America's Greedy CEOs

America's Greedy CEOs

America's Greedy CEOs

Moneybox
Commentary about business and finance.
Aug. 13 1998 3:41 PM

America's Greedy CEOs

As U.S.-style capitalism spreads around the world, foreign shareholders are going to have to fight very hard to keep U.S-style compensation practices from spreading with them. If they don't, before too long foreign corporations are going to feature the same kind of top-heavy, high-reward-for-low-risk pay scales that are fattening CEOs and their subordinates at every major--and not-so-major--American company.

Advertisement

Striking evidence of this arrived last week in the form of a proxy statement filed by Chrysler, which showed that current Chrysler CEO Bob Eaton will receive $70 million in cash and stock next year. This is 35 times the salary of Daimler CEO Jurgen Schrempp, with whom he'll be running the new DaimlerChrysler. Eaton's base salary will be twice that of Schrempp. But he'll also receive 628,000 shares of stock in the new company. These aren't stock options, but actual shares, which means they're pure gravy. Eaton will also receive warrants on another 2.3 million shares, and he worked a nice little deal with his pension benefits as well. As long as he sticks around for three years, he'll get an extra $30,000 a month after he retires. But then, what's $30,000 a month between friends?

Oh, Eaton also has a new golden parachute clause in his contract. If he gets fired in the first two years, he takes home a cool $24 million.

By contrast, if you add up the salaries of the entire 10-member management board that runs Daimler, they amount to less than what Chrysler's former No. 2 guy, Bob Lutz, made last year. Daimler's execs, in fact, made slightly less in 1997 than they did in 1996, even though the company's business has been booming.

There's no economic reason for the discrepancy, of course. Chrysler hasn't been doing better than Daimler, nor is it bigger. No sensible person would argue that Eaton is a better CEO than Schrempp. And the difference in pay can't be attributed solely to stock options, either. What it can be attributed to is an American corporate culture in which stratospheric salaries are now seen as a matter of course. It's a culture in which the idea that there should be some reasonable ratio between the salary of the highest-paid employee and the lowest-paid employee at a company is as discredited as Marxism itself.

Advertisement

The burden of curbing CEO salaries falls on the boards of directors of U.S. corporations. But who sits on these boards? Mostly executives from other companies, and it's hardly in their interest to curb executive compensation. When he ran Warner Communications, Steve Ross made sure that everyone below him lived high on the hog, so that his own lavish pay and free use of the company expense account would be relatively unnoticed. You might say that the same logic is at work in the boardrooms of America.

The argument, of course, is that you have to reward excellent performance with excellent pay. But if CEOs were really interested in being paid for performance, then all stock options would be indexed to the performance of the S&P 500, and when companies did badly CEOs would have to take pay cuts. More to the point, the success of companies like Daimler, Bertelsmann, and Toyota suggests that excellent corporate performance is not dependent upon egregiously high CEO salaries. There are things to admire about U.S.-style capitalism. But the self-dealing that has sent CEO salaries through the roof is not one of them.