ANOTHER DAY, ANOTHER $3,000
Blumberg, Paul
In a society that extols its egalitarian tradition and during periodic bouts of national self-delusion even proclaims its essential classlessness, it might be instructive to examine the range of...
...Most of the executives testified that, although operations might be difficult or inconvenient for a time, production could continue and the company could function adequately without them.42 An old-fashioned conservative argument holds that the high income of some works no substantial injustice on the rest...
...With ordinary options, the executive must buy and pay for the stock, pay the taxes immediately on his potential gain if the option does not satisfy IRS rules for long-term capital gains, and take the chance that the market price of his stock will go under water after he purchases it...
...What these bureaucracies have in common—public utilities, nationalized industry, government, and the military—is that in all of them there is some public regulation and public control...
...281ronically, the Tax "Reform" Act of 1969 did more to increase the pay of top executives than anything in recent years...
...57-61...
...It:See especially Executive Compensation in Large Industrial Corporations (New York: National Bureau of Economic Research, 1968), and The Ownership Income of Management (New York: National Bureau of Economic Research, 1971...
...Bureau of the Census, Current Population Reports, Series P-60, No...
...If the executive exercises his option to purchase the stock two years later and its market price has risen to $75, this executive is able to buy the stock at the original option price of $50 per share...
...I am grateful to Dean Savage who rediscovered this study and suggested its relevance here...
...30 Top Executive Compensation, p. 5. 163 income has been substantially reduced since 1969, executives are finding it profitable to shift over to nonqualified options...
...sibilities about some persons accumulating more money than they or their families could ever reasonably need or spend, while at least 25 million Americans remain ill-housed, illfed and ill-clothed...
...The period from 1950 to 1961, when the Dow Jones industrial average rose from about 200 to 700, was clearly ideal for options...
...In the same year General Motors paid its chairman $325,000 plus a bonus of $625,000, a total of $950,000...
...It is one of the system's hoariest beliefs that high profits and high income are fully justified for those courageous enough to risk it all in the uncertainties of the marketplace...
...Moreover, stock purchased on qualified options must be held for three years or more before it is sold if the entire gain is to be taxed at the lower rate...
...Thereafter the stock option device not only helped to enrich many executives...
...These prodigious executive salaries are a measure of corporate power and autonomy from public control...
...John C. Perham, "The Changing Compensation Package, Dun's Review, September 1977, pp...
...by 1976 the figure had increased to 65 percent...
...The result of all this has been an extraordinary recent accumulation of stock ownership by management...
...160 inherited wealth is a factor, each of the remaining top managers owned an average of more than $1.1 million of his company's stock...
...In the same year, the chairman and president of United Technologies earned $650,000 in salary and bonus, but realized an additional $1 million in potential gains from his options on United Technologies stock...
...Second, the bear markets of the 1970s made options far less profitable for most executives than they had been in previous periods of continually rising stock prices...
...Civil Service Commission found that the highest paid federal civilservice employees, at the GS-18 level, earned an average of $36,000 in 1975, while comparable employees in private industry were paid an average of $71,000, plus another $23,000 in bonuses...
...Thus, not executive avarice but functional necessity dictates these opulent salaries...
...But even this is not the end, for the number and variety of executive fringe benefits is extraordinary...
...Add also profit-sharing plans, savings and investment plans, long-term incentive plans, performance shares (essentially piece rates in six digits), deferred compensation, and handsome pensions...
...613-17...
...In 1976, Lee A. Iacocca, Ford president, earned a salary of $360,000 and a bonus of $610,000 for total direct compensation of $970,000...
...Clarence B. Randall, Many thanks to Dean Savage for good conversation and helpful suggestions...
...Stock options on such a scale have more than monetary significance...
...As maldistributed as income is in this country, it is important to recall that wealth is far more highly concentrated even than income...
...While in the 1940s only 5 percent or less of top executives' after-tax income derived from stock-related rewards, by the late 1960s, stock-based rewards comprised fully 46 percent of aftertax compensation...
...9 What Did Berle Mean...
...Necessity has therefore mothered at least one ingenious invention designed virtually to guarantee executives rising prices on their company's stock even while the actual market price may be declining...
...However, in a long period of stagnating or slowly falling stock prices, such as the present, stock options cannot be counted on to provide the large, risk-free income to which executives have become accustomed...
...The moral issue aside, the high salaries of some do indeed work substantial injustice on the rest...
...38A...
...For example, in 1975, the chairman of General Dynamics earned just $400,000 in salary and bonus...
...39 The highest ranking official in the U.S...
...This or similar proposals had been introduced at eight previous GM meetings and had been defeated at each by a total of 9396 percent of total shares voted, no surprise if one considers management's domination of the proxy machinery...
...In 1976, his last full year as chief executive at CBS, Paley's income from salary was $500,000, an enormous sum by the standards of most American families...
...Large option grants are especially popular when company stock prices are low, for potential gains are maximized later on when stock prices rise...
...This represents an immense increase of ownership interest since the 1940s, when the ownership income of the top executives in Lewellen's sample was only 80 percent of salaries, bonuses, etc...
