You Go Joe !!

CEO Pay Went Up 19% Last Year. Three Cheers for The Economy Recovery
By Joe Rothstein
Editor, USPoliticstoday.com

I love the Wall Street Journal.

Here’s what I love most. They speak truth to financial power. And they do it from their unique vantage in the rarified atmosphere of lower Manhattan where so much of the world’s wealth and corporate decision-making is managed. It's not uncommon to see on the Journal's news pages the toughest and most carefully documented articles published anywhere about corporate and accounting fraud, economic mismanagement and other violations of the capitalist system.

What triggers this love note to the Journal is a whole section it published April 12 about executive pay, based on an annual survey by Mercer Human Resource Consulting. Many CEOs and their corporate boards are likely to have seen this report and then looked at their shoes with embarrassment. Let’s hope. They should.

Example:

The median white collar worker made $46,100 in 2003, an increase of 3.3% from the previous year. By contrast, the median CEO at 350 of the nation’s largest corporations, made $3.6 million, an increase of 19% from the previous year.

The disparity hardly needs further explanation, but the Journal goes on to note that it’s even worse than it looks. If you factor in stock and options the typical CEO receives, the average jumps to $6.2 million. As Journal columnist Jesse Eisinger points out after looking at these numbers, “Most of the top CEOs didn’t invent anything, nor are they entrepreneurs. They are custodians. Yes, they are caretakers with big responsibilities—but not that big.”

Drilling down into the numbers we quickly find Rueben Mark, the CEO of Colgate-Palmolive with total compensation in 2003 of $141 million. (above average, as Garrison Keeler might say on Prairie Home Companion. Shareholders of Mr. Mark’s company didn’t share in his good fortune. They lost 2.5% last year.

David Dorman, CEO of AT&T, presides over a company whose share value has declined 17% over 5 years, and even lost 2.6% in 2003—when most stocks enjoyed robust growth. Dorman took home about $7.5 million for his contribution to this performance.

The Journal neglected to point out that 2003 was also a year when more companies than ever shipped jobs overseas and cut back on employee health benefits to "cut operating costs and become more competitive." I don't think it's off point to mention those details here.

One of the drivers of such high CEO pay is the issuance of stock options. Volumes have been written during the past few years about how tying CEO and other top executive pay to an increase in stock price has led to shareholder calamities such as Enron, Worldcom and the other fast-Eddie businesses that are now in the process of “reorganization."

The Wall Street Journal’s Executive Pay edition has a lot to say about stock options—noting that fewer companies are granting them and that shareholders voted on a record 201 CEO pay limiting resolutions in 2003, 49 of which passed. Remarkable, since most corporate votes resemble Cuba's, where you don't need exit polls to know the results in advance.

On the bright side, the Journal's Executive Pay edition features John Faraci, chairman and CEO of International Paper who dropped options in favor of performance-based shares. Faraci and his top executives designed a plan where they can only sell their shares if the company achieves better return on investment and total shareholder return better than the median player in its peer group.

Performance-based rewards? What will they think of next?

Not everyone is for changing the system, as you might imagine. The powerful Washington Business Roundtable looked at executive compensation last year and warned compensation committees to “resist an over-reliance on surveys and other statistical analyses in determining compensation levels….Company specific factors should be given significant weight in determining executive compensation.” Read between the lines—"how cozy are the board members with the CEO."

Despite the hold-outs there’s no question that a new sense of shareholder activism, driven mainly by large pension funds and organized labor, has been having an impact on what up until lately has been a tightly circular system: The CEO maneuvers a friendly board into a lush contract, and the board, in turn is rewarded with lush perks.

But a number of obstacles have popped up in the way of that relationship.

--With the Internet and high speed communications, many more people are much better informed about the inner workings of the company than ever before.
--The accounting and corporate scandals of the past few years have shot down the stars in the eyes of investors who thought they could depend on institutional protections.
--The gaps between them on top and the rest of us is widening, and the blatant unfairness of a CEO who takes home megabucks more than the average company worker is too hard to miss.

Michael Eisner’s dismissal as CEO of Disney was a high visibility shot across the bow. Even with all of the evident waste and mismanagement at Disney, Eisner might have kept his mouse ears on if the corporate environment in general had not changed.

Other CEOs are also biting the dust. Hit lists of Board members are widespread. In this age of outsourcing, maybe Eisner and some of his fellow CEOs and corporate insiders might be re-trained after losing their jobs. That's certainly the solution the economists try to stuff down the throats of displaced workers lower down on the pay scale.

Maybe they can be trained in a new and expanding manufacturing field, like fast food management.
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Joe Rothstein, editor of USPoliticstoday.com, is a former daily newspaper editor and long-time national political strategist based in Washington, D.C.