But for the fact that Democrats are now drinking from the same campaign-finance trough as Republicans, the scandal of executive salaries would be a major issue in the 1992 campaign.
The scandal has been growing for years, of course, even before the Reagan-Bush greed decade. In 1960, the chief executive of one of America's 100 largest nonfinancial corporations earned, on average, $190,000, or about forty times the wages of his (rarely hour) average factory worker. After taxes, the chief executive earned twelve times the factory worker's wages. By 1990, the chief executive earned, on average, more than $2 million, not even including stock options that hadn't yet paid out -- a sum equal to ninety-five times the wage of his average factory worker. The regressive shift in the tax burden during the Reagan-Bush years has made the disparity even more absurd. After taxes, the 1990 chief executive's compensation was seventy times that of the average factory worker.
Now, after three years of bad economic news, with the American economy still mired in recession -- and ten million Americans unemployed and countless more too discouraged even to look for work -- what was simply absurd has become grotesque. As American corporations lay off platoons of workers, CEO salaries continue to balloon. And the Bush administration suggests no way out of the economic mess other than a capital-gains tax reduction, which will make CEOs even richer.
A few months ago, Time-Warner announced that it was laying off 600 of its employees, including nineteen correspondents of the conglomerate's flagship, Time magazine. Henry Luce used to pride himself on never laying off anyone; the institution he created was wealthy enough to recruit talented people and keep them for life. But the Time-Warner merger created a mountain of debt and has seriously crippled the company -- apparently requiring that the staff be cut. All this would be sad, but perhaps understandable, had Time-Warner's CEO, Steve Ross, not pocketed $74.9 million in bonuses last year, atop his salary of $3.3 million. The portion of taxes he paid on this tidy sum was far less than he would have paid before the Reagan-Bush years; a capital-gains tax reduction would give him even more to take home. Prior to the 1980s, it's doubtful that Time and Warner could have consummated their questionable deal to begin with.
Orthodox free-marketeers argue that if CEOs get this much money for their labors, they must be worth it. Film stars and winning athletes also earn huge sums of money. But there is no economic justification for recent astronomical CEO earnings. They are unrelated to company performance. Last year, CEO salaries rose by an average of 7 percent, but corporate profits dropped about the same amount.
Even the private sector has begun to complain. After last spring's annual publication of executive pay-hikes, Business Week called CEO compensation on this scale "dangerous." Fortune warned that it invited a political backlash. A few pension funds and major investors are asking embarrassing questions. One of America's most prominent compensation experts, Graef Crystal, who used to advise major companies on setting CEO salaries, recently quit the business and went public with his outrage in a new book (In Search of Excess, just published by Norton).
So if they're not adding that much value to the corporations they head, how do CEOs do it? Easy. They sit on one another's boards of directors, and, after sober deliberation, agree to give one another huge salaries, bonuses, and perquisites. It is rather like a group of monkeys sitting in a large circle with their backs to one another, scratching.
Foreign-owned corporations, most of which have outperformed American companies in recent years, pay their CEOs far more modestly. In 1990, according to a survey by the compensation specialists Towers, Perrin, Forster, & Crosby, the typical U.S. chief executive officer of a medium or large company (sales of at least $250 million) earned, on average, $543,000, in salary, bonus, and perquisites. This is at least 50 percent more than the earnings and perks of a Japanese executive ($352,000), and 90 percent more than the total compensation of German and British CEOs (averaging $287,000). Consider also that the American CEO's dollar goes further: The typical CEO can buy much more in America than a similarly paid executive in Japan or Germany.
The problem is not that American CEOs are draining corporate treasuries. Even absurdly high CEO salaries rarely constitute a significant percentage of the corporation's revenues. The problem is more subtle. The only way American companies can become as productive, flexible, and innovative as they need to be to meet global competition is with the total support and commitment of their work forces. But the widening gap between CEO compensation and the earnings of workers at the lower end is sapping morale and reducing commitment.
Several years ago I wrote a book about the Chrysler bailout. After interviewing hundreds of Chrysler managers and production workers, it became dear to me that the taxpayer's help wasn't the most important reason why Chrysler had survived the crisis: It was because everyone in the company -- from top to bottom -- had been willing to sacrifice something to keep the operation going, and get something in return if it survived. Shop-floor workers agreed to a big cut in wages, in return for a share in future profits (if there were any); Douglas Fraser, the president of the United Auto Workers (UAW), was put on Chrysler's board; Lee Iacocca agreed to take one dollar in compensation in 1981.
That was then. Now is now. By the mid-1980s, with Chrysler's health seemingly restored, the company terminated its profit-sharing agreement. The UAW no longer has a seat on the board. And Lee Iacocca isn't working for one dollar. In 1986, when Chrysler seemed to be out of the woods, Chairman Lee took home $20.5 million. Even last year, as Chrysler's earnings dropped and its market share continued to dwindle, and as Chrysler began laying off large numbers of its workers, Iacocca earned $4.8 million. (It should be noted that Nobuhiko Kawamoto earned $356,000 last year, including perks. Kawamoto, in case you didn't know, is the CEO of Honda, now America's third-largest automaker.) I've spoken with several of the Chrysler workers I interviewed in the early 1980s. They're angry. Every one of them has mentioned Iacocca's compensation.
What to do? For one thing, the managers of pension funds and other investment institutions could get more actively involved fighting this craziness. They may, but don't forget that these large institutions make money by moving in and out of large issues of stock very rapidly depending on where they think the market will go next. There is no reason for them to stop long enough to complain about how a specific company is being managed.
Here's another idea. In a long line of cases and rulings, the Internal Revenue Service has determined that any "excessive" or "unreasonable" compensation awarded by a company to one of its executives may not be deducted from the firm's taxable earnings -- because it is not a legitimate business expense but more like the payout of a dividend. Granted, the IRS hasn't pushed this concept very far. The last time it raised the issue was in the recent bankruptcy of Drexel, Burnham, where the IRS claimed that Drexel had wrongfully deducted from its taxable earnings millions of dollars that it had paid Michael Milken (including $600 million or so in 1986).
But, as lawyers say, there is at least something of a precedent. Why not a law? Any executive compensation (including the market value of stock options and bonuses) in excess of twenty times the earnings of the lowest-paid worker in the firm shall be deemed "unreasonable," and thus may not be deducted as a business expense.
A modest law, to be sure. It would not put an end to excessive executive compensation. But it might at least force the corporation to reconsider. More important, it would establish a benchmark -- a publicly accepted standard for executive compensation. Any executive whose compensation exceeded the benchmark, and any company that so rewarded its executive, would bear something of a burden of proof to justify the compensation -- not in a court of law, but in the court of public opinion.
Right now, there are no standards. There is no responsibility, just greed in executive suites and simmering resentment below. That's no way to build an economy.
