Fed's McDonough Calls for CEO Pay Cuts
Wednesday September 11, 4:55 pm ET - Reuters Business Report
By Victoria Thieberger
NEW YORK (Reuters) - New York Federal Reserve President William McDonough on Wednesday called on U.S.
corporate executives to take pay cuts, saying their salary packages are bloated and morally hard to justify.
"Beginning with the strongest companies,
CEOs and their boards should simply reach the
conclusion that executive pay is excessive
and adjust it to more reasonable and justifiable
levels," McDonough said in a speech at Trinity
Church just steps from the World Trade Center
site.
"Should there not be both economic and moral
limitations on the gaps created by the
market-driven reward system?" McDonough
asked in a speech to mark the Sept. 11
attacks.
His remarks were the strongest denunciation
yet by any public official of chief executive
pay, which McDonough said has swollen in
publicly traded companies to 400 times that of
production workers on average from 42 times
two decades ago.
"It's noteworthy that somebody in that position -- with an emphasis on the free markets -- would be suggesting
that there ought to be some limits," said Carol Bowie, director of governance research at the Investor
Responsibility Research Center.
In recent months, stunning corporate excess during the boom years of the late 1990s has fueled investor outrage
as share prices have collapsed but executives walked away with huge riches from stock options, corporate
perks and loans.
Tyco International Ltd. (NYSE:TYC - News) ex-CEO Dennis Kozlowski, indicated for sales tax fraud, reportedly
funded a lavish lifestyle with $135 million in corporate loans. Just last week, court papers showed that former
General Electric Co.(NYSE:GE - News) chief Jack Welch, who earned $16.5 million annually, still lives large in a
GE-financed apartment overlooking New York's Central Park and has access to a corporate jet and country club
memberships.
CEO compensation exploded during the late 1980s and then during the long economic boom of the 1990s. Much of
the rise in CEO pay packages in the last decade was tied to the frenetic growth in stock options, which
companies began doling out freely in a bid to attract top talent.
In the last five years alone, CEO compensation has doubled. In 1996, the average CEO at the 200 largest
companies made about $5.8 million, according to compensation consultants Pearl Meyer & Partners. By 2001, that
figure jumped to $11.7 million.
For his part, McDonough earns a comparatively moderate $297,005, while Federal Reserve Chairman Alan
Greenspan made about $136,000 last year.
UNJUSTIFIABLY HIGH PAY
The New York Fed president said voluntary pay cuts, starting with the best companies, will benefit shareholders
and strengthen the United States' market economy.
"We must recognize that the leadership of the American economy has made a large number of American citizens,
and countless more around the world, question our judgement and/or our ethics," McDonough said in his speech.
In particular, the inflated levels of executive pay require corrective action, he said.
"It is hard to find somebody more convinced than I of the superiority of the American economic system, but I can
find nothing in economic theory that justifies this development," McDonough said.
With the benefit of hindsight, the policy of vastly increasing executive compensation was also "terribly bad social
policy and perhaps even bad morals," the central banker said.
He urged executives to voluntarily trim their pay packages to more reasonable levels, saying government
regulations were a blunt instrument.
McDonough was speaking at a day-long commemoration at Trinity Church, on the corner of Broadway and Wall
Street, in the heart of the financial center of New York.
"CEOs are terribly overpaid, it's been destructive to workers' morale, and it's been destructive in the economy as
a whole," said a member of the congregation who listened to McDonough's remarks, Nancy Barsotti, an interior
designer.
No one on Wall Street or in Washington has publicly taken such a strong stand.
While New York Stock Exchange President Dick Grasso has called for tougher corporate governance standards
and the heads of Goldman Sachs Group Inc. (NYSE:GS - News) and Merrill Lynch and Co Inc. (NYSE:MER -
News) have urged steps to restore investor confidence, pay has been seen as the purview of corporate boards.
Treasury Secretary Paul O'Neill several times has vigorously condemned unethical behavior by executives, saying
in June for instance: "I think people who abuse our trust, we oughta hang them from the very highest branch."
Recent legislation and listing standards adopted by the stock exchanges have tried to clamp down on the
largesse. Company loans to top executives, many of which were forgiven later, have been banned. Board
compensation committees must now be made up entirely of independent directors, meaning directors with
financial ties to the company, for example, cannot sit on the committee that approves executive pay packages. |
