From the Chicago Tribune

CEO pay 531 times that of workers

Study: Gap grows despite downturn

By R.C. Longworth
Tribune staff reporter

August 28, 2001

Even as the American economy limps along, the corporate captains at its peak are making more money than ever, a new report says.

The average chief executive of a major American corporation now makes 531 times as much in pay, bonuses and stock options as the average factory worker, according to the report by the liberal-leaning Institute for Policy Studies and United for a Fair Economy, a Boston organization focusing on economic inequality.

Although the economy stalled and the stock market dipped in 2000, the salaries and bonuses of CEOs jumped by 18 percent, according to the study, titled "Executive Excess 2001." The paycheck of the average worker, by contrast, went up 3 percent.

Defenders of executive pay levels argue that a global market for top executive talent drives up pay, which is justified by the performance of U.S. companies.

"It's not fair to compare them with hourly workers," said Ira Kay, practice director for compensation consulting at Watson Wyatt Worldwide. "Their market is the global market for executives."

Kay said that CEOs hold exceptionally demanding and important jobs and that, unless companies pay them top salaries, "the best and the brightest will no longer go into the corporate world but will become investment bankers or venture capitalists."

According to the report, the average pay of a CEO at 365 major corporations now stands at $13.1 million per year, the result of an increase of 571 percent in the 1990s. The average factory worker's annual pay is $24,668, the report said: If it had grown as fast as the CEOs' pay over the decade, it would be more than $120,000 now.

The statistics used in the report were taken from official government figures or from published reports on executive pay in magazines like Business Week.

Some gain amid layoffs

Some of the CEOs getting the biggest raises were also the ones laying off the most workers, the report said. These included Disney CEO Michael Eisner, who earned $72.8 million in 2000 while laying off 4,000 workers; American Express' Harvey Golub, whose pay rose 22 percent while he laid off 6,600 workers; and Cisco Systems' John Chambers, who made $28.7 million in 2000, including a 40 percent pay increase, while laying off 8,500 workers, the report said.

Among the 365 top firms, the analysts found 52 that had laid off more than 1,000 workers during the year. The CEOs of these firms, it said, took home $23.7 million in 2000, a full 80 percent more than the average CEO in the whole group.

`A question of fairness'

The report called the gap between the pay of CEOs and their workers "a question of fairness." Other analysts agreed, but for different reasons.

Investors, including big institutional investors like pension funds, "are concerned about the delinkage between pay and performance, rather than absolute levels of pay," said Patrick McGurn, vice president of Institutional Shareholder Services, which studies corporate performance on behalf of investors.

While the stock market was going up, many Americans accepted soaring levels of pay, McGurn said. Now that the market is down, they "expected to see CEO pay fall. Instead, it's kept on rising."

The reason, he said, is the willingness of boards of directors to shelter CEOs from losses, by giving them more stock options or, increasingly, to offer them "retention bonuses," which "reward CEOs just for staying with their company, even if, in many instances, there's no place else for them to go."

As an example of this, the "Executive Excess" report cited Bernard Ebbers, CEO of WorldCom, who laid off 6,000 workers while persuading his board to give him a $10 million bonus "in return for his promise to stay with the company for at least two more years."

"This is a heads-I-win-tails-I-still-win proposition," said Nell Minow, co-founder and editor of The Corporate Library, which researches corporate and board performances. "That's where the unfairness comes in."

Minow said the problem is not recruiting ambitious and hungry executives who are anxious to build companies and take a risk on stock options. The problem, she said, is the overpayment of established, complacent CEOs who, having made their pile, are unwilling to risk it.

"When they want a non-risk-associated pay package, that's when you know they're the wrong person for the job," she said.

McGurn and Minow agreed that in a capitalist society, executive pay scales should be set by the market, with high pay rewarding high performance. But the system often breaks down, Minow said, "because boards are not doing their jobs."