Is a CEO worth $9 million? Why not tax him down to size?

The Economy

October 30, 1995|By Jay Hancock

NORMAN R. Augustine is a worthy chap. Runs a big company. Wrote a book. Is kind to children, small animals and members of the Senate Armed Services Committee.

But is he worthy of a salary big enough to buy, at one checkstroke, the entire inventory of a dozen Giant supermarkets?

Mr. Augustine, president of Lockheed Martin Corp. in Bethesda, is expected to make about $9 million this year. Is he 900 times as worthy as, say, Melvin Graham, a Baltimore resident who says he takes home "a little more" than minimum wage? Mr. Graham doesn't believe so.

"I don't think it's fair," he said on a corner near Broadway Market last week, "that one man should make a million dollars or more running a corporation."

Journalistically, executive pay is a well-beaten nag. Acres of newsprint have been dedicated to the proposition that CEO salaries are unfair and unwholesome.

But two university professors have a new angle. Fat pay for fat cats isn't bad just because they make more than the rest of us and we're mad about it.

It also hurts the economy, say Robert H. Frank, of Cornell, and Philip J. Cook, of Duke. In their book, "The Winner-Take-All Society," the two argue that the lure of gigapaychecks misallocates America's talent.

"There are way too many people forsaking non-superstar occupations to compete for a limited number of slots at the top of a handful of corporations," Mr. Frank said in an interview. "If the wannabes instead pursued careers as engineers and teachers or accountants or manufacturing supervisors, they'd do a lot more both for themselves and for the economy."

Only one thing -- financial pheromones emitted by certain professions -- explains why a majority of students in many MBA programs yearn to be investment bankers, why law school enrollments have soared, why a recent survey showed that 60 percent of NCAA Division I basketball players want and expect to start in the NBA.

But the truly big money, the Augustine-size pay, remains beyond almost all aspirants. More people wash out of pre-med programs than succeed. Only the tiniest fraction of MBA grads make partner at Goldman Sachs. Fewer than 5 percent of NCAA of Division I hoop players end up starting for the pros.

The teeming hordes of also-rans land in careers that are far less rewarding both financially and emotionally, Mr. Frank said.

Many spend several years and big dollars for education that is never put to use. Or, if they get jobs, they toil in oversubscribed trades where small advances require great efforts and where the recompense never comes close to the marquee salaries that drew them in the door.

The winners take all, almost. And many of the losers "essentially end up not contributing very much," Mr. Frank said. "They end up like actors waiting tables in Hollywood and getting only the bit parts."

Here's the trick. It's hard to tell if you're a winner or a loser until you buy your ticket and the numbered ping-pong balls get sucked into the tube. The consolation-prize winners are almost just as smart, attractive, athletic, educated, eloquent and connected as the Powerball jackpot winners.

The differences in reward are huge. The differences in qualification are tiny. We make dumb career choices as a result, human optimism being what it is. And society is the worse.

Mr. Frank and Mr. Cook offer a solution: Tax the superstars. Tax 'em, not into the middle class, but enough to ease their appetite for the cream and gravy. And everybody's else's appetite, too. If superstar rewards didn't look quite so sexy, more unhappy lawyers might have become teachers.

Mr. Frank favors a tax on spending, which would have the added advantage of stemming wasteful, mine-is-bigger arms races among the rich. But the main benefit, he says, would be in the distribution of talent.

The able would still fill key jobs. "Michael Jordan would still play for the Bulls. Disney would still be managed by Eisner," he said. But less glamorous trades would gain, and the country might be better off. "If the rewards at the top were a little less grandiose," Mr. Frank said, "you'd perhaps get more economic growth than less."

You also might avoid social upheaval, if you believe Graef "Bud" Crystal, executive-pay Jeremiah and the scourge of corporate compensation consultants. Mr. Crystal, a business professor at the University of California at Berkeley, likes to compare pay at the top and bottom of the success ladder.

In 1974, the typical CEO made 35 times more than the typical factory worker, he says. Today, with packages like Mr. Augustine's on the rise, the multiple is 120 and climbing. How much higher can it go?

"By 2010, the ratio could reach what it was in 1789, when Louis XVI was king of France," Mr. Crystal said. "And you know what happened then. Louis XVI lost his head. And so did his wife."

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