Even Executives Are Wincing At Executive Pay

Many say it's too high, though they're not as mad as the public

As the 1997 proxy season draws to a close, CEO pay again has hit unprecedented levels. According to BUSINESS WEEK's 47th annual Executive Pay Scoreboard, average total compensation for the top execs at big companies rose 54% in 1996, to $5.8 million, outstripping most corporate profit and stock growth (BW--Apr. 21).

Unsurprisingly, such sums have stirred outrage among ordinary Americans--most of whom are seeing pay raises in the 3% to 5% range. The big shocker: Top executives agree. A BUSINESS WEEK/Harris Poll conducted in mid-April shows that top executives at America's largest companies, like most of the public, think the current compensation system is out of whack.

Many managers and executives--not just CEOs--have benefited from a surging market that has multiplied the value of options. Even so, the level of executive antipathy toward elevated pay levels at the top is striking. Nearly half think that CEO pay at large companies has surpassed acceptable limits. Says Jude T. Rich, chairman of pay consultant Sibson & Co.: "That must mean they think either they or their close colleagues or peers are overpaid."

If so, that's not what they're telling BW pollsters. Nearly three-quarters of executives say they are being paid about the right amount; most of the rest say they're underpaid. Similarly, few think their own CEO is getting too fat a check. Outrageous pay, it seems, happens only at other companies.

Still, the top brass concedes that pay-for-performance needs serious tinkering. Some 71% of executives said large companies reward good results but don't penalize laggards. "I'm pleased that executives agreed," says Anne S. Hansen, deputy director for the Council of Institutional Investors, an association of large pension funds. "Look at great [admirals]. They go down with the ship."

What to do? Most executives say they're amenable to a pay cut--preferably via a reduced bonus--when results head south. But the idea of linking CEO pay to that of lower-level workers, a favorite formula among the rank and file, strikes them as a lousy idea. Most managers support the notion of limiting the number of options awarded management in any one year. And surprisingly, 44% of the sample agreed that some sort of cap on pay was in order.

CHANGES? The strong feelings about CEO pay among execs, however, are still mild compared with what the public indicated in BUSINESS WEEK's poll. Nearly three-quarters of ordinary Americans felt corporate bosses were overpaid. Only 13% said the system worked effectively. Older respondents, those working for large companies, and those with better education were particularly critical.

Clearly, Washington is sensitive to such discontent. On Apr. 15, Senators Carl Levin (D-Mich.) and John McCain (R-Ariz.) introduced a bill that would require many companies to treat as an expense any stock option grants they deduct from taxes. "There's no other form of compensation that's given that inconsistent treatment," says Levin.

If passed, such legislation could curb the popularity of options in executive pay packages. So far, though, the Levin-McCain bill hasn't created much of a stir on Capitol Hill. And more radical legislative or regulatory change isn't in the offing anytime soon. Yes, voters are outraged by exorbitant pay. Even their bosses are bothered. But no one's upset enough yet to actually legislate the rules.