Are they really worth it? Outsized executive pay has generated howls of protest for years. First it was the $1 million package. Then $10 million. $100 million soon followed. This year, the five best-paid execs of BUSINESS WEEK's Executive Pay Survey split $1.2 billion! Outrageous, right?
Well, no and yes. With the U.S. economy putting in its best performance in decades, the Dow at 10,000, and U.S. corporations back at the top of their competitive game, many CEOs appear to be earning their keep. Thanks to options, the link between pay and performance, at least as measured by the stock market, has never been tighter. Enormous value has been created by many of these top execs--and not just for themselves. Millions of middle managers now hold options, as do lower-level workers, and they're doing nicely, thank you. And shareholders are not complaining either.
The U.S.-style pay system is being credited in Europe and Japan for the dramatic comeback of Corporate America. Spurred by such transatlantic mergers as DaimlerChrysler, higher exec pay is moving offshore. Britain now has several million-pound-per-annum CEOs. In Japan, Sony, Sega, and other companies are using options. Anything that focuses management attention on shareholder value is a good thing in Europe and Asia.
But there's another side to the story. CEOs have been toiling in a prime business environment. Interest rates have fallen over a 15-year period, flicking up only recently. Deregulation has overcome barriers within the economy, and trade barriers have fallen overseas. A high-tech revolution is making it easier to increase productivity. The Internet is spawning new opportunities. The times are exceptionally good for executives to strut their stuff. It's too easy to confuse genius with a bull market.
Furthermore, while many execs are taking home dazzling pay packages, not all are earning them. Boards are giving huge option grants to execs who are not delivering "Welchian" returns to shareholders. There is a vast fleet of CEOs riding a surging stock market fueled by boomer cash. And when the market dips, boards reprice CEO options at lower levels, an odious practice. Even worse is rewarding failed execs with huge sums of money when they get booted out.
What to do? To ensure that only the best performers reap their just rewards, we support Federal Reserve Chairman Alan Greenspan in advocating indexed options. Give CEOs options that have no value unless the stock actually does better than a market or, better yet, a peer group index. High pay is O.K. only when genuinely supported by performance.