‘Fabulously Wealthy’ Is Now a Relative Term

‘The Thomas Crown Affair” was a slick summer heist movie in which the hero, a fabulously wealthy financier (worth billions) played by Pierce Brosnan, steals a $100-million painting, mostly just to prove he can do it. The movie is a remake of a 1968 Steve McQueen classic in which the hero, a fabulously wealthy financier (worth $4 million), pulls off a daring bank robbery, also just to prove he can do it. McQueen’s caper, however, grosses just $2.7 million, and that’s before he pays off his seven accomplices.

For all his swagger, it turns out that Brosnan’s “Thomas Crown Affair” is actually a bit of a laggard in the wealth-accumulation game: Adjusted for inflation, his 1999 haul is only about eight times bigger than McQueen’s. Most of his executive peers have done a lot better than that. According to Graef S. Crystal, chronicler of fat-cat pay packages, in the mid-1970s the average CEO made about 45 times as much as the average worker. Now CEOs average 450 times as much their workers.

Linda J. Wachner, for example, the CEO of the Warnaco Group, is one of Crystal’s favorite exhibits. She had a pay package worth more than $70 million last year, even though her company lost money. Warnaco is an underwear company, and it should be possible to find somebody to run it for a lot less than $70 million a year. For $2 million, say?

The piggishness record, however, could go to Michael Dell, whose total compensation package last year was valued at more than $1 billion. Dell Computer has done spectacularly well over the past few years, and Dell’s stock is already worth about $20 billion. Shareholders surely wish him every happiness, but does he need to take an extra billion out of their pockets to feel fully requited? Why can’t he behave like Microsoft’s Bill Gates and Amazon’s Jeff Bezos? Their stock holdings have made them extremely rich, so they draw modest salaries and keep their fingers out of the shareholder till. Would that more of their peers showed similar restraint.

There is a telling scene in “Bonfire of the Vanities,” Tom Wolfe’s 1988 sendup of high living on Wall Street. Sherman McCoy, a million-dollar-a-year bond trader, is in financial trouble and turns to his father for help. The senior McCoy, “the lion of Wall Street,” retired as head of one of New York’s top law firms. Sherman is shocked to discover his father is not rich. Sure, he sent his kids to good schools, has a great apartment in the city, a nice house at the beach and a good pension--but that’s all. McCoy senior, moreover, is disposed to think it’s quite enough.

The notion that business people should be very rich, as opposed to merely well-to-do, dates from the mid-1980s. In 1979, for instance, the president of Bache Securities, then a substantial Wall Street brokerage, was paid $150,000. The president of Chase Manhattan Bank got about $300,000. Million-dollar pay packets were rarities. What happened?

In the early 1980s, American businesses were just emerging from a decade-long penitential hell. Japanese and European companies had been eating our lunch in automobiles, consumer electronics and steel. Youthful baby boomers flooded the job market, driving down productivity. Inflation got out of control. Financial markets suffered a prolonged depression. The Dow Jones Industrial Average broke 1,000 in 1968--and didn’t reach that level again for almost 15 years. (No, Virginia, the stock market doesn’t always go up.)

But markets tend to overreact. By the early 1980s, U.S. companies were getting competitive, but stock prices relative to earnings were as low as at any time since the war. That’s why there was a leveraged buyout, or LBO, boom. Sharp operators could borrow money, buy up a company’s stock and make a fortune when stock prices caught up to reality. If LBO funds had just bought the S&P; 500 stock index with the same degree of leverage, they would have made as much money, or even more, but without all the fun of takeover battles.

Since Wall Street traditionally gets paid a percentage of the action, when stock- market prices finally corrected in the mid-1980s, the returns were gargantuan--remember the days of Michael R. Milken’s billion-dollar bonuses? Naturally, CEOs noticed how much their youthful legal and financial advisors were taking home, and demanded a piece of the action. By the 1990s, CEO pay packages had already pushed up to, and even beyond, Wall Street compensation standards.

In the more recent past, compensation has been increasingly tied to stock prices. Since most stock prices, even of mediocre companies, have been rising steadily for the past decade, CEO pay has soared right along with it. Disgracefully, as Crystal has documented, even when CEOs fail to meet stock-based compensation objectives, it is common for directors to scale back the performance targets so they still get their bonuses--a kind of affirmative action for the managerially challenged.

Not since the notorious Gilded Age have business compensation expectations been so high. In today’s prices, Cornelius Vanderbilt paid himself a fee of a quarter billion dollars for reorganizing New York’s railroads in the 1860s. J.P. Morgan’s firm got a $200 million fee for organizing U.S. Steel in 1901, and Andrew Carnegie was paid more than $5 billion for selling his company into the deal. Those are impressive numbers--especially since there was no income tax--but not staggeringly high by today’s standards. Yet, they named an era, and prompted a decades-long drive for reform.

Are there any prospects for muzzling executive piggishness today? The truthful answer is, not really, since CEOs sit on each others’ boards and set each others’ salaries. In a generally rising market, shareholders just don’t care enough about the gluttons eating out of their pockets. Attitudes will change eventually, but only when the market suffers through its next prolonged flameout--which will come as surely as old age.