for listing on a stock exchange, or some other voluntary-but-necessary requirement?
Steven Pearlstein: Honestly, I don't like the idea. Employees at different levels operate in very different labor markets that are only loosely tied to each other. You're thinking about this from a fairness point of view, but the truth is that capitalism isn't fair. Its just an effective way to organize our economic life that generates the greatest good for the greatest number. If you start down the fairness road, you pretty quickly end up in highly socialist arrangements.
Baltimore: Clearly, the best way to curb runaway executive compensation is to place a 50 percent tax rate on income above $1 million, and a 90 percent tax rate on income above, say $10 million.
I realize that bleeding hearts like myself don't get much play or respect from the media and punditry in this country, but personally, I find it obscene that CEOs in the late 90's were making nearly 500 times the salary of average workers (up 1000 percent from 1980) and all this time, we learn, they were merely using their companies as personal cash cows (artificially inflating earnings reports, to pump up the value of their stock options).
The notion that you have to pay CEOs 100s of millions of dollars to attract "top talent" is hogwash. This nation is full of very bright and talented people, and if Michael Eisner is not happy with a $1,000,000 salary to run Disney, for instance, there are plenty of very talented individuals who would gladly do it for such a "paltry sum" (a salary that is truly astronomical by any sane measurement). Indeed, I submit that by limiting salaries to reasonable levels, CEOs actually have an incentive to create growing, prosperous companies. Pay a guy a $30 million a year and he's "set for life" after the first couple of months on the job. What incentive does he really have after that? Greed? It's shameful, really.
Steven Pearlstein: As I said in this space last week, I don't think its a good idea to involve the government in setting caps, even by the indirect means of tax policy. In fact, Congress did set a million dollar cap on pay that wasn't based on performance, and the way companies got around that was with the kind of "guaranteed bonuses" tied to company performance that Gary Forsee got at Sprint. I think the best way to reform is is to change the norms of behavior in the corporate community by shaming them into doing the right thing. Arthur Levitt, the former SEC chairman, said that the other day and I agree with him on that. And chats like this one are part of that process.
Silver Spring, Md.: Are any big institutional investors pushing for changes, using their holdings in public companies to push for change?
Steven Pearlstein: Not enough. I'd like to see some of the big pension funds and mutual funds announce guidelines for executive compensation that they will follow in deciding whether to invest in a company or not. Included in these guidelines should be some limit on the overall value of the pay packages. It seems to me that $1 million in base pay, $1 million on bonus and $1 million in stock grants ought to be enough to incentivize anyone. And if its not, you probably don't want that person as your CEO anyway.
Bethesda, Md.: I'm wondering what Rakesh Khurana's students at Harvard think about his criticisms of CEO pay.
Steven Pearlstein: Why don't you e-mail him and ask. You can get his address at the HBS Web site. Use google.
Austin, Texas: I tend to agree with most of what you say, but do you really think the public is that concerned about this issue? Yes, in really flagrant cases like AA, but in general? What are some more broad-based examples of public anger?
Also, how does the fact that the current Administration is (in my opinion) probably too pro-business for its own good fit into this equation?
Steven Pearlstein: The public is bull -- about this issue, trust me. Writing about it is like touching a raw nerve.
Herndon, Va.: Sooo, are any CEOs anywhere working to change the CEO compensation culture? Seems like there ought to be at least a few corporate citizens out there who'd be willing to lead the charge for rational CEO pay.
Steven Pearlstein: Hugh McColl, the former chief at Bank of America; Warren Buffett; Bill Gates. Not enough though.
Alexandria, Va.: I have to say, your column paints a pretty stark picture of the current state of affairs. If boards and CEOs only feel like they are accountable to each other and not investors or consumers, what hope do we have...?
Steven Pearlstein: You raise an interesting point that I meant to raise in the column but didn't have room for. The election of directors most resembles the elections they used to have in Soviet Russia at the Politburo. Investors get a chance to vote on one slate of directors, yea or nay. Getting an opposing slate on the ballot requires hundreds of thousands of dollars in legal and other fees. And the same problem exists with directors as with chief executives: they circumscribe the criteria so much that they leave out thousands of people who might make great directors. The result is that it is a very small club. The SEC could help out by requiring truly open elections, with individual directors standing on their own and nominations possible by, say, investors representing 25 percent of the outstanding shares. We'll see if Bill Donaldson really believes in corporate democracy or not by the way he handles these kind of issues.
Arlington, Va.: This executive compensation problem doesn't apply to just corporate enterprise. Look at the salaries of college presidents (not to mention coaches) or even Washington police chiefs. The boards that oversee these jobs really need to think more carefully about what value the person hired really has and whether they can get someone better cheaper.
Steven Pearlstein: I'm not sure I agree with you on the police chief and college president thing. The levels are no where near as outrageous.
Herndon, Va.: Buffett and Gates? Two of the richest men in the world are the only ones pushing this? I can see why the rest of corporate America ignores their entreaties. It'd be great if, say, the CEO of No. 499 on the Fortune 500 list would be out in front on this ...
