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Executive Salaries That Raise Eyebrows

Especially When Pay Doesn’t Match Performance

NEW YORK, MAY 13, 2006 ( High levels of executive pay are making headlines again. It’s the time of year when companies in the United States have to file information about what they pay their chief executive officers (CEOs) — and critics are questioning the amounts.

Eyebrows rose when it was revealed that Lee Raymond, who retired last December after 13 years as chairman and chief executive of oil giant Exxon, received $686 million in compensation from 1993 to 2005. During this period the company’s market value increased fourfold and income soared to record levels, the New York Times noted April 15.

More than $400 million of Raymond’s benefits came in his last year with Exxon. The sum included his pension benefits, which he opted to receive in a lump sum of $98.4 million. Other oil company executives are being paid handsomely. Ray Irani, CEO of Occidental Petroleum, received around $63 million last year.

Alan Murray, in his April 19 column for the Wall Street Journal, defended Exxon’s retired CEO. “Shareholders, by and large, got their money’s worth from Mr. Raymond’s tough-minded leadership,” he wrote. Exxon even outperformed other big oil companies.

Still, Murray acknowledged that many felt outrage at the idea that someone in Raymond’s position can earn more in a day that others earn in a year.

But the real problem, Murray contended in his April 26 column, is with the underperforming executives who also receive princely salaries. He cited the case of Hank McKinnell, chief executive of the drug company Pfizer. Over the last five years shares have dropped 40% in value, yet McKinnell received $79 million in that period. Plus he has a guaranteed pension worth $6 million a year for life.

Nor is McKinnell alone. Reuters reported March 31 on a study showing that CEOs at 11 large U.S. companies were paid a total of $865 million over the past two years, while presiding over a collective loss of $640 billion in the value of their firms’ shares. Among the 11 companies cited as having the widest gap between CEO pay and performance were Lucent Technologies, Home Depot, Hewlett-Packard and Wal-Mart Stores.

Big pay, falling value

The CEO study published by the organization Corporate Library said: “Far too much compensation is delivered without any link to performance at all, with executives showered with golden hellos, golden goodbyes, tax payments and perquisites before during and after their employment.”

A special report on executive pay published by the New York Times on April 9 mentioned the case of ConAgra Foods. Bruce Rohde retired as its chairman and chief executive last September. During his eight years in charge he received more than $45 million, plus a retirement package estimated at $20 million.

These rewards came in spite of the company missing earnings targets, and performing worse than its peers. Its share price fell 28% and more than 9,000 company jobs were cut during Rohde’s tenure.

According to the New York Times, average CEO pay increased 27% in 2005, to $11.3 million. The information is based on a survey of 200 large companies. The average wage-earner, by comparison, took home $43,480 in 2004, according to U.S. Commerce Department data.

The gap between top executives and workers continues to grow. A CEO salary at a big company stood to gain more than 170 times the average worker’s earnings in 2004. This compares with a multiple of 68 in 1940. The change came in recent years, when executive salaries started to accelerate in the 1980s.

The Wall Street Journal also published an in-depth look at executive pay, on April 10. Its figures, based on a survey of 350 major companies, showed compensation for CEOs growing 15.8% in 2005, to a median of just over $6 million. This amount covers salaries and bonuses, plus stock sales.

The survey noted that companies are reacting to complaints about high executive salaries. Delphi Corporation, which is in bankruptcy, had proposed setting aside $500 million in benefits for some 600 executives. The sum was reduced after pressure from unions and creditors.

Similarly, John Mack, CEO of investment bank Morgan Stanley, backed down amid widespread protests and had to give up a deal that guaranteed him $25 million for 2005 and 2006 if average CEO pay at Wall Street rivals reached a certain level.

But questions remain. Among them is the case of Gillette CEO James Kilts, who was set to receive a package estimated at $185 million after the company was taken over by Procter & Gamble.

Shareholder activists are proposing measures at company annual general meetings that put pressure on companies to limit salaries and to disclose more information about executives’ benefits, the Washington Post reported April 28.

A case in point is Lucent Technologies, where a measure was passed in a vote during a February meeting to tie bonuses and certain rewards to company performance.

The chairman of the Securities and Exchange Commission has also weighed in on the issue. Christopher Cox has proposed obliging companies to disclose more information on how much they pay executives, including revealing the many hidden perks.

One of the perks that has come in for attention recently is the use of company planes. On Wednesday the New York Times drew attention to the issue, noting cases such as those of Richard Parsons, chairman and chief executive of Time Warner. Parsons owns a small vineyard in Tuscany, Italy, and twice a year, he uses a company plane to make a visit. Parsons had a pay package valued at $16 million last year.

Other companies allow their planes to be used for CEOs to travel to their holiday homes. And as this benefit counts as taxable income for the executives, some companies even pay an extra amount to reimburse the taxes on the trips.

Ethical guidelines

The Church’s social teaching hasn’t directly addressed the question of upper limits on salaries. The freedom of the market and of businessmen to organize their affairs and enjoy the benefits of their work is clearly recognized. The Compendium of the Social Doctrine of the Church, in No. 336, “considers the freedom of the person in economic matters a fundamental value and an inalienable right to be promoted and defended.”

This is not to say, however, that it is unconcerned about matters of inequality and wealth. “Economic and social imbalances in the world of work must be addressed by restoring a just hierarchy of values and placing human dignity of workers before all else,” states No. 321 of the Compendium.

Concerning economic activity and wealth, the Bible has words of encouragement. In the New Testament parable of the talents (Matthew 25:14-30), for example, it exhorts a productive use of our capacities. And No. 323 of the Compendium notes that in the Old Testament, riches are not in themselves condemned so much as their misuse.

Nevertheless, the Church insists on the importance of solidarity and of looking after the needs of those who are less well-off. The Compendium calls for “A more human development in solidarity,” which addresses the question of social inequality (No. 374).

In fact, the economic well-being of a country should be measured not only by the total amount of goods produced, but also by taking into account the way they are distributed (No. 303). Points that should guide consciences at salary-setting time.

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