The Cure for Lavish Pay? Shame It to Death
Had investors and voters known more about the wretched excesses in executive pay and fringe benefits that have come to light in the last few months, some long-needed reforms of corporate compensation might already be in the works as part of the recent legislative and regulatory crackdown on fraudulent accounting and finance.</br></br>Only the most blase boosters of unfettered free markets can look at these revelations without feeling some measure of amazement and outrage. After the grotesque $100 million pay packages lavished on chief executives of failing companies such as Adelphia Communications and Enron came the spectacle of extravagant fringe benefits -- one of the most prominent being the Medici-like retirement package of former General Electric CEO Jack Welch (which included an $80,000-a-month Manhattan apartment, plus cash for flowers and groceries). Then, last week, it was revealed that Tyco, the scandal-riddled conglomerate, had agreed to pay a severance package of $45 million to an executive even though he was already under criminal investigation by a grand jury that later indicted him for fraud and theft.</br></br>There's been muted criticism of corporate pay and perks for years, but these recent revelations have produced a wave of public revulsion that extends to institutions rarely thought of as critics of American capitalism, such as the Federal Reserve system and the editorial page of the Wall Street Journal. But while nearly everyone agrees that executive compensation in America has become absurdly excessive, there's less agreement about what -- if anything -- can be done about it. As it turns out, the most effective regulation may be imposed by the companies and the CEOs themselves, driven by the infamy that we now see enveloping those whose excesses are brought to light.</br></br>While chief executives of big corporations worldwide have always been paid princely sums, hard data show that U.S. executives have been paid more like kings and that in recent years they have become even more Croesus-like. By 1996, according to one study, total compensation of American CEOs was more than twice as high as that of their Japanese and European counterparts, even allowing for the benefits and perquisites, such as company cars and clothing allowances, that tend to be more common overseas.</br></br>The first problem with trying to control corporate compensation is practical. Even if Congress decided to outlaw excessive pay and perks, defining what is "excessive" would be at best difficult -- and at worst impossible. How much, for instance, has Bill Gates been worth to Microsoft? He started the company from scratch in 1975 and, even in today's depressed stock market, it's worth about a quarter of a trillion dollars. Microsoft's directors and managers, along with hundreds of thousands of shareholders, might reasonably argue that Gates has been worth every penny of the billions he has made. How could a lawmaker or regulator determine what level of compensation is excessive for someone like him? It's even conceivable that some people might forgive Jack Welch his Pharaonic excesses for similar reasons.