'06 numbers accent CEO-worker pay gap
The wide income gap between top-level executives and the average worker was driven home last week when Wall Street's largest securities firms began issuing 2006 results.
Goldman Sachs Group Inc.'s profit hit a record $9.54 billion and it said average compensation for each of its 26,467 employees hit $621,906. Morgan Stanley CEO John Mack was awarded a $40 million bonus - the biggest ever for the head of a Wall Street firm, as the company headed for the best profit in its 71-year history.
Goldman Sachs, Morgan Stanley and three other top Wall Street securities firms are projected to allocate $36 billion for employee bonuses -- a per-person average of about $211,000 -- up from about $150,000 per employee one year ago.
"Stories about excess point out the huge gulf between what the average worker makes and what the people at the top of the food chain make," said John Challenger, CEO of outplacement firm Challenger, Gray & Christmas Inc., Chicago, which specializes in tracking corporate activity. "They just keep on coming."
"Boards of directors have to ask themselves, 'why are we doing this?'," said Eleanor Bloxham, CEO of the Value Alliance and Corporate Governance Alliance, a corporate-governance advisory service in Westerville, Ohio.
Securities firms are an excellent example of what's known as pay for performance, experts said. Goldman, for example had the best year in history for any Wall Street firm.
"Surely, the securities firms' compensation is market-driven, with bonuses just following profits," said Bill Coleman, senior vice president and chief compensation officer for salary.com , Waltham, Mass. "They aren't paying bonuses based on bad performance."
Wall Street's huge bonuses and compensation packages are the latest examples of what some compensation watchers call an out of control system that rewards good -- and bad performances.
No less an authority than billionaire investor Warren Buffett, known for his investment mastery through his investment vehicle, Berkshire Hathaway Inc., calls the current high level of executive compensation "ridiculous."
"Too often, executive compensation in the U.S. is ridiculously out of line with performance," Buffett said in Berkshire's 2005 annual report. "That won't change, moreover, because the deck is stacked against investors when it comes to CEOs' pay. The upshot is that a mediocre-or-worse CEO ... all too often receives gobs of money from an ill-designed compensation arrangement."
Buffett's reference to "gobs of money," particularly when comparing executive compensation to average worker pay seems appropriate. Consider:
• In 1960, studies found for every $1 the average worker was paid, the average CEO whose company was among the Standard & Poor's 500 garnered $41.
• Last year, the ratio jumped tenfold: For every dollar the average worker made, the average S&P 500 CEO made $411.
Every year when compensation packages are publicized, protests from shareholder watchdogs and other groups are loud, but generally toothless.
"There are structural and cultural forces in our society that keep changes to the compensation system from being made," Challenger said. "We're living in the age of the lottery and the ones hitting the lottery are CEOs."
Company boards of directors are directly responsible for determining executive compensation packages, and do so based on unproven beliefs, said University of Pittsburgh Professor James Craft.
"There is a perceived shortage of executive talent, with boards (of directors) feeling that to get qualified executives, you have to pay, and that can lead to a bidding war," said Craft, a professor in Pitt's Joseph M. Katz Graduate School of Business. "It creates a lot of pressure."
Craft said the compensation committees on boards of directors establish pay rates, generally through hiring a consulting firm to survey the particular industry to determine the going rate for talent.
"The board says: 'We have to compete with that figure.' So they add on to the amount," Craft said. "Then the next time the consulting firm does a survey, it uses that last number as their base, and the numbers just keep escalating."
However, a combination of events, including continued increases in executive compensation, the options-backdating scandal, and the spectacular fall of some well-known executives and companies because of poor leadership could lead to compensation changes, experts believe.
In July, the U.S. Securities and Exchange Commission adopted new rules intended to allow shareholders to better understand compensation. The regulations went into effect Friday.
"I think that pay will get reined in once these new rules go into effect," said Marc Stockwell, Toledo, Ohio-based National Practice Leader for consulting firm Findley Davies Inc.'s Rewards Management Consulting Practice. "The public's shock and awe with these compensation numbers and some egregious business situations made the SEC feel it had to act."
The new rules mandate that company compensation committees stand behind their decisions related to executives' pay, and they require new disclosure that provides a focused look at total annual compensation, all written in what is described as "plain English."
The rules will result in a much fatter Compensation Discussion and Analysis section of the annual proxy statement prepared by management and issued to shareholders, observers said.
"We're going through the new regulations now with clients, and it's a lot of work," Stockwell said. "It's going to turn the discussion into a small book."
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