Steven Pearlstein: One of the curiosities is that there isn't yet much of a "market" for corporate governance. By that I mean there isn't some sort of rating system for governance comparable to the S&P's rating for financial worthiness that investors can use in deciding where to put their money. Some organizations are working on it. If it takes, I think then you'll see companies changing their behavior to get the best ratings. But they have to be very hard-nosed and distinguish between the reforms that, in the long run, boost a company's long run business and reforms that may make people feel good but don't have an impact on long-term value creation.
Baton Rouge, LA: You don't seem to think that government regulation is the way to address this issue. But do you acknowledge that fear of such regulation on the part of executives may be very helpful? Suppose a bunch of senators started seriously proposing laws tying CEO compensation to 25 times that of the lowest-paid employee (a bad idea, I agree). All of a sudden the guidelines you suggest (1+1+1) might look a lot more appealing. Isn't something like this the only way things are going to change?
Steven Pearlstein: That's a very Louisiana approach worthy of the great Huey Long. Threaten legislation and see what happens.... I like it.
Baltimore, MD: But how do you shame those who have no shame?
Steven Pearlstein: You'd be surprised how easy it is to shame a corporate director. Maybe we in the press, when we write about some CEO's salary, should name the members of the executive compensation committee that came up with it.
Arlington, Va.: As ridiculous as the pay/perks have gotten ...
I'm working as hard in my career as possible to get their myself. If you can't beat 'em, might as well join 'em. And believe me, the little guys will never, ever , ever, ever, beat 'em. They may drop a little, but the pay and stock grants are here for eternity. To much money to be made and spread around to any politician who would dare challenge it.
Don't expect a few pension funds to fight it too hard. CALPERS had several very profitable side deals with ENRON.
Steven Pearlstein: I think you are underestimating CALPERS. They have an obligation to get a good return for the state workers of California, who deserve nothing less. Enron may have looked like a good partner at the time. But when it comes to corporate reform, CALPERS has put its money and reputation where its mouth is. They are not perfect but they are far better in these matters than Fidelity and T Rowe Price.
Washington, D.C.: I guess the moral of all this is a reminder that public companies are not democracies...
Steven Pearlstein: You got that right.
Olney, Md.: The uproar over the compensation for the chair of Children's Hospital made me wonder how big a gap do you think there is between the skills of someone right out of an MBA program and the top CEOs? While I realize that not just anyone could do these jobs, it would seem that paying 100K or so to someone who has no history as an executive but is very sharp and has the appropriate training would be a far better value for the company than paying 20-100 times more for people who, as we have seen, get mixed results at times.
Steven Pearlstein: It is a good question about whether paying $100,000 to a freshly minted MBA is a good idea. But I doubt even 20 working together has the wisdom to do the job of a chief executive of a large, multinational corporation. I'd be careful about mixing up these very different labor markets.
Washington, DC: How does the pay/compensation of U.S. CEOs compare with their counterparts in Western Europe and Asia. I hear CEOs are payed far more here in the U.S. than elsewhere. And I disagree that you can "shame" CEOs into acting moral and responsible because they apparently have a sense of entitlement to the lavish compensation they receive. Please read Robert Samuelson's (no bleeding heart liberal) Article in today's Washington Post OpEd section. Finally, what is wrong with a little "socialism" if it means a more equitable distribution of the income pie? Why should there be such a huge disparity between the "haves" and "have nots". in this country? Do you think there should be a permanent class of oligarchs? I think it just breeds resentment and jealousy of the wealthy.
Steven Pearlstein: Lots of good issues in that question. Europe proves you can get good people at much more modest pay as a result of norms of behavior that frown on excessive compensation. We need to change those norms of what is considered acceptable. We don't do that just by shaming CEOs. We have to shame directors, who ultimately should control. As for socialism, a little bit might be nice but the problem is that it quickly leads to all sorts of very inflexible labor laws that gum up an economy (see Germany, Italy). I'd concentrate on changing the norms, not the laws.
Washington, D.C.: I agree with the naming of the top executives and their pay and the committee that came up with it. Too often these things are anonymous and hidden in quarterly reports, and never revealed until the revenues turn sour.
Name names and print them in the paper please.
Steven Pearlstein: By the way, the column two weeks ago about the pay for the chief executives of defense firms should have mentioned that the compensation committees of all three firms (I think that's right, but two anyway) were headed by former admirals and generals. No let me ask you: do you get to be a top admiral or general by challenging authority or being good at taking direction? I'll let you answer that yourself, but I think its instructive that the most important person at setting CEO pay at these companies is a guy who used to make $150,000 a year and now gets $150,000 for a 8 - 10 meetings a year and was recruited for the post by the CEO.
Somewhere, USA: The levels of compensation might be just a tiny bit less maddening if all those guys were doing a good job.
Steven Pearlstein: Many times they are doing a good job. But they'd do a good job for $3 million a year, too.
Steven Pearlstein: That's about it for today, folks. Keep reading. Thanks.
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