EXECUTIVE EXCESS 1997
CEOs Gain from Massive Downsizing
Fourth Annual Executive
Compensation Survey
May, 1997
Excerpts from this
report are available below. To order a complete copy, send $5 plus $1.50
shipping and handling to:
Executive Compensation
Report
United for a Fair Economy
29 Winter Place 2nd Floor
Boston, MA 02108
Executive
Summary | Efforts to Close the Wage Gap |
Corporate Self-Regulation | Government Policy
| Investor Activism
Executive
Summary
In 1996, 30
firms announced U.S. layoffs of between 2,800 and 48,640 workers. Our
analysis of these leading job-cutters reveals that their top executives,
for the most part, were handsomely rewarded for wielding the axe.
MAJOR FINDINGS:
1. Layoff Leaders
Get Massive Compensation Hike
In 1996, the layoff leaders enjoyed an average increase in total
direct compensation (including salary, bonus, and long-term compensation)
of 67.3 percent--far above the average increase of 54 percent for
executives at the top 365 U.S. firms. Most of the job-cutters' increased
earnings came in the form of gains from stock options, reflecting the
continued trend on Wall Street to reward downsizers. In salary and bonuses,
the layoff leaders received a 22 percent raise, which placed them far
ahead of the average U.S. worker, who earned only a 3 percent raise in
wages in 1996.
2. Enormous
Wage Gap at Job-Cutting Firms
Of the 12 top job-cutting companies for which data were available,
the average gap between the top executive's salary and bonus (not including
stock options) and the wage of the lowest-paid full-time worker was 178
to 1.
3. Efforts
to Control Excessive Pay are Gaining Strength
A national coalition of community, labor, and business organizations
is working to eliminate the massive loophole that presently allows corporations
to deduct excessive salaries from their taxes. One proposed law, the Income
Equity Act (H.R. 687), would prohibit corporate tax deductions on salary
and bonuses that exceed 25 times the wage of a firm's lowest-paid full-time
worker. This "CEO Subsidy" costs U.S. taxpayers billions. Capping
the deduction for only the top two executives at the 365 U.S. firms surveyed
in Business Week would generate over $514 million in increased
revenue.
Executive
Summary | Efforts to Close the Wage Gap |
Corporate Self-Regulation | Government Policy
| Investor Activism
Efforts
to Close the Wage Gap
Corporate spokespersons
are quick to argue that multi-million dollar compensation packages are
good for business because they give top brass incentives to perform. Yet,
at what point does the widening canyon between the rich and everybody
else become so large that our social fabric starts to fray?
A growing number
of business leaders are expressing alarm. Abraham Zaleznik, a retired
Harvard Business School professor who heads or serves on compensation
committees for four companies told The Wall Street Journal, "There
is unease and disquiet and a sense of concern [about] when enough is enough.
At some level, pay levels are obscene." (1)
It is interesting
to note that other industrialized nations have significantly smaller income
gaps between top and bottom, even though they are operating in the same
global economy as the United States. Most European and Asian nations manage
to hold pay ratios between top and average workers to less than 30 to
one. (2)
This section
describes an array of public and private policies that have been proposed
to close the gap between top executives and those who work for them.
Executive
Summary | Efforts to Close the Wage Gap |
Corporate Self-Regulation | Government Policy
| Investor Activism
Corporate
Self-Regulation
Some U.S. companies
do maintain a much smaller gap between workers and top executives. Since
1984, the Herman Miller Company, a Michigan-based office furniture maker,
has limited top management salaries and bonuses to 20 times the average
paycheck in the firm. The company's retired CEO Richard Rueh told The
Wall Street Journal that "the way the CEO gets more compensation
is if he can raise the average workers up. From a fairness standpoint,
it seems like a good idea."
Herman Miller
adopted a narrow pay ratio policy, says Board Chairman Max DePree, after
consulting with Peter Drucker, possibly America's most distinguished management
guru. A smaller compensation differential, Drucker advised, would strengthen
the company's team culture and productivity.
"People
have to think about the common good," notes Herman Miller's DePree.
"Our CEO and senior officers make good competitive salaries when
the performance is there." (3)
The Salem, MA-based
Harbor Sweets Candy Company employs 140 workers at peak season and maintains
a pay ratio of less than ten to one. CEO Ben Strohecker believes that
Corporate America's widening pay gap is "folly" and "counterproductive."
