NEW YORK, APR. 21, 2001 (Zenit.org).- When chief executive officers of U.S. companies earn, on average, 475 times what the average worker earns, that prompts an inevitable question about basic fairness.
The 1990s were a time when companies paid their CEOs record rewards. Stock options, combined with a boom on Wall Street, meant that chief executive officers and others saw their wealth soar.
But now, share prices and company sales have fallen, dramatically in some cases. Recent reports recently on CEO salaries for 2000 show signs of moderation, though not all companies have changed tack.
A Business Week report on executive pay showed that American CEOs enjoyed an average salary last year of $13.1 million. The magazine in its April 16 edition quoted examples of executives whose pay was slashed due to poor results. Such was the case of Joseph M. Magliochetti, CEO of auto-parts maker Dana Corporation. He lost his bonus and stock grant after sales fell 6% and profits plummeted 44%.
At the top end of the scale, however, CEOs were not much affected by the slowdown. The 20 highest-paid earned an average $117.6 million, up from $112.9 million in 1999. The biggest pay package, $293 million, went to John S. Reed, the former co-CEO of Citigroup.
At many companies, oddly, there was little linkage between results and pay. At Walt Disney Company, CEO Michael Eisner was rewarded with a salary increase, stock options on 2 million shares in Disney Internet Group valued at $37.7 million, and an $11.5 million bonus, after three years in which income fell by more than half, from $1.9 billion in 1997 to $920 million.
In all, cash compensation for the CEOs at 365 of the largest U.S. companies increased 18% in 2000, while total pay packages increased 6.3%. Business Week observed that this increase is far more than the 4.3% pay hike salaried workers received last year.
Some companies have linked rewards with future performance. At Coca-Cola, CEO Douglas N. Daft was granted $87.2 million in restricted shares. He will get the full amount only if he manages to increase earnings per share by 20% a year for five years.
A survey of about 50 companies done by the consulting firm Pearl Meyer & Partners found that the average compensation for chief executives reached $10.9 million in 2000, a 16% increase over the previous year, and more than double the $4.4 million average in 1995, the New York Times reported Feb. 14.
In 1995, about half the compensation was in cash. In 2000, about 60% — $6.5 million on average — was in stock options, a 28% increase from 1999.
Companies were found to be moving away from performance-based plans. In fact, the only portion of executive pay to decline was long-term incentives. Those incentives decreased 16% from 1999 and now represent about 12% of total compensation.
At the same time, companies are looking for ways to maintain incentives for executives in the face of declining share prices, the Financial Times reported March 16. The paper noted that even though Coca-Cola had conditioned its CEO´s options on performance targets, his salary tripled to $1.27 million and he received a $3 million bonus — despite leading the company through a year of layoffs and underperformance.
Bad results have not affected CEO pay at toy maker Mattel, either. Just days after announcing plans to close its last U.S. factory and move 980 jobs to Mexico, Mattel said it paid its top executive more than $12.5 million in cash and other compensation last year, the Associated Press reported April 10. Additionally, Mattel loaned chief executive Robert Eckert $5.5 million, all of which, plus interest, will be forgiven if he stays at the company until May 18, 2004.
The trend to pay CEOs such enormous sums is chiefly a U.S. phenomenon. But pressure is growing in other countries to follow suit. DaimlerChrysler CEO Jürgen Schrempp´s pay package, officially a company secret, was calculated by a shareholders group in Germany to be about $2.9 million in 1999, the New York Times reported April 1.
Daniela Bergdolt, a lawyer and shareholder activist in Munich, said CEOs´ pay in Europe is growing, with bonuses and stock options, and often this data is not disclosed publicly.
In Britain, companies must disclose more information. So it´s public knowledge that Fred Goodwin, chief executive of the Royal Bank of Scotland, received $3 million last year, 250% more than in 1999. That included a bonus of about $1.2 million for his part in the bank´s takeover of National Westminster Bank. The Vodafone board, meanwhile, awarded company chief Chris Gent a $15 million bonus for the acquisition last year of Mannesmann of Germany.
Overall in Britain the salaries of senior executives at the country´s top 100 companies rose by an average of 20.4% last year, to around $1 million, according to New Bridge Street, a consulting firm in London. While that total is only a fraction of U.S. executive pay, the increase contrasts with a national average pay gain of about 4%.
Another consulting firm, Towers Perrin, said Britain´s chief executives were paid 24 times the average manufacturing salary, the highest multiple in Europe, compared with 15 in Germany and 13 in Sweden. The average American CEO made 475 times as much as the average blue-collar worker in 1999, according to the AFL-CIO.
Limits to salaries?
Christianity is not contrary to rewarding some people more than others. All are equal in their human dignity and none may be legitimately denied their basic rights, including what they need in order to sustain themselves and their family. But Catholic social teaching also places a high value on private ownership and also recognizes some people are more talented than others — the Gospels acknowledge as much. This means that it is not unjust for someone in charge of a company to receive a greater reward for the work involved in directing its activity.
At the same time, doubts arise over the wisdom of the extraordinarily high levels of executive compensation. Paying the CEO 475 times the average wage is a clear case of things getting out of hand.
The concept of the universal destiny of earthly goods can shed some light on this problem. In the document “Gaudium et Spes,” the Second Vatican Council in sections 69 to 71 explains that people should not regard material goods as belonging exclusively to themselves. Rather, the goods have a common destiny, in the sense that they are for the benefit of all people. The document also notes that private property has a social dimension, and that when this is forgotten, “ownership can often become the source of greed.”
In the financial euphoria of recent years, a sense of proportion seems to have been lost. A decent reward for talent and results is good, but within limits.