The Boss Never Takes a Salary Reduction, No Matter How Deserved

March 21, 1991|By TRB

WASHINGTON — Washington. It's annual report season for America's corporations, and according to The New York Times, top executives got pay increases averaging 8 to 15 percent last year. That's pretty modest compared to the rip-roaring 1980s, but not bad in a recession year. Did you do that well?

In one study cited by The Times, median compensation for 176 chief executives was $1.7 million in 1990.

When executive pay increases faster than the economy -- which has happened for the past couple of decades -- other people's share of America's bounty decreases. It's another piece of the general trend toward greater income inequality.

Critics of this sort of talk say that the size of the pie matters more than the size of the slices. And they're right, if growing inequality is generating greater prosperity for all. But does that connection exist? Executive pay raises the question in miniature.

During the 1980s boom years, the connection was at least plausible. The economy was growing,corporate profits were soaring, unemployment was shrinking. Huge increases in top executive pay were held to be the reward for success.

Often given in the form of stock options, whose value depends on the company's performance, pay raises were also held to be the reward for risk-taking. Corporate CEOs were being re-engineered from plutocrats into entrepreneurs, and American capitalism was being re-energized as a result.

But entrepreneurs don't get more modest increases when times are bad. They actually bring home less. If the ''risk'' executives were taking was merely that in bad years their raises would only amount to two or three times the rate of inflation, that hardly justified the huge raises they got during the good years.

Now that the increase in top executive pay has continued through two cycles of boom and bust, it is hard to explain as a mid-course correction in the long successful voyage of American capitalism.

Some economists argue that changes in the world economy are making people who work with their minds more valuable and people who work with their hands and bodies less valuable.

Whereas blue-collar workers must increasingly compete with labor from the impoverished third world, this same global economic integration sets off world-wide competition for the unique talents of those who peddle ideas and decisions.

Could this process explain the explosion in executive pay? The Times reports that chief executives of large companies typically make 70 or 80 times what an average worker does, and the gap has more than doubled in the past 15 years. But American chief executives "also earn almost twice as much as. . .in Canada and Germany, which rank second and third.''

Japan is famous for its modest executive pay, both compared with America and relative to a company's workers. Clearly international competition cannot explain why American top executives are paid more and more each year. It ought to have the opposite effect.

In truth, competition and other free-market virtues have almost nothing to do with determining what top corporate executives get paid.

Top executive compensation is typically set by the compensation committee of the board of directors. The members are outside directors, who are not executives of the company itself.

But they are most often executives of some other company. And they are chosen for the board -- itself a cushy deal -- by the executives whose pay they are deciding. Both these factors give them every incentive not to be chintzy.

Consulting firms advise corporations on executive pay, generally based on comparability studies of what other firms are paying. This turns pay raises into a self-feeding process and a genteel conspiracy in restraint of trade, as the consultants enforce the executive-pay cartel.

Anyway, corporations generally aren't looking for bargains. CEO salaries are widely publicized and compared. What corporation wants to admit that it got its CEO off the discount rack? In the American corporate culture, how much the top birds get fed can be a point of pride. No such status anxiety affects remuneration for the lower-downs.

One claim often made for the mergers and acquisitions frenzy of the 1980s was that it would reacquaint fat corporations with the discipline of the marketplace. But the merger boom was no discernible restraint on excessive executive salaries.

In fact, by putting corporate executives in close proximity with financiers making hundreds of millions of dollars for similar work, and by creating such opportunities for executives themselves through leveraged buy-outs, the merger era just increased pressure for higher executive pay.

So what should be done? Corporations are almost farcically sensitive to bad publicity. Constant harping on bloated executive pay, by the media and by opportunistic politicians, could itself bring some healthy restraint. So would noisier opposition from large institutional shareholders, such as pension funds.

The government itself should probably stay out of this, at least directly. The overpaid CEO is just one example of fate's arbitrariness in financial matters. There's a remedy that addresses that arbitrariness in general. It's called progressive taxation.

TRB is a column of The New Republic,written by Michael Kinsley.

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