...former chief executive of Inland Steel, explains: The senior officers in a corporation have a range of ethical questions which are peculiarly their own...
...The U.S...
...At the 1970 General Motors stockholders' meeting, for example, Lewis and John Gilbert, well-known corporate gadflies, introduced a motion to limit total compensation to any GM executive to $350,000 33 Harland Fox, "Security, Uppercrust, U.S.," Across the Board, March 1977, pp...
...Recently, however, auto executives have resumed their ascendant position...
...One needn't be a dogmatic egalitarian to realize that income distribution is indeed a zero-sum game, and that the affluence of some does in fact result in the poverty of others...
...for stock purchases are convenient, their one disadvantage is that the executive must incur tremendous indebtedness...
...Because of the traditionally high taxes on straight salary and bonus, corporations have shifted to other ingenious forms of compensation to help executives avoid the tax bite...
...Has their composition been altered by the civil rights struggles of the 1960s, the women's movement, the equality revolution in general that sought to break down barriers of exclusiveness based on race, sex, and class, and to democratize access to the desirable positions in American life...
...In exercising most options, the executive must purchase the stock that can involve an enormous expenditure of funds...
...With the gimmick known as stock appreciation rights (SARs), the stock option device becomes just a matter of bookkeeping...
...The systematic minimization of risk extends into the executive's retirement years, a period that for most Americans is fraught with insecurity...
...4 The Executive in Transition (New York: McGraw-Hill, 1967), p. 130...
...Wilber G. Lewellen, probably the foremost academic specialist on executive compensation, has conducted a series of meticulous studies of the total compensation package since 1940 of the top five executives in 50 of the largest industrial corporations in the U.S., including the largest firms in auto, steel, chemicals, electrical equipment, petroleum, and other industries...
...As one compensation specialist described it, "When the stock plunges, the executive can simply say, 'I don't want to play this game any more.' Then he turns his shares back to the company, the loan is wiped out and the transaction closed...
...Some corporations, therefore, have decided to reduce the profitlessness of a falling market by simply "recycling" their executive stock options...
...29 The maximum marginal rate on 25 Top Executive Compensation„ p. 11...
...In 1950 Congress amended the tax code, granting favorable tax treatment to executives who were rewarded with stiares of their company's stock...
...Some executives are so used to getting a free ride from their companies that one compensation expert has argued that a disadvantage of company loans is that often managers simply "look on the money as theirs, without strings," and the company has trouble obtaining repayment...
...private industry and small also in comparison with British private enterprise...
...The company thereupon adopted a compensation plan that protected their executives from the vicissitudes of share prices, even though ordinary shareholders were losing heavily...
...43 The executive suite today is full of the same old faces...
...But every occupation has its make-work practices, so why not economics...
...36-38...
...8 The highest paid of these earn more in one nine-tofive air-conditioned day than most farm workers make in an entire year of toil...
...The complex details of a phantom plan are usually set forth in small type—and even smaller footnotes—toward the back of the proxy statement...
...17 While management's Gargantuan ownership interest ought to put the coup de grace to Berle and Means's venerable theory, economists persist in playing the same old games, asking themselves and each other in articles in which they carefully lose the forest for the trees whether corporate executives really do have a strong personal interest in the financial success of their firms...
...16/bid., p. 105...
...166 whose contribution to the health and survival of American society and its citizens we are all familiar with...
...125-32...
...GM's salary committee once again successfully urged defeat of the motion...
...But because the market fell during the year, Gulf simply withdrew the options later that year and in their place issued 715,000 new ones at $17.81...
...yes, Hemingway might have replied, they make more money...
...Although relatively new on the compensation scene, SARs seem ideally suited to the principle of maximum gain with minimum risk, and by 1977, of the 200 industrial corporations 80 had adopted SARs for their executives...
...Whether this is, as Clarence Randall suggests, an executive's dilemma, or, more likely, an executive's dream can be left to the corporate psychologists...
...The stock option itself symbolizes the principle of risk minimization...
...When we speak of the "ordinary" top manager with immense income, we speak of the rich but not of the richest...
...Besides these pensions, retired executives can look forward to deferred compensation accumulated during their working years, stock options, employment contracts (consultantships), and, for pin money, social security...
...One compensation specialist writes: ". . . by its very nature, phantom stock does not arouse the controversy of bonuses or muchtouted options...
...31 Although stock options are still alive and relatively well in the executive suite, the recent feeble performance of the stock market is inevitably taking its toll...
...Annual statistics are published in a number of places, most accessibly in Forbes and Business Week in May...
...If the stock price falls after an option has been granted, the executive avoids loss by merely declining to exercise his option...
...6 Auto executives typically rank at or near the top of corporate compensation...
...27 As one delighted management consultant said of du Pont's system of phantom stock awards, "du Pont has found a simply fantastic way to bury executive compensation...
...Early in 1974, for example, Gulf Oil granted its top executives options to buy some 760,00 shares of Gulf stock at $21.75 each...
...But in that year he exercised his option to buy General Dynamics stock...
...Risk and Reward THE ONE towering irony about executive compensation in this country is its complete violation of one of the central ideological pillars of capitalism, the principle of risk...
...They receive dividends on their shares and can eventually sell the stock back at the new book value per share...
