Outrage over executive pay echoes from Congress, which is holding hearings this week, to the Financial Accounting Standards Board. Radio talk shows debate stock options, and Graef Crystal, a onetime compensation consultant turned compensation critic, is suddenly a high-priced property himself. When Lee Iacocca accompanied President Bush to Tokyo last month, the Chrysler chief’s $4.6 million pay package got as much attention as his acerbic comments about the Japanese. Even Dan Quayle took a whack at “some of these exorbitant salaries paid to corporate executives unrelated to productivity.”
As often happens when economics meets politics, the critics have the problem wrong. That is not to defend overpaid CEOs: it’s hard to see what Time Warner chief Steve Ross did to merit all of the $78.2 million he was paid in 1990, or how Reebok International’s Paul Fireman could justify a $14.8 million pay package while his company was losing its lead in the sneaker business. Shareholders have every reason to be angry about the gap between pay and performance. Too many CEOs treat the corporate treasury like a private bank.
The public’s interest, however, is an entirely different matter. Why do we care how much the chairman of Reebok makes? For the same reason we watch “Lifestyles of the Rich and Famous”: it’s titillating. But the fact that it titillates doesn’t mean that it is consequential. While we rightly bemoan the growing gap between rich and poor, very few of the rich run major corporations. None of the purported ills of the U.S. economy-an indifferent work force, declining international competitiveness, endless layoffs-has much to do with Paul Fireman’s pay.
Sure, there were some greedy CEOs behind the 1980s leveraged-buyout boom that left much of Corporate America drowning in debt, but so were a lot of insurance companies and pension funds. Yes, some companies are sending out pink slips–but in grossly inefficient industries like banking and insurance, CEOs should be criticized more for their lateness in doing so than for facing up to low productivity at last. In any case, the money they make won’t put America back to work: if you add up the compensation of every chairman in the Fortune 500, it comes to a fraction of 1 percent of GNP.
Some of them might even deserve their money. Take a guy like Finis Conner. In 1990, his cash pay was $1.4 million. From 1988 through 1990, he also received rights to buy 300,000 shares of company stock-options worth about $1.7 million today. Even in California, that’s a lot of dough. But in return, he has hired 8,500 people and built Conner Peripherals to $1.6 billion in sales from a cold start in 1985. Or take Wayne Huizenga. Although his 1990 salary and bonus totaled only $398,077, from 1988 to 1990 he received options now worth more than $4 million-and got options on an additional 250,000 shares last July. Those generous options are supposed to focus an executive’s energies on improving the company’s performance. They seem to have worked: Blockbuster Entertainment’s sales have climbed 1,900 percent since Huizenga took charge in 1987. Conner and Huizenga are making out pretty well, but investors and employees haven’t done badly themselves.
Greg Herrick, the head of computer maker Zeos International in St. Paul, Minn., got paid only $173,234 in 1990. Martin Sabo would like that: Sabo, a Minnesota congressman, wants to bar companies from taking income-tax deductions for pay that is more than 25 times what the lowest-paid employee makes. If that be virtue, Herrick can afford it: he owns more than a quarter of Zeos’s shares, worth $37 million. “If the value of the company goes up, that’s where the payback for me comes,” he explains.
Executive pay does need scrutiny. Companies should have to disclose the value of stock options more clearly. Letting shareholders vote on the policies directors use to set compensation, as Sen. Carl Levin proposes, is a good idea, too. But these are matters of corporate governance, not of economic policy. Congress has plenty of serious economic issues on its plate. This one is better left to shareholders.
