EthicalDilemma

AREU.S.EXECUTIVESPAIDTOOMUCH? Thereisnoquestionthatexecutivepayisgrowing.From1999to2003,thepayofthetopfive executivesfromthe1,500largestcompaniesintheUnitedStatesamountedto$122billion, comparedto$68billionfrom1993to1997.Incomparison,from2001to2003,topexecutive compensationamountedto9.8percentofthecompaniesnetincome,andthefigurewas5 percentfrom1993to1995. Perks,bonuses,andstockoptionsareoftenparticularlycontroversial.FordsCEOAlanMulally pulledin$28.2millionin2006,includingabonusof$18.5million,andfreecorporatejettravel forhiswife,Nicki(whichcostFord$172,974forthefirstquarterof2006).VerizonsCEOIvan Seidenbergreceivedstockoptionsworth$27millionin2005,despitethefactthatthe companysstockdropped25percentthatyear.OneofthemembersofVerizonsboardof directorsarguedthattheoptionsweregrantedtomakeupforthefactthatSeidenberghad beenunderpaidinthepast. Thevalueofstockoptionsisboostedwhencompaniesgrantexecutivestockoptionswhen pricesarelow.Youveprobablyheardofbackdating,apracticeinwhichexecutivesaregiven therighttopurchasetheircompanysstockatsomepriorprice,generallywhenthepriceofthe stockwaslow.Forexample,whenthestockmarkettankedafterthe9/11terroristattacks, manycompaniesgrantedexecutivesstockoptions(HomeDepotissued$19.2millionworthof optionstoitstopfiveexecutivesonSeptember17,MerrillLynchgave$14.4milliontoitsCEO onSeptember27)eventhoughSeptemberisusuallyamonthinwhichstockoptionsarerarely issued.Somecompanies,suchasApple,wentevenfurtherandbackdatedstockoptionssothat astockcouldbepurchasedatsomeretroactivelowerprice. Eventhoughbonuses,perks,andstockoptionshavecausedtheratioofexecutivepayto employeepaytogrowdramaticallyoverthepast25years,somesaythisrepresentsaclassic economicresponsetoasituationinwhichthedemandisgreatforhighqualitytopexecutive talentandthesupplyislow.IraKay,acompensationconsultant,says:Itsnotfairtocompare [executives]withhourlyworkers.Theirmarketistheglobalmarketforexecutives.However, executivepayisconsiderablyhigherintheUnitedStatesthaninmostothercountries.U.S. CEOsarepaidmorethantwiceasmuchasCanadianCEOs,nearlythreetimesasmuchasBritish CEOs,andfourtimesasmuchasGermanCEOs.Thisdifferenceisevengreaterwhencompared towhataverageworkersmake.U.S.CEOsmake531timesthepayoftheiraveragehourly employees.Incontrast,BritishCEOsmake25timesasmuchastheirworkers,Canadians21 timesasmuch,andGermans11timesasmuch. CriticsofexecutivepaypracticesintheUnitedStatesarguethatCEOschooseboardmembers whomtheycancountontosupporteverincreasingpay(includinglucrativebonusandstock optionplans)fortopmanagement.Ifboardmembersfailtoplayalong,theyrisklosingtheir positions,theirfees,andtheprestigeandpowerinherentinboardmembership.Mutualfunds

ownasignificantpercentageofthestockofpubliclytradedcompanies.Soyouwouldthinkthey wouldreigninexcessivepaytoexecutives.Mutualfundcompanies,however,voteinfavorof managementpayplans76percentofthetime,whiletheyvoteforshareholderproposalsonly 28percentofthetime.DonPhillipsoftheresearchfirmMorningstar,commented,Mostasset managersarereluctanttopickfightswithmanagementbecausethesebigcorporationsarethe oneswhocanwritebigcheckstomoneymanagementfirmsforbusiness. IshighcompensationofU.S.executivesaproblem?Ifso,doestheblamefortheproblemlie withCEOsorwiththeshareholdersandboardsthatknowinglyallowthepractice?AreU.S. CEOsgreedy?Aretheyactingunethically?Whatdoyouthink? Sources:J.S.Lublin,ForCEOSpouses,CorporateJetsArethePerfectPerk,WallStreet Journal,June30,2007,p.A1,A8;J.Levitz,DoMutualFundsBackCEOPay?WallStreetJournal, March28,2006,pp.C1,C4;andJ.Eisinger,LavishPayPutsaBitonProfits,WallStreet Journal,November11,2006,pp.C1,C7.