Tech's phony dollar-a-year men.

Tech's phony dollar-a-year men.

Tech's phony dollar-a-year men.

Moneybox
Commentary about business and finance.
Jan. 30 2003 3:06 PM

Tech's Phony Dollar-a-Year Men

How CEOs make millions by eliminating their own salaries.

Illustration by Robert Neubecker

Since the tech bubble burst in 2000, leading chief executive officers including Cisco's John Chambers, Siebel Systems' Thomas Siebel, and Oracle's Larry Ellison have either eliminated their six-figure salaries or reduced them to $1.

The moves seem both practical and highly symbolic. In theory, the savings help the company preserve jobs, and the CEO shows himself to be unselfishly devoted to the company, willing to bet it all on recovery. The $1 salary especially resonates now that the nation mobilizes for war. After all, the original "dollar-a-year" men were the corporate executives who quit the private sector to help the government during World War II.

But today's dollar-a-year men are practicing phony virtue. In the '40s, salaries accounted for a hefty percentage of executive compensation, and hence directly influenced the ability of a CEO to get rich. Today, the salary of a CEO is a mere pittance compared to his earnings. Many of the bosses who have forsworn their salaries are still lapping up other forms of compensation—such as options and bonuses—that divert far greater company resources. As cost-cutting, these salary cuts are preposterous. It is like a fat person who devours two pizzas a day forgoing the mushroom topping to cut calories.

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In 1941, as war planning began, high-ranking executives flocked from the private sector to Washington, essentially volunteering to work for entities like the Office of Production Management and the Office of Price Administration. In a time of national conscription, Victory Gardens, and Rosie the Riveter, executives were expected to pitch in their expertise and time. The dollar-a-year men included GE CEO Philip Reed, Sears executive Donald Nelson, Ford production chief Ernest Kanzler, and General Motors President William S. Knudsen. By helping to transform the U.S. consumer economy into the "arsenal of democracy," these executives—and hundreds of others—contributed significantly to victory.

In recent decades, dollar-a-year executives have been found almost exclusively in the private sector, particularly at ailing companies that, like the United States in the '40s, were involved in life-or-death struggles against powerful, putatively evil forces. In 1978, when Lee Iacocca assumed the helm of Chrysler, which was fighting for survival—partially against Japanese imports—he took a $1 annual salary. In 1997, when Netscape's future suddenly seemed in doubt as technology's Evil Empire—Microsoft—began to challenge its business, chief executive James Barksdale cut his annual salary from $100,000 to $1. Between 1999 and 2001, when Apple's Steve Jobs returned to rally his wounded warriors against the Microsoft-Intel-IBM monolith, he took a total of $3 in salary.

Jobs and Barksdale represent the new breed of dollar-a-year men: company founders with hundreds of millions of shares of stock leading their suddenly cash-strapped organizations through tough times. By refusing a salary, they were essentially volunteering to nurse their babies back to health. In theory, they would only gain if the stock price rose.

In practice, it's a different story. The World War II dollar-a-year men sacrificed real wealth for the good of the nation. Today's dollar-a-year men are sacrificing nothing. In part because of the way the tax code penalizes companies for paying salaries of more than $1 million, cash has shrunk as a share of overall compensation. In effect, the dollar-a-year CEOs simply traded small amounts of cash for massive amounts of options. As part of a four-year, no-salary agreement he reached with Oracle in 2000, CEO Larry Ellison—who already owned about a billion Oracle shares—received options on another 40 million. Cisco's John Chambers cut his salary from $268,131 in 2001 to $1 in 2002, but took 4 million options, half of which are exercisable at an eminently reachable $16.01.

Reducing a six-figure salary to a buck is a good tactic for billionaires who know they're about to cause real pain to others. New York Mayor Michael Bloomberg's status as a dollar-a-year man has partially insulated him from charges of insensitivity as he has raised property taxes and cut social programs to close budget gaps.

But the tactic has less utility in the private sector, especially when the dollar-a-year men aren't really depriving themselves. In 2001, when Tom Siebel slashed his salary from $1 million to $1, he exercised options on more than 3 million shares, earning more than $174 million. The cost of those options to shareholders vastly exceeded any savings from his salary cut. Economically speaking, a dollar is a dollar to shareholders, whether it comes in the form of a salary, a bonus, or an option. Or in the form of a $90 million jet. In 1999, Apple gave Steve Jobs what the company called a "special executive bonus": a plane "with a total cost to the Company of approximately $90,000,000." Apple shareholders would have been better off if Jobs were paid a huge salary instead.

Nobody will ever accuse this generation of executives of self-sacrifice. Indeed, as a class, today's CEOs have excelled at insulating themselves from risk and hardship while inflicting it on their underlings and their putative bosses, the shareholders. The only hair shirts these dollar-a-year men are wearing are made of cashmere.