...The sheer number of shares offered to executives on option is enormous...
...Is it then not a sign of the times that in 1977 when Business Week magazine, in its annual survey of executive compensation, announced that the chairman of United Technologies was the highest paid executive in America, the company immediately issued all manner of qualifications, disclaimers, smoke screens, and denials, as if their chief executive had been stigmatized rather than honored...
...4° In other words, those positions that are crucial for the proper functioning and survival of society must necessarily be rewarded best...
...22/bid...
...Also, the executive's price for stock bought on a qualified option can be no lower than the market price on the date he was granted the option...
...The rich earned considerably more, the poor considerably less...
...But stock options, which first appeared in the 1920s, were not widely used until after Congress accorded them special tax treatment in 1950...
...One thing is sure: however it comes and whatever form it takes, the democratization of corporate governance will end once and for all the moral anarchy of executive compensation as it exists today...
...28/bid., p. 34...
...Harvard Business Review, November-December 1976, pp...
...162 Like SARs, phantom stock plans are becoming more attractive because the executive risks none of his own money and never has to worry about financing the purchase of large blocks of stock...
...an effective executive compensation policy must . . . provide meaningful differentials between levels of responsibility in order to encourage employees to seek greater responsibilities . . . It is apparent that a drastic reduction in compensation for the Chief Executive Officer and the Chief Operating Officer and other important executives of General Motors would have a depressing effect on the entire organization...
...In one study of major corporations, Dun's found that more than 10 percent of the executives responding to the survey reported that they had received loans from their company...
...q 44John C. Baker, "Are Corporate Executives Overpaid...
...Of the more than 700 manufacturing corporations studied by the Conference Board in 1976, 86 percent continued to award stock options to their executives, down only slightly from 91 percent in 1970...
...True, his board of directors must give pro forma approval to his recommendations, but it almost never challenges them...
...Massive ownership of company stock by managers casts serious doubt on the theory, developed nearly a half-century ago by Adolph A. Berle and Gardiner C. Means, that in the modern corporation there has been a decisive split between ownership and management...
...Thus Chrysler, in trouble in 1974, losing $52 million, its stock price down, gave options to its three top executives totaling 150,000 shares...
...But this argument misses the moral issue of what such a maldistribution of income says about our aspirations for a more just and equal society...
...See, e.g., David H. Ciscel, "Determinants of Executive Compensation," Southern Economic Journal, April 1974, pp...
...Is there not something that jars the sen41 For a discussion of executive salaries and functional theory in sociology, see Leonard Broom and Robert G. Cushing, "A Modest Test of an Immodest Theory: the Functional Theory of Stratification," American Sociological Review, February 1977, pp...
...The number-one man confronts a very special moral equation, for example, when it comes to fixing salaries for himself and the other executives...
...30 In an apparent paradox, as stock options have become taxed more heavily in recent years, executives have switched from qualified stock options (i.e., options that qualify for favorable tax treatment) to nonqualified options...
...242-49 and reprinted dozens of times as a modern sociological classic...
...Harvard Business Review, July-August 1977, pp...
...Bureau of the Census, loc...
...11-19...
...42 Margaret Bright Rowan and Harry V. Kincaid, The Views of Corporation Executives on the Probable Effect of the Loss of Company Headquarters in Wartime (New York: The Rand Corporation, Bureau of Applied Social Research, Columbia University, 1956), RM-1723...
...158 executive in each of these 50 firms, salary and bonus in the late 1960s comprised only 41 percent of total after-tax compensation, the remainder consisting of deferred compensation, profit-sharing, pensions, and, above all, stock options...
...With stock appreciation rights the executive is spared all these headaches, yet he reaps the same appreciation rewards as if he had actually purchased the stock...
...34Ibid., p. 38...
...At the 1977 Chrysler stockholders' meeting, for instance, a small stockholders' resolution to limit executive bonuses and stock options gained an amazing 20 percent of the total vote, and shareholders lawsuits in 1977 against Norton Simon, Inc...
...there is no attempt to push off onto workers or the community at large part of the social costs of the enterprise...
...New York: McGraw-Hill, 1964), p. 113...
...32 Salary, bonus, options, stock purchase plans—all this does not yet exhaust the variety of executive compensation...
...In 1970, only 9 percent of the 700 manufacturing corporations surveyed by the Conference Board offered nonqualified options to their executives...
...A recent study of the social background of 450 top executives from 250 of America's largest corporations answers all these questions in the negative...
...Firmly in control and unencumbered by the constraints of ownership, modern management is allegedly free to direct corporate goals away from an exclusive concern with profits and toward broader economic and social objectives, such as corporate stability, public service, and community involvement...
...9Economics, 6th ed...
...The average income of all American families in 1976 was about $17,000...
...Conference Board, Top Executive Compensation (1976 edition), Report No...
...Shareholders' anger rises at avaricious executives, and public-interest and consumer groups grow aware that the trusts cannot be busted and so must be democratized...
...Even friendly insiders are warning that the greed of top executives may eventually kill the goose that lays the golden egg...
