High Exec Pay Just a Symptom of Problems
The Securities and Exchange Commission ruling last week that shareholders may vote on executive pay could help turn things around for U.S. business--although at the moment most stockholders don’t care.
Oh sure, growing numbers of the American public care, and the SEC ruling may produce a rash of stockholder motions at annual meetings. Everybody loves to kick the brass, and the compensation of U.S. executives has become a global scandal--as was evident last month in Tokyo where the pay levels of Detroit’s bosses undermined their arguments on trade. W. Edwards Deming, the 90-year-old management guru who taught lessons to Japanese industry, calls the American compensation system “the cause of our decline.”
But if the SEC’s ruling results merely in attacks on overpaid stuffed shirts, it will accomplish little. Because executive pay is only a symptom of the larger problem: The lack of stable ownership and daring, visionary management in U.S. business today.
Blame that partly on pension and investment funds that control more than half the major corporations and roughly 30% of all U.S. companies. Those funds behave like arms-length investors rather than active owners. Stock market performance is what most fund managers want, and if corporate managers can deliver it, they can pay themselves what they like--with long-term success of the business a secondary consideration.
That’s one reason “the great mass of pension funds have no interest in the SEC ruling,” says Michael Clowes, editor of Pensions and Investments magazine.
But those skewed priorities also explain why executive pay levels continue to rise more than 10% a year, even as overall employee compensation stagnates or declines. And why, with U.S. living standards in retreat, there are a public outcry and SEC action.
The distortions are piling up. “The present situation, with interlocking boards of directors setting executive compensation, leads to a less than efficient form of management,” says Dennis Tito, president of Wilshire Associates, a pension fund investment and research firm.
In the much-lamented automobile industry, big money led to timidity. In the mid-1980s, when profits were at a peak for U.S. auto makers, all turned cautious. They curbed expansion and played to tie rather than win because doing otherwise “would have meant taking on staff, raising new money,” says a top auto exec today.
Instead, the cautious approach preserved peak profits and stock prices, which yielded millions in stock gains for executives--although it has left U.S. auto makers still behind the leading Japanese companies rather than caught up or ahead.
Similarly, in foreign markets U.S. investment is lagging because American executives who make double the pay of Japanese bosses and half again as much as German top brass have become risk averse.
Mere greed is evident. Stephen Wolf, chairman of UAL Inc.--the holding company of United Air Lines--is paid 1,200 times the pay of a flight attendant.
At once-great IBM, anger and bad form have replaced team spirit. Chairman John Akers hauls down $3 million a year and yet loudly blames employees for the company’s troubles as market share slips, the stock price declines and older workers are coerced into early retirement.
Yet hope and change can come easily, says Wilshire Associates’ Tito, if pension funds take an active ownership position. They could extend the holding period on stock options to encourage executives to think about long-term success and the priorities of the whole company, not only those of top people.
A noted private company succeeds by doing that. Bechtel, the great engineering firm, has made hundreds of executives rich--including one-time Secretary of State George Schultz and Defense Secretary Caspar Weinberger--with private stock that can only be sold back to the company. If Bechtel prospers, so do the executives.
The idea is not new. It goes back to the original intent of stock options, as devised by Pierre S. duPont for the chemical company bearing his name, and for General Motors, which duPont rescued in 1920. That intent: “To align the interests of the managers with those of the owners.”
Today Robert H. Campbell, president of Philadelphia’s Sun Co., the oil refining and marketing firm, uses duPont’s very words in ruling that during these hard times that management pay raises will come in Sun stock and that optioned stock must be held for 10 years. “Our goal is to make sure a manager’s personal finances are closely tied to how well our shareholders are doing,” Campbell wrote to stockholders.
Meanwhile, a modern shareholder-rights reformer, RoberG. Monks--one-time head of the pension section in the U.S. Department of Labor--is raising $1 billion for an investment fund that will take active ownership positions to encourage long-term policies.
If winter comes, can spring be far behind? There are signs that American companies, having strayed from the right path, are looking to get back on track. And the SEC suggests it would be a good idea if shareholders gave them a push.
