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Executive Pay in US Just Goes Up and Up

THE average employee in the United States got a 3.5 percent wage hike last year. The biggest bosses got a 7 percent increase, or more than $80,000 extra.

For the chief executive officers of the Fortune 1,000 largest companies, the median pay (salary plus bonus) in 1993 was $1,282,800, according to early results from an annual study by Towers Perrin, a compensation and management consulting firm. The median is that number where half the CEOs got more; half got less. If the long-term portion of these CEO compensation packages (such as stock options) is included, the median reaches just over $2.4 million.

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By comparison, median annual earnings for everyone over 15 years of age in the US in 1992 (the latest figure available) was $17,696. Average earnings (boosted by the high salaries of executives and some others) came to $22,667.

Moreover, the wage gap is widening. In 1974, CEOs for the 200 largest companies got, on average, 40 times the average wage of the American worker. By 1992, the ratio was 157.

This massive pay gap prompted such an outcry in the last few years that the Clinton administration, Congress, and the Securities and Exchange Commission moved to discourage corporate megasalaries. But Graef Crystal, a retired compensation consultant and the top critic in the nation of executive pay, doesn't expect any change soon. This unwarranted gap, he says, could get wider. ``You haven't seen anything yet.''

Congress passed a law taking effect this year that removes the tax deductibility for companies of any excess over $1 million in compensation for the top five paid officials in a company.

That law, says Mr. Crystal, ``is very easy to get around. The whole thing has become a mockery.''

Companies can pay executives more than $1 million and maintain deductibility if the compensation package is performance-related and approved by shareholders. Crystal expects lawyers and compensation experts to figure out pay and stock option packages that meet the letter of the law without stretching the ability of executives to get huge incentive bonuses.

After looking at 1993 CEO compensation in 107 big companies, Paula Todd, manager of compensation research at Towers Perrin, concluded: ``Executive compensation is becoming closely tied to the ability of an executive to contribute tangibly to the creation of shareholder value.''

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To Crystal, the pay-for-performance argument is nonsense when applied to busy executives. Most already work 70 to 80 hours a week. Will they work longer to earn more pay? Not likely, Crystal says. Will they work smarter? The implication of a ``yes'' answer would be that CEOs are holding back on doing their best.

Corporate executives in other nations are paid far less, notes Crystal. CEOs of major Japanese companies get about 25 times the pay of the average worker; German and French CEOs 25 to 30 times; and British CEOs 35 to 40 times.

A comparison of British and US companies, taking account of size, industry, and corporate performance, found US executives were paid 3.6 times as much as their British counterparts on average. Maybe US corporate boards should ``bring over the cheap boys,'' suggests Crystal. ``They speak better English. Why do you need to pay all this money for American executives.''

In an important 1990 article in the Harvard Business Review, Profs. Michael Jensen and Kevin Murphy of Harvard's Business School argued that what is wrong with executive compensation is not the size of pay packages but rather their lack of sensitivity to shareholder returns, one measure of company performance. Taking their 1988 numbers and shareholder returns on to July 31, 1993, Crystal found no sign that higher pay bought better performance. If anything, it was the opposite.

Why then do boards continue to approve higher pay packages?

One reason, Crystal explains, is a ratchet effect. With most pay packages, executive wages go down less on poor corporate performance than they go up with good performance. As a company goes through an economic or industry cycle, this automatically pushes up pay. And since most boards want to pay their executives at least the average for executives, the average gets ratcheted up and up over time. Nice if you are a top boss.

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