Twenty American malefactors of great wealth have just made off with much booty: even exceeding a whole year's net profit for Merrill Lynch, the world's largest securities firm. You don't need the FBI to track down the suspects. They head 20 leading corporations, ranging from Walt Disney to General Electric.
Their combined pay in salary, bonus and 'long-term compensation' (mostly stock options) topped $2 billion for 1998. Nor were these all shining stars. In the latest Fortune rankings, Disney came 162nd out of 500 companies in total return to shareholders, while GE was 117th. Yet it's this return which supposedly justifies America's grotesque pay packets.
The remuneration, however gigantic, is presented as a mere smidgen compared to the 'shareholder value' (i.e, stock market valuation) the bosses have 'created'. So GE's celebrated Jack Welch, having already pouched a billion, will garner another $43 million in this, his final year, as an incentive to meet his targets. The implications are riveting. Would Welch otherwise play golf and let the company (and his shares) go to rack and ruin?
Devil's (or Welch's) advocates have found a new argument in the bountiful rise of the US economy. Business Week, the source of the American statistics, compares eight expansive years with a Europe struggling 'to boost growth and entrepreneurialism' and a Japan 'mired in recession': while 'US executives are energising older companies and creating new ones daily'.
Ergo, these costly shenanigans can no longer be dismissed as American extravaganzas, like tail-fin Cadillacs or the Lewinsky affair, of no concern to sober citizens elsewhere. If Europe wishes to match US performance, companies must match US pay, right? The pay bonanzas have long been acting like reverse gravity on European rewards, irresistibly tugging them upwards. Britain is in the van, with men like Jan Leschly of SmithKline Beecham trying especially hard: his latest package is worth $140 million.
But BW asks a pertinent question: 'Are the sky-high pay and the sky-high performance linked?'. Actually, the sky-high only applies to the pay. Outside the electronic wonderland (the rocket-engine of US economic out-performance), the achievement of major companies has been patchy. Even super-stars have been slipping, including the legendary Coca-Cola.
With uncanny timing, Coke promptly went ex-growth after the untimely death of Roberto Goizueta (another option billionaire). His successor, Doug Ivester, though, need not wait to prove his worthiness and collect his undue reward. Already, his latest take totals $57 million. That doesn't place him among five executives who gave shareholders least for their money. That quintet is headed by Disney's Michael Eisner - last year's highest paid of all.
Both Disney's earnings and its relative stock price have lagged in the past two years. The defence argues that Eisner is really being rewarded for longer-term magic. Disney's total return to investors from 1987 to 1997 averaged 21.6%, doubling every three-and-a-half years. That looks considerably less magical, though, if you subtract the Wall Street boom. Between 1988 and 1998, the Dow Jones Average rose fourfold.
Some three-fifths of Disney's gains were shared by the stock market in general. That overall rise largely reflected, not splendid underlying performance, but a spectacular jump in what investors were prepared to pay for the same quantum of earnings. There's little logic behind this revaluation: but it certainly doesn't reflect some miraculous rise in the genius of CEOs.
Their miraculous pay, moreover, reflects the Great Man view of history, which Tolstoy so rightly despised. Anybody heading almost any major corporation would have floated upwards on the Wall Street tide. Few CEOs have truly transformed their businesses. Take IBM's Lou Gerstner, who last year collected $46 million as further huge reward for having 'wrestled one of the country's largest companies out of near-obsolescence'. What did he really do?
After I published The Fate of IBM in 1994, just as Gerstner took over, many people asked me what would happen next to the stricken giant. The answer was easy: $64 billion of sales don't disappear overnight. Five years on, sales have crawled up to $81.6 billion, the once-dominant PC business has lost nearly $1 billion, and IBM is worth far less than either Microsoft or Intel - whose fortunes rode and rose on the back of IBM.
The key electronic fortunes have been genuinely self-made. There would be no Microsoft without Bill Gates, no Oracle without Larry Ellison, no Sun without Scott McNealy, no America OnLine without Stephen Case. Their position as founders made them super-rich. Yet even founders can stuff themselves with options. Last year McNealy pocketed $46 million and Case $159 million. Wealth does not make people less greedy: it just raises the threshold of avarice.
That has risen amazingly. In 1978, the highest paid CEO feasted on $2 million: in 1988, $40.1 million (Eisner): in 1998, $575.6 million (Eisner again!). The greed has surged despite constant sniping from political critics ranging from President Clinton downwards, from business mavericks like billionaire investor Warren Buffett, and from assorted academics. The explanation is simple. There is no countervailing force; no regulation, no shareholder opposition, no restraints from boards. The latter, largely composed of corporate leaders, are mindful, doubtless, of their own rewards.
Like the robber barons of old, the corporate overlords can in effect write their own cheques - and they adore plenty of noughts. Their rewards make no concessions, even to error. Jan Leschly's huge package was approved despite losing heavily on reselling a US drug distributor (bought as a major strategic plank), and despite the botched, aborted merger with Glaxo.
One completed mega-merger, between Travellers Corp. and Citibank, saw profits collapse, but CEO Sanford Weill still pocketed $159.7 million. Then there's Cendant, whose bid for the RAC's services fizzled out. Henry R.Silverman's last major US merger was blighted by belated discovery of monstrous accounting defects. His board reacted promptly and vigorously to the slumping shares; it rewrote Silverman's options so he could cash in at a much lower price.
The pay scandals - for that they are - have created a circle, vicious or virtuous according to taste. What will the 20 do with their $2 billion? They will largely invest the loot in equities, which will gain from the purchases. If equity prices rise further, still more CEOs will pocket and reinvest still more option wealth. And, while self-made in one sense (because they really fix their own remuneration), these people have not made their fortunes. They have snaffled them from supine, acquiescent shareholders.
Never have so few owed so much to so many.
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