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July 2, 1992
"Tempting Target for Activist Shareholders - CEOs: Where the Bucks Don't Stop"
San Jose Mercury News

By Timothy Taylor
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ON THE subject of whether any individual corporate executive is paid too much, I'm an agnostic.

Take the hardest case for 1991: H.J. Heinz chief executive officer Anthony O'Reilly. He received $75 million during 1991, and was named by Business Week magazine as the nation's highest paid executive for the year.

Annual compensation in the high eight figures may look unconscionable at first glance. But shareholders in Heinz feel that O'Reilly is a great deal, and it would be hard to prove them wrong. For the 10-year period ending in 1991, holders of Heinz stock earned 27.5 percent per year, nearly double the return for the average company. O'Reilly's base pay, without bonuses or stock options, was $514,000 in 1991. But the bulk of his compensation comes through stock options, and is thus linked to how well the company performs for shareholders. Even if explanations can be made for this executive or that, several bits of evidence add up to the conclusion that too many top executives are being paid too much:

  • In the last 20 years, after adjusting for inflation, the pay of the average chief executive officer has tripled, reports executive compensation expert Graef Crystal in his recent book "In Search of Excess." Meanwhile, the pay of the average American worker has not risen for 20 years.
  • The pay of a top U.S. executive is 109 times the salary of an average worker, according to figures cited by Paul Milgrom and John Roberts of Stanford University. For German and French firms of comparable size, the multiple is 24; for Japan, just 17. In fact, most top executives outside the United States are paid on a straight salary, with no stock options or "incentive" compensation at all.
  • During 1990, the year the recession started, corporate profits dropped 7 percent, but compensation for top executives rose 7 percent, according to Business Week.

Prompted by public outcry over these statistics, along with the generally incredible thought of anyone earning millions of dollars in a single year, the Securities and Exchange Commission stepped forward last week with several proposals. The new rules would basically require that companies be more open about how much they pay executives, how the method of compensation is determined, and how the company has performed vis-a-vis its competitors.

Given these levels of corporate pay, the SEC proposals sound better than a kick in the head, but still are pretty weak gruel. The SEC has an idea, however, or perhaps more of a hope, that the way in which corporations are controlled is evolving in a way that will make these requirements for clear reporting of corporate pay and performance more powerful than they appear.

In the March/April issue of the Harvard Business Review, John Pound of the Kennedy School of Government at Harvard University argues, "In the 1990s, politics will replace takeovers as the defining tool for corporate governance challenges. . . . In the new marketplace of ideas, debate will replace debt as active shareholders identify specific operating policies for their target corporations and then invent new mechanisms to get their message across to management."

Traditionally, top managers would appoint each other to boards of directors, and give each other raises, while large institutional investors stood passively by, generally supporting management through thick and thin.

But a rise of activist shareholders has been in the news for a couple of years now. The enormous California State Pension Fund now pressures several firms each year to change their behavior in various ways. Harold Simmons led a campaign that eventually caused Lockheed to back off on plans to diversify. Carl Icahn pressured USX to separate its steel and oil operations. In all these cases, the aim is not to take over a company, or even to evict existing management, but rather to force a change that will improve stock prices.

These activist shareholders take aim at many issues besides executive compensation, of course, but the SEC action will make high executive pay a more visible and tempting target -- especially when it doesn't accompany superior corporate performance. Earlier this year, the SEC decided to allow non- binding shareholder votes on executive pay.

Publicity and embarrassment, along with pressure from large and politically savvy investors, can have an effect on executive pay. Average salary and bonus for chief executive officers fell 7 percent in 1991, "for what may be the first time in 42 years Business Week has kept tabs on executive pay," reported the magazine in its May 4 issue.

For the future of the U.S. economy, the amount that top executives are paid is considerably less important than how they perform on the job. But if corporate America wants its customers to believe that they are running a tight, competitive ship in other ways, it surely would help to get executive pay under control.

The chart shows the base salary for 1991, plus bonuses, which include long-term compensation such as stock options.

  Salary Bonuses Total
1. Anthony O'Reilly, H.J. Heinz $1.36 million $73.72 million $75.08 million
2. Martin J. Wygod, Medco Containment $459,000 $33.29 million $33.75 million
3. Leon C. Hirsh, U.S. Surgical $1.35 million $21.93 million $23.28 million
4. John C. Malone, Tele-Communications $454,000 $18.48 million $18.93 million
5. Richard K. Eamer, National Medical $1.53 million $15.95 million $17.48 million
6. Sanford I. Weill, Primerica $2.23 million $13.67 million $15.9 million
7. Hamish Maxwell, Phillip Morris $1.74 million $13.93 million $15.67 million
8. William P. Stiritz, Ralston Purina $1.19 million $12.61 million $13.8 million
9. Richard L. Gelb, Bristol-Myers Squibb $2.05 million $10.6 million $12.65 million
10. William A. Schreyer, Merrill Lynch $4.5 million $7.03 million $11.53 million

Source: Business Week, May 4, 1992, p. 143.

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