(4)
Executive
Summary | Efforts to Close the Wage Gap |
Corporate Self-Regulation | Government Policy
| Investor Activism
Government
Policy
Explosive CEO
salaries not only tear at the foundation of the social contract between
corporations and labor but actually cost taxpayers millions of dollars
in lost tax revenue. Should government do anything to encourage more companies
to take the Herman Miller and Harbor Sweets approach to compensation?
1. Capping Deductible
Pay
Most corporate
leaders reject any government regulation of CEO pay as interference in
the free market. Actually, government is already involved in CEO pay--through
the U.S. corporate tax code. The tax code currently allows businesses
to deduct only "a reasonable allowance for salaries or other compensation."
But there is a catch. The tax code does not define "reasonable."
So companies can--and do--routinely deduct the entirety of executive pay
packages that grotesquely exceed the salaries of other employees.
In 1993, Congress
attempted to cap the deductibility of executive pay to a maximum of $1
million. But the law applied only to the five highest-paid executives
in public firms and only capped non-performance based salaries. In response
to this massive loophole, many corporations passed resolutions making
all compensation performance-based and shifted much of their top executive
pay from base salary to stock options and bonuses linked to performance.
The result?
Ordinary taxpayers continue to provide Corporate America with a generous
"CEO Subsidy." Corporations are paying less in taxes than they
should, and regular taxpayers are picking up the slack.
What can be
done about it? One fair-minded proposal comes from Minnesota Congressman
Martin Sabo, who recently filed legislation that clearly defines a reasonable
deduction. Representative Sabo's Income Equity Act (H.R. 687) would deny
corporations tax deductions for executive compensation that exceeds 25
times the pay of a firm's lowest-paid full-time worker. A Senate version
will be introduced later in the year.
If enacted,
such a law could generate many billions of dollars in increased federal
revenues. Using 1996 data, IPS and United for a Fair Economy calculated
that the 365 U.S. firms listed in the Business Week salary survey would
pay an extra $514 million in increased income taxes if the deduction
was reformed in a way that capped the deductibility of the salary and
bonus of just their top two executives. (5)
If Representative
Sabo's bill passed, no longer would ordinary taxpayers subsidize gargantuan
executive salaries. Corporations seeking to reduce their tax liability
would either have to reduce top salaries or lift pay at the bottom. "The
polarization of income is bad for business and bad for the social fabric
of society," says Representative Sabo. "Our hope is that the
Income Equity Act will send a message that those who work on the factory
floor are as important to a company's success as those who work in the
executive suite."
2. Raise the Federal
Minimum Wage
The U.S. minimum
wage is still not a living wage. Though the minimum wage was raised in
1996, it still lags far behind the wages required to lift a family out
of poverty.
Several new
minimum wage proposals have been introduced in Congress. The proposal
that comes closest to closing the wage gap is that of Massachusetts Congressman
John Olver. Representative Olver's bill (H.R. 685) would raise the minimum
wage fifty cents each year starting in 1998 until it hit $6.50 an hour
in the year 2000.
3. Local Living
Wage and Corporate Accountability Ordinances
At the state
and local level, living wage and corporate accountability campaigns have
emerged as a new way to raise the wages of low-income workers. Living
wage ordinances require companies that receive public tax subsidies, abatements,
and contracts to pay a living wage to their workers. A living wage is
calculated as the amount it would take to lift a family of four over the
poverty line (currently around $7.50 an hour).
Some campaigns
are beginning to look beyond simply lifting the wage floor to tackling
the widening gap between top and bottom workers. Some variations of living
wage and wage ratio ordinances include:
A state version
of the Income Equity Act that limits the amount of salary expenses
corporations can deduct on their state taxes to that of 25 times the minimum
wage. These proposals are being debated in Massachusetts and Rhode Island.
Ordinances
that flatly deny public subsidies, abatements, and contracts to any private
company that has an excessive ratio between top and bottom workers (e.g.,
over 150 to 1).
A two-tier corporate
tax rate that builds in criteria to reward responsible firms with
lower taxes. A lower tax rate would apply to firms that retain jobs in
the community, maintain a relatively small ratio between highest and lowest
paid workers, pay a living wage and are generally good corporate citizens.