...Other handsomely paid executives in 1976 were the chairman of Norton Simon ($400,000 + $444,000 bonus), the chairman of ABC ($233,000 + $514,000), the chief executive of American Home Products, Inc...
...The modern corporation is a soulful corporation...
...See "Recent Evidence," p. 161...
...By the terms of this fail-safe plan, the company buys the stock back at the original option price and the executive's debt is canceled...
...The number of companies paying bonuses has increased over the years, and in a study of more than 700 of the largest manufacturing 5 Top executive compensation is made public not because executives wish it—it was once a highly guarded corporate secret—but because the SEC requires it...
...In the Conference Board's 1976 survey, 29 percent of large manufacturing corporations (sales over $3 billion) had phantom stock plans for their executives.25 While large executive salaries, bonuses, and regular stock options may inspire a stockholders' revolt, a singular advantage of SARs and phantom plans is that they are often so complex they confuse shareholders...
...A market that alternately rises and falls can also be good for options, as companies can grant options to their executives when stock prices are low, and executives can sell when prices rise...
...Under the plan, Corning executives are allowed to buy shares of company stock at its book value...
...Geneen did better in 1976, however, earning $421,000 in salary and $425,000 in bonus, for a combined sum of $846,000...
...50-52...
...Democracy THE ECONOMIC STAGNATION of American ca pitalism in the 1970s was preceded by its moral stagnation in the 1960s...
...And where the public exercises even nominal supervision, income distribution is always more equitable than where the public is excluded...
...According to the prevailing wisdom of the school of functionalism in American sociology, those occupations must receive the highest rewards that "have the greatest importance for society...
...22 While ordinary low-interest company loans 20James E. Cheeks, How to Compensate Executives (Homewood, Ill.: Dow Jones-Irwin, Inc., 1974), p. 215...
...168...
...How ironically significant a comment it is on the relevance of social science to the real social world that the highest paid American corporate executive in modern times was Michel C. Bergerac who in 1974 received a salary and bonus of $1,595,000, plus a stock option grant of 70,000 shares for his service as president of . . . Revlon...
...19 Gulf & Western, R. J. Reynolds, Allied Chemical, Champion International, Squibb, and many others had executive loan programs, mainly for financing the purchase of stock bought on option, but also for paying taxes on the stock purchased and to finance homes, life insurance policies, college tuition, and other major executive expenses...
...In short, top management has been virtually untouched by any of the movements toward equality of the last decade and a half, and the executive suite remains one of the most highly segregated sanctuaries in the land...
...In 1976, the median income of all full-time blue-collar working males was $12,500 before taxes.' In early autumn 1977, production workers with three dependents were taking home $174 a week...
...No repayment of principal is required until the executive dies, retires, quits, or goes bankrupt, something few Xerox executives ever do...
...2. firms in the country, the Conference Board found that by 1976 nearly 80 percent regularly paid an annual cash bonus to their executives...
...Naturally, stock option grants of this magnitude have become a tremendous source of executive compensation, often dwarfing the executive's huge salary...
...15 Deleting from his sample such companies as IBM, du Pont, Firestone, and General Tire, where there is a family owner-manager tradition or where inherited wealth plays a role in management, we find that the remaining managers in Lewellen's study earned three times more from their ownership interest in the company than from their salaries, bonuses, and the like...
...Note, however, that as salary is just a fraction of total income for working executives, so pensions are just a fraction of total income for retired executives...
...14 Even more significant, Lewellen found that by the early 1960s the after-tax income of chief executives that was derived from all forms of ownership of the company—capital gains, dividends, as well as other stock-based remuneration—was on the average 61/2 times higher than their compensation in salary, bonus, and other compensation based on their management of the company...
...in recent years only in 1974 and 1975, when auto sales turned sharply downward, did salaries fall...
...313-14, quoted in Samuel Norich, "Managerial Theory and the Profit Performance of the Leading U.S...
...The reason is that, while qualified options are taxed at the capital-gains rate, they must conform to certain IRS regulations that may limit an executive's pecuniary gain...
...In its simplest terms, a stock-option grant is a right given to an executive to purchase a given amount of his company's stock, at some time in the future, at a price specified on the date the option is granted...
...government, presiding over a federal bureaucracy of nearly 3 million persons and a budget of nearly $500 billion, earns only $200,000 annually, less than one quarter of what some top executives earn...
...But others have offered alternate explanations for these high salaries...
...Allowing about 25 percent for rent or mortgage, the typical worker was left with $4.70 a day for each member of his family for food, clothing, transportation, recreation, medical care, insurance, phone, gas, electricity and miscellaneous expenses...
...In 1976, the chairman of Dow Chemical earned $435,000 in salary and bonus, but bought Dow stock on option 159 for $1.3 million when its market price was $2.5 million, for a potential gain of $1.2 million that year...
...157 Rapid-American Corp., earned (i.e., paid himself) a salary of $366,000...
...cit., Table 14...
...505, New York, 1970, p. 2. stock at its market price on that day of $50 per share...
...In 1972, the president of Texas Instruments earned less than $164,000 in salary and bonus...
...706, New York, 1976, chap...
...24John C. Perham, "Phantom Stock: Better than Options...
