Skip to Content
 
 
 
Find:
Advanced Search

BUSINESS OVERVIEW

 Reuters (12 September, 2002) “New York Fed President Calls on CEOs to Cut Their ‘Excessive’ Pay,” The Boston Globe

 

Overview

When the president of the New York Federal Reserve complains that the bloated CEO compensation packages of today are morally unjustified, it makes for an interesting moment of self-reflection in the culture of American capitalism. “Beginning with the strongest companies,” says William McDonough, “CEOs and their boards should simply reach the conclusion that executive pay is excessive and adjust it to more reasonable and justifiable levels.”

 

The problem is that a market-driven reward system has little or no innate moral impulse to restraint. But when CEO compensation has doubled in the last five years, and is 400 times the compensation of production workers on average, something seems to have gone unchecked. One reason CEOs have become a target of late has to do with the frustration of shareholders who have watched the booming share prices of the 1990s collapse, while CEO compensation continues to surge. Of course, it was in part the raped growth of stock options over the last decade that led companies to offer more lucrative compensation packages to desired talent.

 

Consider these numbers:

·        Tyco International Ltd. ex-CEO Dennis Kozlowski (indicted for tax fraud) funded a lavish lifestyle with $135 million in corporate loans.

·        General Electric Co. chief Jack Welch earns $16.5 million annually and lives in a large GE-financed apartment overlooking New York’s Central Park.

·        In 1996 the average CEO at the 200 largest companies made roughly $5.8 million.

·        By 2001, the same CEOs made roughly $11.7 million.

·        Alan Greenspan, chairman of the Federal Reserve, made $136,000 in 2001.

·        William McDonough earns $297,005 annually.

 

Part of McDonough’s argument is moral, and part practical. He contends that voluntary CEO pay-cuts will benefit shareholders and strengthen the economy. He also believes that the tremendous increases in CEO compensation over the last decade fueled poor social policy, and possibly lax morals. Unsurprisingly, his position is unusual for the Wall Street crowd. Corporations tend to call for tougher corporate governance standards, but leave discussions of executive pay to the discretion of corporate boards.

 

Questions for Reflection and Discussion

1.      What would be a reasonable scale for determining CEO compensation?

2.      What message is sent to developing nations by our current pay situation?

3.      What message is sent to production-level employees of the same companies?

4.      How do you think McDonough’s stance will be received?

 

Implications

McDonough’s critique is laudable and, it would seem, quite sensible. His message is a call for moral self-evaluation on the part of profitable companies and their boards. But the fact that it is unusual might serve to remind us of the inherent limits in our free-market economy. If profit is the bar of success and merit, then the logic of capitalism will compensate accordingly. The problem of exaggerated compensation might compel us to ask deeper questions concerning just wages and appropriate lifestyles.

 

 

 Christopher S. Yates cCYS