Executive Pay: Time For Restraint

Any baseball star you can name commands a seven-digit salary. For a rock singer or movie star, eight figures isn't unusual. So why all the fuss about the heads of our large corporations making such big numbers? They have much harder jobs. And we'd all agree their work is important to more people--shareholders, customers, employees--as well as to the U. S. economy, right?

There's a problem with that simple analogy, however. When the pitching ace loses his fastball or the entertainer can no longer fill the theater, earnings suffer--probably sooner rather than later. Unfortunately, the market doesn't work as well in the executive suite. Too often, pay continues its climb into the stratosphere come good times or bad for the stockholders picking up the tab.

Just look at the numbers in BUSINESS WEEK's 41st annual survey of executive pay (page 90 52 ). In a recession year, when the average company's earnings slid 7%, the typical chief executive officer's compensation went up by 7%, and in some cases by an outrageous multiple of that. It's true that the average raise was less than the double-digit raises that were routine through the 1980s. But in a difficult economy that has many bosses eliminating jobs and cutting vital budgets for capital projects, product development, and marketing, the lack of restraint is disturbing.

Companies have been telling investors for years that they were devising pay systems to reflect corporate performance. But the 1990 numbers seem to say that when it comes to the boss, performance doesn't matter all that much.

To make matters worse, 1990's hefty increases widen the gap between the boss's compensation and that of an engineer, a teacher, a factory worker, or a laborer--and they dwarf pay for executives in any other country. In short, last year's $1.9 million average pay for U. S. CEOs seems out of whack with corporate performance, employee sacrifices, and the whole tenor of these recessionary times. Predictably, many shareholders and employees are fed up, and even customarily inert institutional investors are exasperated. It's time for corporate boards to face up to the growing public concern over executive pay. If they don't, a backlash against business could easily develop.