...Yet, while high income is seen as the just reward of high risk, corporate executives have hired hordes of management consultants, compensation specialists, actuaries, tax experts, and financial counsellors to help them remove any possibility of risk that might jeopardize their extraordinary income...
...35 Robert A. Gordon, quoted in Gerhard Lenski, Power and Privilege (New York: McGraw-Hill, 1966), p. 355...
...26 It is also possible to disguise exactly who is getting what by listing the award of phantom shares to groups of executives, rather than to individuals, by omitting the monetary value of the phantom units, and then relegating the whole thing, to "minuscule footnotes," which "most shareholders don't read . . . and don't understand .. . if they do...
...Even in adversity, the principle of risk minimization is triumphant...
...Instead of actually buying stock, the executive merely collects money or shares from the company equal to the appreciation he would have realized on the stock had he actually purchased it...
...For example, in 1976 Citicorp gave chairman Walter B. Wriston options to buy 101,000 shares of company stock, the chairman of Norton Simon received an option grant of 100,000 shares, Union Pacific gave its chairman the option to purchase 50,000 shares of company stock, and the chairman of Texas Instruments received an option grant of 25,000 shares...
...Maybe I'm worth $5 million a year...
...In 1956, during the height of the cold war, the Air Force's Rand Corporation interviewed top executives from 37 of the country's largest corporations seeking their opinion on whether their companies would be able to continue production if an atomic attack on the U.S...
...39Compensation Review, 7 (3rd Quarter 1975), p. 5. of dollars, pays its four-star generals and admirals with a quarter-century of service in uniform less than $46,000 annually (net income in 1975...
...In short, as Michael Harrington is fond of saying, the system provides socialism for the rich and capitalism for the rest of us...
...36 Chief executive officers (CEOs) of the nation's largest utilities, for example, earn substantially less than their counterparts in industry...
...34 Ideology WHAT JUSTIFICATION is there for executive compensation on this scale, a magnitude that led one economist to call it a form of "legal embezzlement"?35 The rationale most frequently invoked in management circles is that these rewards are essential in order to "attract, motivate, and retain" competent executive personnel...
...In order to preserve proper differentials, such a reduction would force changes in compensation at all levels of management thereby increasing the possibility of losing valuable management talent...
...But even if it is granted that some income differentials are necessary in an organization to provide work incentives, the question remains whether the degree of inequality need be so great...
...Phantom stock plans are similar to SARs, giving executives "units" equivalent to company stock, and the executive ultimately collects dividends on his imaginary stock, the appreciation of that stock, and/or the stock itself...
...His option price for the stock was $2 million at a time when the current market price was $4.2 million, a paper gain in that year of over $2 million, five times his salary and bonus and probably taxable at the capital-gains rate...
...12 Thus Congress set in motion the machinery that would ultimately make corporate managers significant part owners of their companies, and, in essence, lay to rest what little remained of the celebrated theory of the separation of ownership and management...
...In their personal background and characteristics do they reflect the diversity of the American population...
...15 The Ownership Income of Management, p. 89...
...As the tax difference between capital gains and other percentage increase than in the previous thirty years...
...13 13Carl Kaysen, "The Social Significance of the Modern Corporation," American Economic Review, May 1957, pp...
...6 lnterview, Forbes, May 15, 1971, p. 187...
...First, the 1969 Tax Reform Act reduced the tax advantages on stock options and narrowed the tax gap between gains from options and ordinary income...
...Many companies do not report executive loans to their shareholders in proxy statements because state and federal laws on disclosure are fuzzy...
...In a sense, this was correct...
...military, certainly larger and more bureaucratic than even General Motors, involving millions of men and tens of billions 37 Top Executive Compensation, pp...
...I 2Cited in The Conference Board, Qualified Stock Options foorr Executives, Report No...
...Management must occasionally parade this ideology before angry shareholders who, although not exactly egalitarians themselves, see in high executive compensation a threat to their own financial interests...
...Of these generous pensions and other postretirement executive income, Harland Fox of the Conference Board writes that this just goes to prove that "American companies still do take care of their own—top management, that is...
...4 Because boards of directors and compensation committees are normally rubber stamps when it comes to executive compensation— and occasionally even goad executives on— top executives are in a position, within very broad limits, to write their own ticket...
...The larger the firm (in sales), the larger was the bonus, both absolutely and as a proportion of salary...
...While the U.S...
...21 Perham, "Those Controversial Executive Loans," p. 68...
...For example, a qualified option must be exercised within five years after it is granted, thus possibly limiting the "spread"—i.e., the difference between the price the executive pays for the stock and the stock's market price at the time he buys it...
...Thus, an executive of, say, a large conglomerate, General Everything, is granted an option on January 15, 1978 to buy 10,000 shares of his company's "Wilber G. Lewellen, "Recent Evidence on Senior Executive Pay," National Tax Journal, June 1975, p. 164...
...37 In the mid-1960s, the total before-tax remuneration of full-time directors of Britain's four largest nationalized industries ranged from only £8,000 to £12,000, a pittance compared to salaries in comparable U.S...
...I've set my eyes on a much higher figure...
