The public is giving the government little credit in opinion polls for trying to stamp out corporate corruption, partly because chief executives, even those implicated in scandals, continue to rake in huge pay packages and perks.
Despite indictments of top executives at Tyco, Enron, WorldCom and other high-profile companies, polls show voters still hold corporate America in low esteem and do not believe justice has been served.
The issue has been feeding into the elections in a way that favors the presumptive Democratic nominee, Sen. John Kerry, who says he wants to roll back President Bush’s “tax cuts for the rich” and restore higher tax rates for top income-earners as well as for stock gains.
“The anticorporate message does well” in voter polls, said Democracy Corps pollster Stan Greenberg, with as many as 80 percent of voters surveyed saying they are more likely to support Mr. Kerry of Massachusetts because of his platform against “corporate greed and excesses.”
Securities and Exchange Commission Chairman William H. Donaldson, a Bush appointee who has received high marks for aggressively pursuing corporate fraud, recently said he has been struggling with the pervasive public skepticism.
He noted hundreds of enforcement actions and new regulations put out by the agency since the Enron scandal erupted in December 2001.
“For all the progress, this has yet to engender much good will among the general public,” he said, blaming the excessive pay of chief executives, which he said now averages about 400 times the earnings of hourly workers in the United States.
According to data compiled by Business Week, the AFL-CIO and other groups, executive pay ballooned particularly during the late 1990s when the stock market boomed and compensation increasingly was granted in the form of stock options.
Before the widespread use of stock options, CEOs earned about 40 times the pay of average workers in 1980 and 85 times ordinary workers in 1990.
The rationale for the escalating pay during the 1990s was that the executives had earned it because their outstanding management had led to increased earnings and soaring stock prices.
However, since the stock market bust of 2000, many Wall Street analysts have questioned whether the higher stock prices were because of deft management by executives or a herd mentality that led to the overvaluation of most company stocks.
In addition, the revelations since Enron’s collapse have shown the executives’ manipulation of earnings in many cases were fraudulent or questionable and short-sighted at best.
Stocks fall, CEO pay dips
Whatever the original justification, executive pay did not follow the stock market down after the bust in March 2000.
While major stock indexes fell as much as 80 percent and remain far below their March 2000 highs, executive pay declined about 20 percent from a high of more than 500 times the average worker’s earnings in 2000 to 400 in the past two years.
Moreover, executive pay appears to be back on its sharp upward trajectory, thanks to the revival of the stock market. The value of unexercised CEO stock options skyrocketed by 53 percent last year to a median value of $8.3 million, according to Watson Wyatt Worldwide, an executive consulting firm.
When added to an average 8.3 percent increase in base pay to $818,000, and an average 13 percent jump in bonuses to more than $1 million, total CEO compensation last year climbed well to over $10 million on average, according to preliminary Watson estimates.
Even when the drubbing in the stock market rendered many executives’ stock options worthless during 2002, corporate boards made up for it by lavishing a 42 percent average increase in cash compensation on high-performing CEOs, Watson said.
By contrast, the heads of the worst-performing companies, where stocks lost billions of dollars in value, saw their cash pay cut by 7 percent on average, the firm said.
Although stock options are increasing in value again, analysts say their heyday may be nearing an end as a result of plans by federal rule-makers to require companies for the first time to deduct options as expenses from company earnings.
Options lose favor
The new rules make granting executives stock options a more costly and unattractive option for boards of directors. But instead of reducing executive pay accordingly, many boards are choosing to simply replace stock options with equally lucrative grants of restricted stock.
Even companies caught up in scandals continue to reward their CEOs well. Janus Capital Group Inc., a top mutual-fund company where trading abuses last year cost shareholders billions of dollars in value, announced April 9 that Chief Executive Mark Whiston received a $3.4 million bonus on top of his $600,000 salary for the year.
With executives prospering through bad times and good, it is little wonder that the public thinks that the heady days of lavish pay and corporate profligacy never ended, although most executives have adopted a lower public profile and now profess a strict adherence to ethical codes and full disclosure.
L. Dennis Kozlowski, the chief executive of Tyco who received at least a temporary reprieve April 2 when a mistrial was declared after a six-month courtroom drama, in many ways epitomizes what the public sees as the problem.
In his final year as head of the Tyco conglomerate in 2002, he was one of the 10 top-paid executives in America, receiving $81.2 million in cash and stock compensation — only a little less than the top-paid executive, Steven Jobs, who took in $90 million as chief of Apple Computer that year, according to the AFL-CIO.
But as was revealed in vivid detail during Mr. Kozlowski’s trial in New York, such stupendous pay was not enough. He and Chief Financial Officer Mark Swartz were accused of looting the company of further millions to support a lifestyle that was ostentatious even in an era of extravagance.
Jurors interviewed after the mistrial ruling said they were close to convicting the Tyco executives on several counts of theft and fraud. Still, taxpayers face the expense of bringing them to trial a second time.
The Grasso case
Another source of public disillusionment comes from what some say is the poster child of excessive pay. Former New York Stock Exchange Chairman Richard Grasso received an unprecedented $188 million pay package, including accrued benefits and deferred compensation, which caused his resignation under pressure when it was revealed last year.
Mr. Grasso’s enormous pay was approved by a board of directors that has been largely replaced in the wake of the scandal. Mr. Grasso offered to forgo $48 million of the payout, but the new board this year demanded that he return at least $120 million. Mr. Grasso is refusing, citing his contractual rights.
The Grasso matter is under investigation by the SEC and New York Attorney General Eliot Spitzer, and the stock exchange is considering legal action. But legal experts say it will be difficult for them to make a case for forfeiture that will stand up in the courts.
Despite a tightening of federal securities law in the wake of the Enron scandal, legal experts point out that little can be done under current law to counter what the public sees as excessive compensation.
CEO salaries are established not by law, but by corporate boards that in the past were largely run by the CEOs themselves, and in recent years have been engulfed in a “race to the top” in their efforts to attract top executive talent and bolster stock prices.
Because the boards ultimately are accountable to stockholders, CEO pay tends to be closely tied to the performance of a company’s stock. But Watson Wyatt surveys show that the CEOs of even the poorest-performing companies still get raises or, at worst, small pay cuts while stockholders lose billions of dollars in value.
Exception or rule?
Although some progress has been made in ensuring that boards are more independent — the SEC is requiring, among other measures, that boards now include independent members not chosen by corporate management — most boards continue to ratify big increases in executive pay every year.
The NYSE’s new CEO, John A. Thain, defended the boards of the 2,600 companies listed on the exchange and said he believes most executives today are fairly paid, despite the stock exchange’s own struggle over Mr. Grasso’s pay.
“There have been cases of egregious CEO compensation,” Mr. Thain said, but “it’s the exception rather than the rule.”
Although the stock exchange’s board had no difficulty concluding that Mr. Grasso’s pay was excessive, Mr. Thain said there is no simple way for a board to determine how best to pay executives. He rejected efforts to limit a CEO’s pay to, say, 100 times that of an average worker, as has been proposed at a few corporations.
Mr. Thain said boards must be free to set pay at the levels needed to attract and keep top-caliber executives who will boost their companies’ stock values, even if that means the explosion of executive salaries continues.
Mr. Donaldson said that, while corporate boards must be empowered to make independent and sound judgments, they also must be trusted to do the right thing.
“Some have said the government should rein in the high pay of CEOs,” he said. “I don’t agree. I would, however, like to see company boards show greater discipline and judgment in awarding pay packages that are linked to long-term performance.”
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