Those Million-Dollar Salaries

By Stephen Koepp

Some hefty pay hikes open a controversy about executive compensation

The bountiful pay raises that top executives served themselves this year are in some cases turning into bitter fruit. Critics ranging from union leaders to management experts are assailing the increases as an affront to workers and a potential threat to the economy. Last week the attacks mounted. "A scandal and an outrage!" charged United Auto Workers Vice President Marc Stepp. "When I saw those numbers, I was stunned." Management Guru Peter Drucker, writing in the Wall Street Journal, called for voluntary curbs on top-executive paychecks, maintaining that if companies do not control themselves Congress will set up restrictions. The Democracy Project, a New York City think tank headed by former Naderite Mark Green, released a study criticizing "excessive" executive salaries.

Many experts believe that lavish raises for corporate higher-ups will hurt the U.S. economy. Big executive paychecks, they fear, could spark an upsurge in inflation because rank-and-file workers and union leaders can use them to justify higher wage demands. Moreover, higher wages would make the U.S. even less competitive with foreign producers than it is at present.

The issue is emerging now because executive pay, which is usually disclosed in the spring just before corporate annual meetings, is moving up again. During the recession, corporate raises slowed to a creep. But now that many companies have returned to profitability, big corporate raises are back. In fact, some of these are pushing executive incomes over the million-dollar summit. But, of course, it is difficult to make meaningful generalizations about salary levels for all U.S. corporations.

The epicenter of the protest is Detroit. At Ford, Chairman Philip Caldwell took in $1.4 million in salary and bonuses last year, compared with $445,833 in 1982. General Motors Chairman Roger B. Smith became the first official in GM history to top $1 million, receiving $1,058,000. In addition, the company paid 5,807 executives bonuses that averaged $31,289. Those gains are expected to prompt U.A.W. employees at Ford and GM to seek large increases when new contract talks begin in July. Says U.A.W. President Owen Bieber: "If these executives who are providing so well for themselves think for one minute that they can convince workers to do without an up-front raise this summer, they'd better think again."

The automakers are by no means alone in receiving increasingly generous raises. Sibson & Co., a New Jersey-based consulting firm that monitors executive compensation, estimates that the chief executive officers of leading American industrial companies will average a 12.5% gain in salary and bonuses during 1984, a rise far outpacing the expected inflation rate of 5%.

Executives can argue that they have some catching up to do. After an adjustment for inflation, for example, the current GM chairman's $1 million salary is actually worth far less than the $925,000 earned by GM Chairman Frederic Donner in 1965. Says Sibson Senior Consultant Alan Johnson: "The average person's pay has at least doubled in the last 20 years, which is a lot bigger than the pay raise of the chairman of GM." Indeed, at a conference on executive pay last week at the University of Rochester in New York, researchers vigorously defended hefty executive salaries as important incentives for management.

On top of these salaries and bonuses, companies increasingly give stock options as a sweetener in the boss's pay packet. William S. Anderson, who retired in April as chairman of NCR Corp., earned perhaps the highest executive income in the U.S. last year, $13.2 million, largely by exercising stock options he had acquired over a ten-year span.

The array of goodies at the top poses the hazard of a backlash among lower-echelon managers. The auto engineers at Ford, for example, traditionally the loyal core of the company, have lately taken to griping and restlessness. A major defense contractor, Drucker says, recently lost 20 prized engineers who had received only a 3% salary boost at a time when top management got a package of incentives totaling 30%. Says Drucker: "Resentment over top-management compensation is by no means confined to unions and rank-and-file employees."

Much of the animosity stems from the way in which top executives can virtually determine their own salaries. A chairman's pay is normally approved by the board of directors that he heads. Although compensation consultants generally determine whether the salary is competitive with those in similar businesses, directors usually go along with pay suggestions.