...Consequently, many companies have relieved their executives of this burdensome financial outlay by granting them low-cost (or no-cost) loans, or by arranging bank loans, usually at the company's own bank, and guaranteeing them...
...Tobacco executives are also handsomely paid men 40 Kingsley Davis and Wilbert E. Moore, "Some Principles of Stratification," American Sociological Review, April 1945, pp...
...24 23Frederic W. Cook, "Stock Appreciation Rights: A Research Report,"Compensation Review, 9 (1st Quarter 1977), pp...
...In actual fact, therefore, he himself is the one who decides what compensation he shall receive...
...Industrial Corporations," (paper presented at the In terms of the economic realities of contemporary management, this theory makes very little sense, for the ownership interest of managers today—and hence their inevitable concern for profits—is immense...
...forced top executive compensation down...
...In their survey of executive compensation in 1976, the Conference Board found that the median salary of CEOs in utilities was only about half of those in manufacturing...
...63-4...
...Although nonqualified options are taxable at higher rates than qualified options, they carry none of the latter's restrictions, thus gaining in flexibility and potential for gain what they lose in tax benefits...
...In a society that extols its egalitarian tradition and during periodic bouts of national self-delusion even proclaims its essential classlessness, it might be instructive to examine the range of income inequality, as illustrated, for example, by the salaries of top corporate executives...
...107 (Advance Report), "Money Income and Poverty Status in the United States: 1976" (Washington, D.C.: U.S...
...GM explains the consequences of tampering with this natural order...
...they are simply quantitative symbols of corporate autocracy...
...As measured by periodic Harris polls, public trust of business is probably at an all-time low, aggravated by Watergate and other revelations of illegal activities at home and bribery abroad...
...To remedy this, compensation specialists have devised plans that eliminate the need for any executive financing whatsoever...
...352-61...
...As one ecstatic managerialist, Carl Kaysen, wrote some years ago: No longer the agent of proprietorship seeking to maximize return on investment, management sees itself as responsible to stockholders, employees, customers, the general public, and, perhaps most important, the firm itself as an institution . . . there is no display of greed or graspiness...
...51-56...
...The idea of economic democracy is sweeping Europe in innumerable forms of workers' participation, control, and codetermination, and in the more radical wing of the work humanization movement in this country the idea is finding fertile ground...
...2 According to U.S...
...The answer is obviously no...
...J. Merrett and D. A. G. Monk, Inflation, Taxation and Executive Remuneration (London: Hallam Press Ltd., 1967), p. 45...
...165 employees are sufficiently motivated...
...Although I have cited some of the largest corporate salaries here, the compensation of top executives in almost all large corporations is extraordinary...
...3U.S...
...AntiMarxists always found the theory quite congenial, for it allowed them to argue that the capitalism of Marx's day had been transformed into something far more civilized...
...20 But the executive's presumptions are sometimes accurate...
...As modesty has never been Geneen's chief virtue, he replied on one occasion when questioned about his high salary, "Somebody recently commented that my objective is to be a million-dollar-a-year man...
...164 surveyed some 1,100 large companies in 1976 and found that the median annual pension of the three highest paid executives after age 65 was $38,400...
...157-69...
...Yet Paley's wealth—in the form of 1.7 million shares of CBS stock worth $90 million on today's market and yielding nearly $3 million in dividends every year—dwarfs even his gigantic income...
...There are countless bureaucratic organizations, many of them exceedingly large and complex, where the ratio of top to average income is not on the order of 100:1, as in many industrial corporations, and yet the work is done and the 36 Lenski makes a similar argument in Power and Privilege, pp...
...those with inherited wealth still have one up on those with merely high income...
...The democratization of corporate governance may not yet be an idea whose time has come, but this is surely an idea whose time is coming...
...His bonus that year was $550,000 for total direct compensation of $916,000...
...167 Roots BUT JUST WHO are these prodigiously paid executives...
...The Conference Board 32 Roger Ricklefs, "Stock Options' Allure Fades, So Firms Seek Different Incentives," Wall Street Journal, May 27, 1975...
...28 Only a few years ago, many writers on the compensation scene predicted an early death for the executive stock option...
...And this brings to mind Paul Samuelson's vivid metaphor: If we made an income pyramid out of a child's blocks, with each layer portraying $1,000 of income, the peak would be far higher than the Eiffel Tower, but almost all of us would be within a yard of the ground...
...A stock option, however, permits an executive to minimize risk by allowing him to look down the road several years, watch the price movement on his stock, and decide on that basis whether or not to buy...
...355,000 + $355,000), and the chairman of Mobil ($403,000 + $295,000...
...In 1975, the chairman of Philip Morris earned $407,000 plus about $270,000 on stock options, and a year later the president of R. J. Reynolds earned $450,000 in addition to a stock option grant of 27,000 shares and potential gains on options exercised of $150,000.41 In another ironic twist regarding the theory of the "functional importance" of highly paid executives, on at least one occasion top corporate executives unwittingly testified to their own supreme dispensability...
...HIGH AS these salaries are, they are only the beginning of total executive compensation...
...10 For the highest paid 8Joel Seligman, "Executive Kremlin: Our Corporate Commissars," Nation, June 12, 1976, p. 711...
