Salaries At The Top Finally Stop Defying Gravity

So much for the big promotion.

After 26 years of working for Chase Manhattan Corp., Thomas G. Labrecque last year finally got the top job as chairman. But the onetime protege of David Rockefeller failed to get a Rockefeller-size pay increase to go along with his new title. With the bank toting up losses of $334 million in 1990, Labrecque's salary and bonus fell 28%, to $680,333.

Labrecque has lots of company this year, as executives at many companies discover the newfound perils of pay in a downturn. Annual bonuses tied to company performance have grown to 74% of the boss's salary in 1989, up from 58% in 1980 on the eve of the last recession. A source of consistent and hefty raises for years, these bonus plans are often linked to hitting targets on net income or return-on-equity.

And while executive pay is still rising generally, executives at poorly performing companies are finding that CEO salaries no longer are assured of defying gravity. As many as a third of the CEOs at major corporations took pay cuts in 1990, estimates Ira T. Kay, a managing director of Hay Group Inc. "It's nothing more sophisticated than that their profitability is way down," he says.

'MORE SCRUTINY.' There's another reason behind the slimmer paychecks. Many compensation experts believe it's bad public relations to give the boss a raise when he's firing employees and shuttering factories. Just ask Roger B. Smith, former chairman of General Motors Corp. He set off a storm of criticism by pocketing bonuses in 1985 and 1986 while asking for austerity measures from the rank and file. "There's more scrutiny over the issue," adds Kay.

So far, executives in the financial-services and banking industries are taking one of the worst beatings. With income falling at American Express Co., Chairman James D. Robinson III made 31% less in salary and bonus last year, an $800,000 drop to $1.8 million. Morgan Stanley & Co. Chairman Richard B. Fisher last year pocketed $2.2 million, a 60% cut from the $5.5 million he pulled down in 1989. Citicorp froze Chairman John S. Reed's salary and paid no bonuses to the bank's senior executives. The upshot: Reed's pay fell by 22%, to $1.2 million, in 1990.

But top executives in many other industries also are taking it on the chin. Boise Cascade Corp.'s John B. Fery saw his pay slashed by 32%, to $693,559 last year, because his cash bonus, linked to the paper producer's return on equity, all but disappeared when the company's income plummeted by 72%. Sears, Roebuck & Co.'s Edward A. Brennan's wallet also was lighter. He took a 39% cut in salary and bonus, to $978,854 in 1990, as the retailer's earnings slid by 40%.

WORN-OUT SNEAKERS. Forgoing complex bonuses, some executives volunteered to bring home less money to show solidarity with their troops. At troubled Tucson Electric Power Co., Chief Executive Charles E. Bayliss ordered a 15% salary cut for himself and his top executives. For grand gestures, though, Robert Y. Greenberg, chairman of L. A. Gear Inc., takes the prize. After the sneaker maker suffered its second consecutive quarterly loss in February, he agreed to work for free until his company gets back into the black.

His decision will cost him $375,000 in salary for every quarter that L. A. Gear remains in the red. Explains Kevin J. Ventrudo, chief financial officer: "We're undertaking a broad-based cost-cutting program as we go into the '90s. This is Greenberg's personal commitment to that program." Greenberg is unlikely to plead poverty, though. He earned $3.5 million last year, while L. A. Gear's earnings fell 43%. And when his pay halt was announced, Greenberg had already pulled down $ 500,000 for the fiscal 1991 first quarter, which ended Feb. 28.

In sum, Greenberg and his corner-office colleagues won't be holding many bake sales. In 1989, when average profits slumped by 7%, just 1 in 5 of the 356 CEOs in BUSINESS WEEK's Executive Pay Scoreboard experienced salary and bonus cuts. Only 36 of them saw their cash pay drop by 10% or more--and in several cases, they exercised stock options that more than made up the difference.

That just demonstrates a common characteristic of executive pay: What goes up doesn't always come down. Indeed, a recent study by Graef S. Crystal, a prominent pay consultant, showed quite a different effect at nearly 200 companies. His findings: When earnings rose by 10% a share, the CEO's salary and bonus jumped 13%. When earnings fell by 10%, pay still went up by 4.1%.

Even so, more executives are learning that no CEO can gain the respect of employees by taking ever larger amounts of money out of the company in a downturn. Call it the Smith Principle.

Before it's here, it's on the Bloomberg Terminal.