It's time for boards to crack down on CEO pay

By DAVID LAZARUS

May 24, 2009 12 AM PT

The touchy subject of executive pay was in the news again last week as Sen. Charles E. Schumer (D-N.Y.) introduced legislation that would give shareholders more sway over how much the CEO takes home.

Also, this paper is reporting today that it’s still swell to be the boss, especially here in the Golden State. All but three of California’s 10 highest-paid chief executives pocketed mega-raises last year, raising their average total compensation to -- hold on to your hat -- $32 million.

So I decided to hit the streets of Los Angeles the other day to ask whether it was fair that CEOs and other senior executives make piles of money, while the rest of us settle for table scraps.

Can you believe it? Not one person I encountered said this was a good idea.

“If you work hard, you should be compensated,” said L.A. resident Winter McDaniel, 29, who works for a company that helps misdemeanor offenders avoid prosecution. “But just because you hold a certain title, you shouldn’t be guaranteed millions and millions of dollars.”

OK, OK: People have been carping about executive pay for years. But things might be different now, with a new administration in power and a clear intent from lawmakers to clean the country’s financial house.

The real question is whether corporate board members, who are themselves very well compensated for their labors, will take up the challenge by showing CEOs a little tough love.

“Top management makes a whole lot more than rank-and-file workers,” said Camelia Kuhnen, an assistant professor of finance at Northwestern University’s Kellogg School of Management. “But there’s a real question whether that represents fair pay.”

It all comes down to how much value the guy (or, infrequently, the gal) in the corner office brings to a company.

Steve Jobs. Now there’s someone most of us can agree brings genuine value to Apple Inc., whether it’s because he’s the one coming up with cool stuff like the iPhone or because he fosters such innovation in others.

Jobs received a salary of just $1 last year, as he has annually for the last decade. Granted, he already owns millions of Apple and Walt Disney Co. shares and is estimated by Forbes magazine to be worth $3.4 billion. Even so -- a bargain, pay-wise.

Compare Jobs’ compensation with that of Citigroup Inc. CEO Vikram Pandit, whose pay package for 2008 was valued at $38.2 million. During that time, he presided over four consecutive quarters of multibillion-dollar losses and received $45 billion in bailout cash from taxpayers.

Not to worry, though. After pocketing the $38.2 million, Pandit said he’d follow Jobs’ lead and receive only $1 in salary until Citi returns to profitability.

Proponents of sky-high CEO pay say the fat compensation packages merely reflect the realities of the market. There aren’t that many people who can run big companies, the argument goes, so they deserve the rock-star treatment.

That may be true. But Northwestern’s Kuhnen said no one had come up with an accurate way of measuring the true value that a CEO brings to a business. Some may deserve credit for a company’s success. Others may be standing atop the accomplishments of others.

“They’re not all coming up with iPhones,” Kuhnen said.

That’s why it’s time that boards finally crack down on this ridiculous drain on shareholder wealth and limited total compensation -- salary and stock options -- to, let’s say, $1 million annually, which should be more than enough for any executive to live comfortably.

Generous bonuses could be tacked onto this amount but based only on the attainment of clear performance goals, such as increases in a company’s net income or market share.

Meanwhile, it’s time to spread the wealth and recognize that a company is the sum of its parts, not the reflection of a single manager’s efforts.

Yes, CEOs of publicly held companies should get bonuses for a job well done -- and so should rank-and-file workers. Profit sharing is the key to maintaining a motivated workforce.

No less important, if it’s determined that giving the boss an ownership stake through stock grants or options is necessary to “incentivize” him to work harder, the same should apply to everyone else.

Even just a handful of shares could prompt the lowest workers on the corporate totem pole to step up their game.

“It would give you a sense of purpose,” said Long Beach resident Troy Moore, 30, whom I met as he delivered bottled water to a downtown office building. “You’d be working for yourself, rather than just for the company.”

The average CEO of a publicly held U.S. company was paid 344 times the pay of the average U.S. worker last year, according to a report by United for a Fair Economy and the Institute for Policy Studies.

By contrast, the average Japanese CEO makes only about 10 to 15 times what ordinary workers make.

Manhattan Beach resident Brian Hembacher, a 57-year-old attorney, said that what was good enough for the Japanese in this regard should be good enough for us.

“Everybody in a position of responsibility deserves to be paid more,” he said, “but not by the order of magnitude in this country.”

Hold it. Hembacher’s a lawyer and makes more per hour than most of us could ever imagine pulling down. Is he saying that he’s paid too much?

“No,” Hembacher replied with a sheepish grin. “The line falls right below me.”

CEO material. Right there.

David Lazarus’ column runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.