...dinary investors buy stock they take substantial risks, for they have no idea whether the value of that stock will increase or decrease over time...
...Dun's Review, September 1970, p. 89...
...During one period of the bear market of the early 1970s, the stock of Corning Glass fell sharply, from $72 to $47 per share...
...For example, in his study of 50 large manufacturing corporations, Lewellen found that oyer the last generation the proportion of top executive income based on stock rewards has increased tremendously...
...In a healthy capitalist society, one whose ideology is firmly intact, an individual who earns an astronomical salary is likely to bear his distinction proudly...
...By reducing the maximum marginal rate on earned income from 70 percent to 50 percent, the after-tax income of the highest-paid executives in Lewellen's sample of 50 major manufacturing corporations increased 64 percent from 1969 to 1973, a greater earned income fell from 70 percent to 50 percent, while the maximum tax on capital gains income (over $50,000) rose from about 25 percent to 35 percent or even more in some cases...
...Nevertheless, just as in earlier periods of market downturns and increased taxation, stock options weathered the storm...
...In 1975, Meshulam Riklis, the chairman of 'U.S...
...After the executive purchases his stock, this requirement increases the possibility that the market may decline before he can dispose of it...
...Department of Labor, Bureau of Labor Statistics, Monthly Labor Review, October 1977, Table 20...
...The number and volume of stockholders' protests against high executive compensation is increasing year by year...
...Nonetheless, as the amount of stock "John C. Perham, "Those Controversial Executive Loans," Dun's Review, October 1974, pp...
...4, 5, 8, 52...
...Stock options are obviously most profitable in a bull market, for rising stock prices guarantee a continuously profitable distance between what the executive pays for his stock and what he eventually gets for it when he sells...
...Enormous bonus payments are not merely a compensation quirk of a few corporations...
...But if everyone were to put his income into a common pile, there would be enough for each family to draw the average, $17,000, thus eliminating poverty and assuring a modest but adequate income for all...
...But he exercised his option to buy Texas Instruments stock, paying $2.7 million for stock that had a market price at that time of $5.9 million—a potential gain of over $3 million in that year alone...
...As one ITT official said, explaining the occasional urgency of executive needs, "If the recipient has a specific reason to want it in a lump sum—to buy an island off the Florida coast or something—he can tell us and the compensation committee, which has the final say, may agree...
...Wrong...
...22/bid., p. 58...
...Ralph Nader's Corporate Accountability Research Group found that the highest paid executive in each of the 50 largest industrial corporations in the United States averaged $400,000 in 1974...
...Also, just 8 percent of the large utilities granted executive bonuses compared to 78 percent in manufacturing...
...The legitimacy of the system has been undermined to such an extent that those who reap its greatest rewards are as likely to be criticized as applauded...
...161 an executive can buy on option may be very costly, loans to executives can run into hundreds of thousands, even millions of dollars...
...Top corporate executives indeed had owned company stock before this...
...For these immense salaries signify that there is no countervailing force, either within the corporation (boards, stockholders, workers) or in society at large (Congress, the courts, consumer groups), which is capable of bringing them into line with the more equitable standards of income distribution that prevail when influenced by public policy...
...More recently, Nader's corporate research group found that in 1974 the 43 highest paid chief executives in American industrial corporations who had not founded their firm nor inherited stock in it each owned an average of over $1.5 million of their company's stock...
...and Rapid-American Corp...
...It also lent each man the full purchase price, at 4 percent...
...Frederic W. Cook, "Book-Value Stock As an Employee Stock Ownership and Incentive Device," Compensation Review, 9 (3rd Quarter 1977), pp...
...president obviously enjoys rewards of power and status besides his salary, there is virtually no other public official at any level of government—including senators, congressmen, cabinet officers, judges, governors, state legislators, mayors, city managers— whose income even approaches six figures...
...Every good worker deserves a bonus, however, and Mr...
...43Frederick D. Sturdivant and Roy D. Adler, "Executive Origins: Still a Gray Flannel World...
...and only 14 percent of the utilities had stock-option plans for their executives compared to 86 percent in manufacturing...
...For example, if an executive borrows to buy his company's stock at $60 per share and the stock goes "under water," i.e., the market price falls below the executive's option price, according to the provisions of a special "non-recourse" loan, the executive can simply ask the company to bail him out...
...By the early 1960s, the top executive in each of the companies Lewellen studied owned an average of $2.6 million of his company's stock.I 6 Excluding again those firms where meetings of the American Sociological Association, New York, August 1976), p. 4. 14"Recent Evidence on Senior Executive Pay," p. 167...
...In defense of its compensation policy, GM argued that high salaries for top executives were virtually a necessity in an organization as large and complex as General Motors...
...But, while he takes no risk, he also does not make any money...
...The case of William S. Paley, a wealth-holder, aptly illustrates that there is a greater concentration of wealth than of income...
...3 As Scott Fitzgerald might have said, top corporate executives are different from you and me...
...To set these salaries in some perspective, I shall use as bench marks the income of the typical American worker as well as the level of officially defined poverty, so we can compare the average and low figures to the corporate heights...
...38 A study by the U.S...
...This would obviously not be in the best interests of the Corporation or its stockholders...
