CHAPTER SIXTEEN
Overpaid Executives
The Greed Effect
EGALITARIANISM HAS NEVER HAD great appeal in this country except to a handful of intellectuals. Now, however, a few high incomes of a very few top corporate executives are becoming a national issue.
Executive compensation played Banquo’s ghost in the 1984 labor negotiations. It is not, of course, a “bargainable issue”; had it been brought up by the union, management would surely have declared it to be irrelevant and impermissible. Yet executive compensation was clearly the biggest obstacle to management’s attempts to limit wage and salary increases for the rank and file and thereby to prevent renewed inflation and improve their competitive position. There is too much resentment in union ranks over the fact that in many large companies—especially in smokestack industries—wage concessions and give-ups by unions during 1982 and 1983 were followed by substantial increases in the “total compensation package” of top executives. And wherever a top management during those years actually took compensation cuts, it has long since restored them, and usually with compound interest. If union leaders will not make that point, their members will.
Resentment over top-management compensation is by no means confined to unions and rank-and-file employees. It extends up into the ranks of professionals and managers. A large defense contractor, for instance, lost some twenty senior engineers and engineering managers in 1983—some of them men with twenty-five years of service in the company. Each quit for the same reason. Said one: “While our salary increases last year were held to 3 percent with the argument that any more would be inflationary, the nine people in the top management group voted themselves bonuses and additional stock options amounting to a 25-percent to 30-percent increase in their compensation—and that’s simply dishonest.” Needless to say, none of these men is antibusiness or even mildly liberal.
Resentment against this perceived greed and abuse of power in high places will likely be expressed in future tax bills: by raising the maximum tax rate on high incomes, for instance; by boosting capital-gains taxes, or by penalizing stock options given to executives. Indeed an old proposal—forgotten these past thirty or forty years—is being dusted off: to set a ceiling on the amount paid an executive in total compensation (salary, bonus, pension provision, health insurance, stock options, and so on) that is tax-deductible for the employing company.
Everyone knows, of course, that such measures will not produce one penny of added revenue; on the contrary, they will reduce it. Almost all proponents of these measures would also agree that they are likely to harm the economy. But they would argue that not to limit or to penalize excessive executive compensation would do even more harm, by provoking inflationary wage demands and by creating divisive class conflict. And this attitude is not confined to so-called enemies of business. The most ardent proponent of a ceiling on the tax deductibility of executive compensation at a recent management seminar was the conservative tax counsel of one of the nation’s largest businesses.
Top managers, and especially those in big companies, will argue that attacks on executive compensation as “excessive” are totally groundless. Executive compensation, they will note, has been declining in the United States in the past thirty years, both if adjusted for inflation and if compared with the total compensation package of the rank and file, where wages and especially benefits have been going up twice as fast as inflation. Indeed, up to fairly high levels in the big companies—just below division general manager, as a rule—managerial compensation is way down by any historical yardstick. Middle-management people such as engineering supervisors or plant superintendents used to make after taxes about three times what rank-and-file blue-collar employees got. With the total compensation package for blue-collar workers in the unionized mass-production industries such as steel or automobiles running close to $50,000 a year these days—or about $43,000 a year after taxes, because more than half the blue-collar employee’s compensation package is either tax-free or tax-deferred, such as payments into the pension fund—many middle managers today receive barely more than blue-collar workers. Up to fairly high management levels, the income distribution in business has become extremely egalitarian, perhaps too much so.
But the real issue is not aggregate “executive compensation.” It is the compensation of a tiny group—no more than one thousand people—at the very top of a very small number of giant companies. Statistically this group is totally insignificant, to be sure. But its members are highly visible. And they offend the sense of justice of many, indeed of the majority of management people themselves. And they are seen as the embodiment of the ethics and values of American business and management.
Few people—and probably no one outside the executive suite—sees much reason for these very large executive compensations. There is little correlation between them and company performance. Our toughest competitors, the Japanese, pay their top executives far less than we pay ours: about a quarter of our top- management salaries and rarely more than eight times what they pay blue-collar workers. Yet their companies aren’t doing too badly. Even in the United States, one finds glaring incongruities within the same industry: companies that pay much more than $1 million to their top man and yet do quite poorly, side by side with companies that pay barely half that and yet do much better.
Indeed, the only correlation we have goes the other way: J. P. Morgan’s finding of eighty years ago that the only thing the businesses that were clients of J. P. Morgan & Co. and did poorly had in common was that each company’s top executive was paid more than 130 percent of the compensation of the people in the next echelon and these, in turn, more than 130 percent of the compensation of the people in the echelon just below them, and so on down the line. Very high salaries at the top, concluded Morgan—who was hardly contemptuous of big money or an “anticapitalist”—disrupt the team. They make even high-ranking people in the company see their own top management as adversaries rather than as colleagues—such as the defense contractor mentioned previously. And that quenches any willingness to say “we” and to exert oneself except in one’s own immediate self-interest.
One solution might be to establish a visible link between executive compensation and employee welfare. In the smokestack industries especially, managements are now trying to establish such a link between employee welfare and company performance through employee stock ownership or profit participation. One complement to this might be to link executive bonuses at the top and employment security. This has obvious drawbacks, of course. It rewards top management for keeping employment—and with it costs—high. But at least it would prevent what employees resent the most: top people getting big increases in the very year in which a company slashes blue-collar and clerical payrolls.
A simpler way would be a voluntary limitation on the total after-tax compensation package paid any employee—including the chief executive officer—to a preset multiple of the after-tax total compensation package of the rank and file. The actual effect of such a measure would be minimal; in most companies it would be nil. But the psychological impact would be considerable. If the multiple were, for example, set at 20, resulting in a maximum of $850,000 or so for top people, it would affect only some 500 executives in all of American business. If the multiple were set at 15—with a resulting maximum after-tax take of about $650,000 today—about 1,000 people would be affected. Such multiples would be eminently acceptable and would be much lower than what, according to a good many surveys, wage earners think top executives make—“50 times what I get” is the most common guess.
“But in the biggest companies,” top-management people will say, “the very large executive compensation is needed because in our culture rank has to be expressed through income. Every level of management has to make more than the level just below it—and if you are General Motors or Exxon or U.S. Steel, you have twenty levels of management so that the top man ends up at $1 million-plus if the blue-collar worker is to get $50,000 a year. Anyhow, these high incomes are largely symbolic: Uncle Sam takes a very hefty slice out of them.” Hierarchy is indeed the one logical explanation of top-management incomes other than plain greed. But if it is true that these large compensation packages for top people in the very big companies are badges of rank rather than “real money” (something no rank-and-file employee will ever agree with), then why not treat them as symbols? To the extent, for instance, to which the chairman and chief executive of Universal International must get more than a certain multiple of rank-and-file compensation, why not have the company give the excess in the form of a charitable contribution in his name to a beneficiary of his choosing?
There are undoubtedly other—and perhaps better—ways to balance the need for top-management compensation that is high enough to provide incentives and reward performance with the need for an equitable relationship between top-management compensation and the pay of the company’s other employees. And some answers will be worked out within the next few years—unions and politicians will see to it.
(1983)
1986 Note: By 1985 excessive executive compensation did then actually become an issue in wage negotiation. That the chairman of the Chrysler Corporation, Mr. Lee Iacocca, had paid himself a multi-million-dollar bonus in the same year in which he cut blue-collar wages by 30 percent was the union’s main reason for refusing to make any concessions on wages, benefits, and working conditions and for its imposing a contract on Chrysler with labor costs so high that they are likely to destroy the company should the American automobile market turn down for a few years.