CEO Pay Affects Company Morale

BACK in December, President Bush traveled to Japan with a convoy of corporate executives to complain about Japan's trade practices and to seek open markets there.

The tables turned, however, when the Japanese raised the question of executive pay. They respectfully observed that American chief executives get, on the average, more than $2 million a year - and often a great deal more - compared with the $310,000 that the Japanese are paid. Shouldn't Americans clean up their own house before pointing fingers at someone else?

The Japanese party focused attention on something that was becoming an issue anyway: the way Americans at the top of the salary heap are grasping ever-larger shares. Last year, a business-school professor named Graef Crystal, who used to advise corporations on executive pay, charged that "the modern American CEO is a cross between an ancient pharaoh and Louis XIV" in a book called "In Search of Excess." More recently, a Wall Street Journal poll found that almost two-thirds of Americans agree that Congres s should limit corporate tax deductions for executive salaries.

Predictably, congressional Democrats are the ones actually pushing such a measure. Less predictably, voter support comes even more from Republicans than from Democrats, the Journal poll found. "There's only one area right now where we stand out in international competition, and that's [executive] compensation," says Dale Hanson, who controls the $65-billion portfolio of the California Public Employees Retirement Fund, expressing the exasperation of many shareholders who see executive salaries escalate wh ile their stock values drop.

Executive pay probably won't become as hot a topic as, say, congressional pay was last year. CEOs wield clout in the media, through advertising budgets and friendships with publishers. But the issue is one Americans need to think about. The problem isn't just the amounts the CEOs are making; worse is the effect these have on American enterprise and on society as a whole.

There are two basic ways to approach the question of pay. One stresses a balance between those at the top and everyone else. The Japanese adhere to this principle; CEOs in Japan make about 16 times the pay of the average worker, in contrast to the United States, where CEOs make 160 times as much as other employees.

That's because Americans at the top adhere to another principle (or nonprinciple): Take as much as you can get. In theory, "market forces" are supposed to substitute for a principle of justice and hold things in line. But Mr. Crystal shows that in the corporate boardroom that doesn't happen. Consultants are brought in basically to justify raises, he says. The rule is that salary must go up and up but never down, regardless of how a company performs. If performance drops, they simply change the statistica l measures so that things seem to have gotten better.

Once, early in his career, Crystal had the temerity to advise that an executive's base pay be dropped, with more bonuses for performance. "Just who do you think is paying your bill anyway?" the CEO said with indignation.

In the end, it all comes down to keeping up with the Joneses. The exorbitant salaries are justified because others are making them, and the spiral spins further out of control. Professional baseball players, another overpaid group, are more honest about this than chief executives are. ve got the stats to get what those [other] players are getting," Wade Boggs, the Boston Red Sox third baseman, said recently of his contract talks.

When the top people are on this gravy train, morale suffers down below, especially when hard times hit and the suffering isn't shared. There was more than a little grumbling about the $56 million pay of Time-Warner chief Steven Ross, for example, when Time Magazine was laying off employees last year.

More is at stake here than bad feelings. It is no accident that the Japanese have succeeded largely by taking American inventions and manufacturing them better than the US does. Production is a social undertaking, not an individual one. It requires teamwork and trust, which is exactly what bloated executive paychecks erode. This isn't radical polemics; corporate people are starting to see it too. An official of the Colgate-Palmolive company acknowledged this at a business forum last year. "The biggest ba rrier to teamwork," he said, "is executive pay."