Now That Communism Has Toppled, How Soon until Capitalism Follows?

GEORGE F. WILL

September 02, 1991|By GEORGE F. WILL

Washington - American's exhilaration about communism's collapse is mingled with dismay about facets of their capitalism. Americans are not toppling statues of tycoons -- there aren't many -- the way Russians are venting their anger against Lenin's statues. But there is anger, about the BCCI and Salomon Brothers scandals, the S&L debacle and soon perhaps about the way some corporate leaders are paying themselves.

The compensation of CEOs is generally disproportionate and often ludicrous in light of corporate performance. Often it is difficult to determine how much CEOs are paid. Compensation packages can be wondrously -- and purposely -- difficult to decipher. (The 1990 compensation of International Telephone and Telegraph Corp.'s CEO has been estimated at between $7 million and $11.4 million.)

But America's CEOs are paid two to three times more than Japan's or Germany's.

In Japan, the compensation of major CEOs is 17 times that of the average worker; in France and Germany, 23-25 times; in Britain, 35 times; in America, between 85 and 100-plus times. The American CEO-worker disparity doubled during the 1980s -- while the top income-tax rate was cut and workers' tax burdens increased because of Social Security taxes. (Japan, Germany and Britain have more progressive tax rates than America.)

In 1990, CEO pay rose 7 percent while corporate profits fell 7 percent. How does this happen? CEO compensation is approved by company directors the CEO helps to choose. Sixty percent of all outside directors of the 1,000 largest corporations are themselves CEOs. They are raising the floor beneath themselves.

Economists puzzle about this: How do you define, measure and appropriately reward individuals' contributions at the pinnacle of complex, sprawling bureaucratized corporations? How do you distinguish between money earned and money merely taken? The slogan ''pay for performance'' does not take us far.

Madonna made $25 million last year? Fine. Her pay is directly a function of performances. If Roger Clemens stops winning, his $5 million salary will stop. Not so with CEOs.

The CEO of Eagle Picher Industries got a 38 percent raise while profits were falling 27 percent and the company was seeking bankruptcy protection. Because times are hard for the auto industry, Ford's CEO took a pay cut last year. But Chrysler's Lee Iacocca took a 25 percent raise -- while earnings were falling 17 percent and workers, suppliers and shareholders were being asked to sacrifice.

According to Business Week, in 1990 Disney's CEO made more in a day than the average Disney employee made in the year. Is there an economic or moral justification for that, or just a power explanation?

Business Week reports that since 1988 Reebok's CEO has received $40.9 million. But $100 invested in Reebok stock in 1988 was worth only $117 by 1990. Nike, which passed Reebok as leader in the sneaker industry as Reebok profits were growing just 1 percent last year, has a CEO who made a three-year total of $1 million in 1988-90 while Nike's return on equity averaged a robust 23 percent a year.

Perhaps Reebok's CEO was worth $14.8 million in 1990, but why, precisely? He would have done his job less well for a piddling, oh, $7 million? He would have left the company if paid less? Would the company have done worse with a $7 million -- or even $1 million -- replacement? Time may tell: his new contract limits his pay, or at least cash pay, to $2 million.

Topping Business Week's annual survey of executive compensation for 1990 is United Airlines' CEO. He received $18.3 million (1,200 times what a new flight attendant makes) in salary, bonuses and a stock-based incentive plan. United's profits fell 71 percent.

The word ''incentives'' is prominent in CEO compensation packages. Think about that. Incentives to do what, exactly? One's job? One's job well? Or better than one would unless lethargy were conquered by lots of cash?

Economists worry that many incentive plans encourage a short-term focus on a few numerical goals, such as stock prices. Those can be floated up by a general market rise unrelated to executive performances.

Congress is considering requir- ing better disclosure of compensation and strengthening stockholders' powers to control it. But stockholder democracy is a weak reed to lean on, at least until large institutional investors get angry and involved.

Public anger could provoke at least caution in the clubby corporate culture. And anti-business fever does flare periodically in America.

The fever's causes include resentment of government-conferred wealth (for example, from protective tariffs), fear of monopoly and hugeness (which gave rise to ''trust-busting'' at the turn of this century), dislike of dependency (such as farmers felt regarding unregulated railroads in the 19th century), disgust with rapaciousness and vulgarity (as in the Gilded Age).

The looting -- it sometimes looks like that -- of companies by some CEOs -- could cause another bout of business-bashing.

George F. Will is a syndicated columnist.

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