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© St. Petersburg Times, published September 15, 2002
Is it wishful thinking or is there a deeper message for business out of Sept. 11?
In the same week as our sobering 9/11 anniversary and the news that GE shareholders subsidize retired chief executive Jack "Jackpot" Welch, from his $80,000-a-month Manhattan apartment right down to his toilet paper, a lone voice in American business finally is saying it:
Enough is enough. The unfettered rise of a self-serving U.S. business elite -- a self-anointed royalty -- must stop.
Quoting the biblical admonition to "love thy neighbor as thyself," New York Federal Reserve Bank president Bill McDonough, a possible successor to Fed chairman Alan Greenspan, said executive pay has ballooned so far beyond reason that it threatens public support for free-market institutions.
"Sadly, all too many members of the inner circle of the business elite participated in the overexpansion of executive compensation," McDonough told a New York audience during a Sept. 11 memorial service at Trinity Church near the site of the former World Trade Center. Quantum leaps in CEO compensation are, he warned, "terribly bad social policy and perhaps even bad morals."
Let's not raise McDonough to sainthood just yet. His call is for voluntary compensation cuts. And his worry is simply about a political backlash against corporate scandals because that may result in good people refusing to serve on the boards of companies and in American capitalism suffering.
I'm still not sure whether to shake McDonough's hand for taking such a rare stand or to ask: Why did it take so long for anybody in the mainstream business world to condemn the gravy train of executive pay?
Corporate boards that piled on executive stock options and bonuses? A big mistake, McDonough said. The widely endorsed idea that huge CEO stock awards would align the interests of top executives with their stockholders? All misguided, he claimed.
"It is reasonably clear now that this theory has left a large number of poorer stockholders -- especially including employee stockholders -- not only unconvinced, but understandably disillusioned and angry," said McDonough, who joined the New York Fed 10 years ago after spending 20 years as a Chicago banker and, in the 1960s, as a foreign service officer in the State Department. "CEOs and their boards should simply reach the conclusion that executive pay is excessive and adjust it to more reasonable and justifiable levels."
At 68, McDonough is hardly some union activist or religious leader, corporate gadfly or academic geek. So why -- on Sept. 11 of all days -- did the Fed's second most powerful official choose to speak not about terrorism or the resilient U.S. economy, but about bloating executive pay?
Because McDonough recognizes the potential for social devastation from a U.S. corporate royalty based on excess and a lack of accountability.
Want proof? Here's what McDonough offered. In 2000, the average top corporate pay was $11-million a year, and CEOs routinely were paid 400 times more than the average employee. Just 20 years ago, a CEO made 42 times as much as a worker -- and that used to sound like a hefty multiple.
"I am old enough to have known both the CEOs of 20 years ago and those of today," McDonough said. "I can assure you that we CEOs of today are not 10 times better than those of 20 years ago."
In the new American corporate royalty, there are thousands of crown princes and even some princesses.
GE's Welch, once crowned by the fawning media as "manager of the century," may sit upon the throne. A King's Ransom in Retirement Benefits was the headline on a Sept. 7 Washington Post story describing the rich goodies Welch receives.
Not to pick on Welch, whose personal wealth is pegged at about $900-million. Plenty of other rogue executives amassed similar treasures. But many of those former executives -- Tyco's Dennis Kozlowski (owner of the $6,000 shower curtain), Enron's Ken Lay and Global Crossing's Gary Winnick, just to name a few -- received ill-gotten gains. Now they are feeling the legal heat and a public backlash.
In contrast, Welch retired from GE as America's Great CEO. Only after his affair with a Harvard Business Review editor, and the resulting messy divorce now pursued by Welch's wife, has the public learned from court filings of the details of the former executive's ultraplush retirement package.
In addition to his $9-million annual pension, Welch's GE-supplied perks include: a $15-million Central Park West apartment in Manhattan (furnished with food, wine, flowers and toiletries); cell phones in five cars, satellite TV in four homes, computers and security service at each of his six homes; around-the-clock access to a GE-owned Boeing 737; dues for three private golf clubs; discounts on jewelry and diamond settings; top-of-the-line tickets to Wimbledon tennis matches, Red Sox baseball games and the Metropolitan Opera; a limited edition 2003 Mercedes-Benz SLR and limousine service. Welch also receives a minimum of $86,000 in consulting fees for up to five days work from GE each year. If he works more than five days, he gets another $17,000 a day.
All are lifelong perks. Most of this package was poorly disclosed to GE shareholders.
No wonder Graef Crystal, a compensation expert who thought he had seen it all, was surprised enough in a recent Newsweek article to ask: "What does he do, tow the Mercedes behind the limo?"
The sad epitaph in all of this is Welch is neither embarrassed nor apologetic. He fully believes he is entitled to such a coddled lifestyle. He should know better.
Who says royalty isn't alive and well in America?
Aside from McDonough, few have complained about excessive pay. Earlier this year, the Fed's Greenspan decried the "infectious greed" behind the rash of current corporate scandals but stopped short of blaming CEO pay. Goldman Sachs chairman Henry "Hank" M. Paulson Jr. this spring said CEOs should be paid mostly in stock and give back any profits from stock sales that occur in the year prior to a company bankruptcy.
Cutting executive pay is possible. Last month, travel and real estate giant Cendant Corp. renegotiated CEO Henry Silverman's contract by terminating his right to annual stock option grants. Cendant instead offered an incentive bonus tied to the company's pretax earnings. The result? Silverman will refocus on improving earnings and stop trying to prop up the company's stock price.
If there's more import behind McDonough's appeal last Wednesday to curb compensation, it's timing.
By linking runaway executive pay to Sept. 11 and addressing it in moral terms, just footsteps from ground zero, McDonough tried to raise the debate over the responsibilities of U.S. corporations to a higher calling. If businesses do not follow the rules, if top managers appear driven only to enrich themselves, if corporate boards of directors serve only as compensation lackeys to CEOs rather than watchdogs for shareholders, then everybody loses.
"It is hard to find somebody more convinced than I of the superiority of the American economic system," the Fed official said, "but I can find nothing in economic theory that justifies this development."
How did a high-ranking Federal Reserve figure with such populist leanings ever survive our Golden Age of Business Royalty?
Beats me. Let's just hope there are a few more folks of influence out there willing to storm the thrones.
-- Robert Trigaux can be reached at firstname.lastname@example.org or (727) 893-8405.