Such an ordinance has been introduced in the Connecticut state legislature.
Executive
Summary | Efforts to Close the Wage Gap |
Corporate Self-Regulation | Government Policy
| Investor Activism
Investor
Activism
1. Shareholder
Resolutions
Shareholder
resolutions have become the major way that investors are able to express
their growing dissatisfaction with bloated executive pay packages.
According to
the Investor Responsibility Research Center, in 1995, there were 40 shareholder
resolutions addressing executive compensation. In 1996, the number jumped
to 63. As of April there have already been over 112 shareholder resolutions
introduced on the issue in 1997. (6)
U.S. Trust Company
of Boston and the Women's Division of the United Methodist Church are
sponsoring a 1997 shareholder resolution at AT&T that asks the AT&T
Board to consider placing a cap on executive pay and freezing compensation
levels during downsizings. This was prompted when AT&T CEO Robert
E. Allen received $10 million in options after announcing a restructuring
plan to cut over 40,000 jobs.
Investors in
TIAA-CREF, the world's largest private pension fund, introduced and unsuccessfully
pushed a resolution in 1996 that would have prohibited the firm from investing
in companies that pay their top executives more than 150 times the median
annual wage in the nation.
This year has
already seen the introduction of a shareholder proposal by the International
Brotherhood of Teamsters seeking to eliminate a form of deferred compensation
for General Electric's chairman and CEO John F. Welch. The proposal calls
for placing a $1 million limit on base salaries for GE's five top executives
unless shareholders approve performance criteria. "This is important
to preserve and promote shareholder prerogative over how much we compensate
top executives," said Bart Naylor, Director of Corporate Affairs
for the Teamsters.
2. Socially Responsible
Investing
Excessive executive
pay is becoming a concern among some socially responsible investors. Several
socially responsible investment firms that have focused on corporate environmental,
human rights, and fair labor practices are now designing criteria to avoid
investing in firms with excessive pay ratios.
Nikki Daruwala,
a Social Research Analyst at the Washington, DC-based Calvert Group, a
socially responsible investment organization, said, "[Executive compensation]
is one of the main economic justice issues of our time. We are trying
to play on our strength as a socially responsible investor to move companies
forward to do better."
Conclusion
The pay gap
issue will not go away until effective action is taken. Unfortunately,
corporations have shown for the most part that they are unwilling or unable
to regulate themselves. The American public, for its part, feels that
both corporate downsizing and executive salaries are excessive. Recent
polling by the Preamble Center for Public Policy in Washington, DC revealed
that 70 percent of the population believes that recent trends in corporate
behavior--downsizing, outsourcing, CEO pay, etc.--are motivated by greed
rather than the quest for competitiveness. By the same 70 percent margin,
those same Americans favored government action to promote more responsible
corporate behavior. (7) Americans want to ensure that the rising tide
lifts all the boats, not just the yachts.
Notes
1. "A Report
On Executive Pay, "Wall Street Journal, April 10, 1997, p. R1.
2. Graef Crystal, In Search of Excess: The Overcompensation of American
Executives (New York: W.W. Norton, 1991).
3. "Corporate Governance Background Report F: Executive and
Director Compensation 1994," Investor Responsibility Research Center,
p. F-47.
4. Interview by Chuck Collins, April 10, 1997.
5. Institute for Policy Studies, with assistance from Ralph Estes,
of American University. Methodology: $11,440 (typical lowest wage for
workers) X 25 =$286,000 (amount above which corporations could not claim
a deduction under the proposed law). $2.3 million (average executive salary
and bonus for top two executives at the 365 companies included in the
Business Week survey) - $286,000 = $2,014,000 (unallowable corporate deduction)
X 35 percent (maximum corporate tax rate) = $704,900 (taxpayer savings
per executive) X 365 companies X 2 executives = $514,577,000 in total
taxpayer savings.
6. "An Embarrassment of Riches?" Business Week, April
21, 1997, p. 64.
7. Guy Molyneux, Peter D. Hart Research, and Ethel Klein, EDK Associates
for the Preamble Center for Public Policy, "Corporate Irresponsibility:
There Ought To Be Some Laws," July 29, 1996, pp. 2-3.
|