...Unlike market value, the book value of a company's stock—basically assets minus liabilities almost never declines and in most established companies increases steadily 31 /bid., p. 6. though not spectacularly...
...According to one report, "In 1969 Xerox sold key executives large blocks of restricted Class B stock at half the market price...
...If you begin at the bottom of the white-collar ladder with reasonable compensation for employees there, and provide financial incentives for movement upward to each successive level, you inevitably reach the six- or even seven-figure mark by the time you reach the top of the corporate hierarchy...
...18 Yet any schoolboy could properly conclude that if a man owns a million-and-a-half dollars of his company's stock and earns three times more from his ownership of the firm than from his management of it, it is a fair presumption he will work to make his company profitable...
...If, after purchase, he holds the stock for more than three years and complies with other routine IRS requirements, the earnings eventually realized on the sale of that stock will qualify for the long-term capital-gains tax rate...
...26Perham, "Phantom Stock," p. 33...
...Moreover, in 20 percent of the manufacturing firms executive pensions exceeded $80,000 annually...
...According to a Senate report at the time, Congress offered preferential (i.e., long-term capital gains) treatment for stock options in order to "convert [corporate] officers into 'partners' by giving them a stake in the business" and to give to employees generally "a more direct interest in the success of the corporation...
...Government Printing Office, 1977), Table 7. 2U.S...
...vaporized corporate headquarters and the top executives themselves...
...This is a very tough spot for a man to be in...
...They are all men, all white, nearly all from upperor upper-middle-class families, are overwhelmingly Protestant (85 percent) and mainly Episcopal and Presbyterian, nearly all college-educated, with Harvard, Yale, MIT, and Columbia the most frequently attended schools, and almost all Republicans...
...Writing in the Harvard Business Review, a long-time compensation consultant and friend of management argues that outrageous executive compensation may be creating a new "privileged class" that could undermine public support for the system—and he urges corporations to put their own house in order and reduce executive income to reasonable levels before the public decides to .do it for them...
...Among the several hundred manufacturing corporations in the sample, the median pension was $48,300, or nearly four times the full-time year-round income of the average American man in 1976...
...When or17Seligman, "Executive Kremlin," p. 711...
...In the bear market of the last few years, ITT, W. R. Grace, Citicorp, Green Giant, and other companies have adopted similar risk-free plans, ironically permitting executives to profit from their company's stock while the firm's regular investors may be taking losses...
...In the last generation this has proven a tremendous boon for executives: in the 1950s and 1960s, the maximum capital-gains tax rate was 25 percent while the maximum marginal rate on ordinary income ranged from 91 to 70 percent...
...However, stock options, even recycled ones, do entail some inconvenience...
...census figures for 1976, 25 million persons, equal to the combined population of Denmark, Sweden, Finland, Norway, and Israel, were living below what was conservatively considered the poverty line, $5,800 for a nonfarm family of four...
...I cite data from the late 1960s rather than the early 1970s because of the atypical bear market of the latter period...
...annually...
...In the panoply of perquisites top executives enjoy are: financial counseling, tax and legal assistance, company automobile and chauffeur services (for business and sometimes personal use), company-provided planes, boats, and apartments (for business and sometimes personal use), company-paid or subsidized travel, recreation facilities, club memberships, liberal expense accounts, personal use of business credit cards, thorough physical examinations, complete medical coverage, including in-patient, out-patient, home health -care, dental, and psychiatric care—all without any outlays by the executive—"educational benefit trusts," i.e., college expenses for children, "social-service sabbaticals," and the best and most complete form of disability, accident, and life insurance...
...In many of these plans, the executive can choose whether he wants his payments from the phantom stock all at once or spread over a long period...
...Riklis is no exception...
...21 Actually, the major benefit of many genuine loans to finance options is not the low- or no-interest rate but the complete freedom from risk...
...While the top 1 percent of income earners account for about 7-8 percent of all income, the top 1 percent of wealth-holders own 50 percent of all privately held stock, 36 percent of all bonds, and about a quarter of total assets...
...5 Not far behind was the irrepressible chairman of ITT, Harold S. Geneen, whose salary in 1975 was $414,000 plus a bonus of $362,000, a total of $776,000...
...If the salaries of top corporate officials were appropriated and distributed, say, to the poor, each family would get only a few dollars...
...The point cannot be emphasized too strongly: what is crucial about the enormous executive salaries I have examined here is their political, rather than their economic, significance...
...While complete equality of income is probably both unrealizable and undesirable, one could easily devise a redistribution scheme that would maintain modest financial increments for purposes of work incentives, while guaranteeing that no family would fall below the poverty line...
...But they are also very special in other respects...
...More important is the way this "moral equation" is resolved...
...The loan was given at 4 percent, a typical rate for executive loans in the early 1970s, and was more than covered by the dividends on his shares...
...it also minimized the tax that executives had to pay on enormous incomes, and it gave them a more substantial ownership interest in the firms they managed than ever before...
...For example, in 1970 the chairman of Norton Simon borrowed money from his company to help him buy 75,000 shares of company stock, worth over $2.3 million at the time...
Vol. 25 • April 1978 • No. 2
