July 2, 1992
"Tempting Target for Activist Shareholders - CEOs: Where the Bucks Don't
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
- 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
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.
|HIGHEST PAID CHIEF EXECUTIVES
|The chart shows the base salary for 1991, plus bonuses, which
include long-term compensation such as stock options.
|1. Anthony O'Reilly, H.J. Heinz
|2. Martin J. Wygod, Medco Containment
|3. Leon C. Hirsh, U.S. Surgical
|4. John C. Malone, Tele-Communications
|5. Richard K. Eamer, National Medical
|6. Sanford I. Weill, Primerica
|7. Hamish Maxwell, Phillip Morris
|8. William P. Stiritz, Ralston Purina
|9. Richard L. Gelb, Bristol-Myers Squibb
|10. William A. Schreyer, Merrill Lynch
Source: Business Week, May 4, 1992, p. 143.
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