The Executive Pay Scam
Editorial
The New York Times
April 14, 2002
You win, I win. You lose, I
lose." That was the
seemingly unassailable deal
corporate chieftains struck with
their shareholders at the outset
of the bull market in the early
1980's, when they aggressively
linked their compensation to
their companies' stock prices. The
arrangement allowed chief
executives like Roberto Goizueta,
Michael Eisner and Jack Welch to
amass fortunes that would once have been unthinkable
for mere hired hands. Their pay, we were constantly
reminded lest we should become resentful, reflected their
performance. What could be more fair, more in keeping
with the American spirit of meritocracy?
The deal looks like a sham now that the roaring bull
market has run its course. "You lose, I still win" is the new
message shareholders have been hearing from companies'
top managers. In a down market, most chief executives
should have suffered under the model that was applied on
the way up. At some companies that has happened, but at
others management rewrote the rules. While base pay did
decline in 2001, some companies made up the difference
in performance pay, where the real money is to be had.
Take Cisco Systems, one of the highfliers of the Nasdaq
run-up that has fallen on hard times recently. The
company lost $1 billion in its last fiscal year, and its stock
price took a nose dive, so it should come as no surprise
that John Chambers, its chief executive, saw his base
salary fall to $268,000 from $1.3 million the year earlier.
But with the six million stock options he got, it is
estimated that his pay might be a third higher. At Coke,
the board reset the performance targets the chief
executive, Douglas Daft, needs to meet to earn a million
shares. If only shareholders could reset the clock like
that.
The pay-for-performance model is blessed by tax laws that
prevent companies from deducting as an expense any
portion of an executive salary in excess of $1 million but
place no limit on the deductibility of so-called
performance-based pay. Yet even before it came to be
egregiously violated, the policy was flawed. Too many
mediocre corporate leaders made their fortunes merely by
riding the bull market. Stock option packages became so
outlandish that they began to undermine the principle
they were meant to serve. A number of chief executives
are now motivated to prop up the stock price at any cost
until they can cash in their options.
The common thread running through these excesses is
the acquiescence of boards of directors. Instead of
overseeing management on behalf of shareholders, boards
have acted as servants of management. Among the
supposedly independent directors at Enron were
individuals who received consulting deals from the
company and one whose medical center got Enron
donations.
The New York Stock Exchange is considering a
requirement that directors on audit and compensation
committees be independent. The definition of an
independent director also needs tightening to exclude not
only past and present employees, but also anyone else
beholden to the company through financial dealings. A
more rigorous rule under consideration would preclude
the same person from serving as board chairman and
chief executive.
Congress ought to consider ways to hold corporate
executives more accountable. Instead, the House last
week passed a so-called pension reform bill that might
actually encourage companies to drop lower-paid
employees from pension plans to direct even more
resources to top executives. Employees lose, the chief
executive wins.
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