VIEWPOINTS : HOW MUCH PAY IS TOO MUCH? : Michael Milken’s Huge Compensation Stirs a Heated Debate About What Executives Are Really Worth to Their Companies
P erhaps the most startling revelation in the 98-count securities fraud indictment last month against Michael Milken, the financier who headed Drexel Burnham Lambert’s “junk bond” operations in Beverly Hills, was his pay: $550 million in 1987 alone and more than $1 billion over a four-year period. Is anyone worth that much? How much pay is too much? And where do you draw the line? Times researcher Melanie Pickett interviewed various authorities on the issue, and excerpts of their comments follow.
Milton Friedman, a Nobel Prize-winning economist and senior research fellow at the Hoover Institution:
“I don’t really see that there’s anything wrong with (Milken’s compensation). It’s a deal between Mr. Milken and his company, and Drexel would not have paid him that sum unless they felt he was worth it. That’s up to them. I don’t see that anyone is harmed by it. It seems extraordinary, I must admit, but on the other hand tell me who is harmed by it. Provided it wasn’t obtained by theft or fraud, and some of that will be determined in the courts.
“He introduced a major innovation in the financial markets. That innovation has changed the character of corporate financing. The contribution to the nation and to the efficiency of the financial system is very large. As to the magnitude of it, who’s going to get it? A large fraction of it will go to the government in taxes. For the rest, Milken can only eat so much, he can only wear so much clothes, he can only live in so much housing. Most of the rest of it will undoubtedly end up in a foundation.”
John Kenneth Galbraith, Harvard University economics professor:
“This has happened many times before over the past several hundred years. We’ve had these people who for the moment were geniuses and the next moment were in trouble with the law or found to have been guilty of speculative excess of one sort or another. And the only difference with Mr. Milken, as I would see it, is that he’s carried the excess to new heights. Whenever anyone sees this kind of excess, one should be warned. One can say in defense of capitalism that if anyone sees money being made too easily, one should be on guard.
“There’s no extravagance of the economic system which will not find some defenders. The right response (to that defense) is not skepticism but mild amusement.”
Rudy Oswald, chief economist of the AFL-CIO:
“It (Michael Milken’s pay) is clearly more than anybody could use at one time. In his case, I would argue that he produced absolutely nothing other than a great shuffling of assets that didn’t produce anything in terms of production of goods.
“The notion that there should be this sort of recompense seems atrocious. . . . In Mr. Milken’s case, what is frequently the most atrocious is that in leveraged buyouts he arranged, the workers were asked to take a pay cut in order to finance the mergers.”
Kevin J. Murphy, University of Rochester business professor:
“I credit (Frederick H. Joseph, Drexel Burnham’s chairman) a lot with being able to retain a talent like Milken, with setting up a compensation policy up front years ago that didn’t have a cap on it but was based on a formula of profits or revenues that gave Milken the incentive not only to stay with Drexel, but to flourish under Drexel.
“For some political reasons that I don’t understand very well, when the rewards come in the form of ownership--look at Bill Gates at Microsoft, for example, who became a billionaire at 32--somehow no one is upset about that. Somehow everyone thinks he’s earned it, he’s built up that business from scratch. But what happened in Milken’s case just seems to be perceived differently because he got his reward in the form of cash compensation instead of ownership, and yet he did precisely the same thing Bill Gates did. He made a business.
“Drexel apparently considered it to be profitable to retain Milken. They could easily have gotten Milken off the payroll, but presumably they saw him as a money-making opportunity. And he was.”
Ralph Whitworth, director of the United Shareholders Assn.:
“There’s an unlimited potential there to create wealth. If somebody is out there making money, why should anyone argue with them being paid for that? By making money they are creating jobs, paying taxes and the economy is moving forward as a result of that. We ought to work them until they totally drop instead of saying how much is enough, now back away, buddy, you’ve had enough.
“If the company (pay) scheme is tied to performance--and performance should be making money for the shareholders--then really the sky is the limit because the more the shareholders make, the more the executive makes. When we have have a problem with it is when it’s tied to other issues like the size of the company or tenure or something like that.”
Ralph Nader, consumer advocate:
“Anyone who makes that much money has got to justify it by the extent to which he gives it away for a more equitable and prosperous society.”
Bruce McNew, a lawyer representing investors who are suing Drexel Burnham Lambert:
“In a privately held company, compensation levels in reality reflect distribution of profits. To the extent the company made profits, I think the owners of the company are entitled to obtain those profits. And the marketplace will dictate whether those profits are excessive. It’s hard to think of profits as being excessive in a free marketplace. If someone is charging too much for his services they won’t have any customers.
“In the public company context, I see a big difference because the people who own the company, the shareholders of a public company, do not have effective control over executive levels of compensation. . . . There is a downside risk so that the people have the best of both worlds--if they hit a home run they get great compensation and if they do a pitiful job they still get very good compensation. In the public company context, I think it would be nice to see greater input from the shareholders as to the level of compensation for executives.”
Basil Schwan, assistant executive officer of the California Public Employees Retirement System:
“We don’t have a particular figure that we think we should be setting for anybody, or approving or disapproving of. Fundamentally, we’re interested in the shareholders and the companies in which we are shareholders, that their executive compensation package is such that the executive is paid in some relationship to the performance of the company. . . . We would also be interested in compensation in the form of ownership, to ensure that the executives continue to have an interest in the performance of the company, as it affects their own compensation.
“We are adamantly opposed to situations--there have been some--where the performance of a company is deteriorating and the executive compensation is increasing. Those we consider to be abuses, and there is certainly a problem with that sort of behavior. It happened in more than once instance and is certainly happening today.”