A chief criticism of executive pay is its frequent failure to correlate with company profits. Says Sibson's Johnson: "The madness we see in executive compensation is that we pay star performers too little and poor performers too much." In 1982, for instance, when Mobil earnings dropped 43%, the salary of Chairman Rawleigh Warner Jr. increased 36%, to nearly $1.4 million. The struggling International Harvester loaded rewards upon Chairman Archie McCardell in the late 1970s and early 1980s even though the company suffered a devastating strike and came close to bankruptcy. When McCardell finally left the ailing company in 1982, it gave him a $600,000 bonus.

Many top executives, of course, are worth every dollar they earn--and more. Says Lester Korn, chairman of the headhunting firm Korn/Ferry International: "The question isn't how high salaries are, but how misunderstood they are." Top managerial talent is a limited resource, and companies must pay competitive rates to attract and keep the most sought-after executives. Shareholders have little reason to complain about the salary of a million-dollar manager who boosts the profits of a billion-dollar company. Says Lawrence Klamon, who earned $429,000 last year as president of Atlanta's Fuqua Industries (1983 earnings: $41.6 million, up 113%): "The key criterion is the return to investors. In my view, we are not out of line. We have had a couple of excellent years."

Indeed, corporate pay can seem modest by comparison with what entertainers, athletes and TV personalities earn with their mass appeal. Former Beatle Paul McCartney croons to the tune of an estimated $45 million a year. NBC Anchorman Tom Brokaw makes a reported $2.2 million, almost three times as much as his boss, RCA Chairman Thornton Bradshaw. Running Back Herschel Walker gets $3.9 million over his three-year contract with the New Jersey Generals. Team officials point out that Walker easily earns his salary by boosting ticket sales.

Executives with their own kind of star quality can make a big difference in company performance. For instance, one of he highest-paid executives in the Silicon Valley is John Sculley, who earned $1.8 million last year in his first seven months as president of Apple Computer. When he arrived, Apple was a management disaster zone, with little coordination among products, warring factions and a rapidly declining market share. Sculley reorganized the company's product line and directed the marketing of two new computers, the Macintosh and the portable Apple He, which was launched last week. Says Chairman Steven Jobs of Sculley: "He's a bargain at the price."

Another argument supporting high pay is that it provides incentives for climbing the corporate ladder. Employees need to be rewarded for struggling up through the hierarchy. Companies as large as GM or Exxon have some 20 levels of management, and the side effect of creating salary differentials among those levels is to push executives at the top into very high compensation brackets.

Nonetheless, last year's high corporate pay stubs are leading to some radical proposals, including plans that would link executive salaries to those given blue-collar workers. A company chairman, for example, might be limited to 25 times the salary of the lowest-paid employee. But that type of simplistic mathematical solution is very far from the real world. The conditions for the pay of each chief executive are unique and based on such factors as performance, responsibility and the size of the company.

Still, corporations are taking some steps to put some order into the remuneration of top executives. More U.S. corporations are making executive pay depend upon the company's performance over several years, rather than just annual profits. That way, at least, they will avoid he embarrassment of rewarding poor performance. Firms like Sears, Roebuck and Borden link executive bonuses to high stock prices and dividends. At Sears, where first-quarter earnings increased 34%, to $214 million, Chairman Edward Telling posted a 1983 salary of $1.4 million, up 36%. A study by the Peat, Marwick, Mitchell accounting firm of the 1,000 biggest industrial companies shows 336 of them tying pay to steady performance gains, compared with just four firms in 1974.

In some corporations, the board of directors is getting tougher, and outside compensation committees are doing careful studies before making recommendations on bonuses or salaries. Says Peat, Marwick's Peter Chingos: "Chief executives are being asked to leave the room, if necessary, so that consultants can have a free and open exchange on pay matters." Nonetheless, a leading former investment banker argues that even more needs to be done. Says he: "Questions should be asked about compensation at all levels. Shareholders should insist that compensation committees be composed of outside directors free to make comparisons, use consultants and make independent judgments." If high-level executive salaries keep rising steeply, more people will be asking those million-dollar questions more loudly. --By Stephen Koepp Reported by Paul A. Witteman/Detroit and Adam Zagorin/New York

With reporting by Paul A. Witteman, Adam Zagorin