CEO Compensation Issues – Never Will Be Settled

ceocomThe New York Times recently reported that Mr. Weill received over $1 billion during the last decade.

If it weren’t for the Times’ report, no one would know Mr. Weill’s true compensation, nor its significance. No Securities and Exchange Commission report or Citigroup annual report gives any hint of this billion-dollar compensation package. No official report compares this with corporate philanthropic giving; for example, Mr. Weill’s annual compensation has generally exceeded Citi’s corporate philanthropy by a ratio of three to one.

No official report provides any data on the ratio of Mr. Weill’s or any other CEO’s pay to that of the average American worker or a company’s average employee. At Citigroup, the CEO compensation package is generally in the area of 3,000 times that of the typical bank teller.

Nor does any official report place CEO compensation in the context of the number of employees without health-care benefits or the relatively modest costs of providing health care for all workers. At Citigroup, the estimated cost of universal health care for all workers is likely to be less than 5% of the total compensation packages for its five top executives listed in its SEC 10-K report.

What may be needed to control excessive executive compensation is a nonlegislative moral compass for CEOs and their executive compensation committees. Neither legislation nor regulation alone can effectively replace a moral compass.

Consider, for example, the utter failure of President Clinton’s corporate tax penalty on salaries of more than $1 million a year. It was subverted by bogus performance bonuses and excessive stock options, neither of which was considered part of the $1 million Clinton salary cap.

The ideal leaders to develop such a moral compass would be President Bush, Treasury Secretary Paul O’Neill, and Mr. Pitt, with support from Mr. Greenspan and the investor Warren Buffett. While all of these leaders have been swift to call for reform, the changes implemented so far have not gone far enough.

A first effective step would be for these leaders to urge all Fortune 1,000 CEOs to be transparent regarding executive compensation. The following readily available information should be prominently placed in the corporate annual report, in the 10-K form, and on a Web site administered by the SEC or the Treasury:

– Total compensation of the CEO for the last year available and for the preceding five years — including stock options, pensions, bonuses, and salaries — plus similar data for the other top five executives.

– The difference between CEO compensation and the median employee salary at the corporation. This would serve as an informal moral compass on executive compensation.

– Percentage of nonmanagerial employees without health insurance and a comparison between the top five executives’ compensation and the cost of providing health-care benefits to all employees. (A significant percentage of bank tellers, for example, are part-time employees without health benefits.)

– Annual corporate philanthropy (cash only) as a percentage of both pretax income and CEO compensation. A comparison of CEO compensation and corporate philanthropy might serve as an additional moral compass.

It should be noted that a typical major bank allocates less than 1% of pretax income for philanthropy. Citigroup generally allocates only one-fourth of 1%.

Many community leaders urge that philanthropic contributions be at least double the aggregate compensation package for the top five executives, or 2% of pretax income. Citigroup, for example, had over $20 billion in pretax income in 2001 and spent less than $50 million on philanthropy. If Citigroup followed the recommendation, it would award philanthropic grants of $400 million a year, or 2% of pretax profits.

As a second step, the President should also use his bully pulpit to urge that no CEO bonuses be awarded unless the executive compensation committee consists of truly independent board members, and that no bonuses be awarded unless corporate profits and shareholder value exceed the median for the industry.

Should the President decide not to use his bully pulpit to create transparency and a public moral compass, Mr. Pitt has the authority to require that all this data be placed clearly and prominently in the 10-K report.

Should neither the Bush administration nor the SEC take this moral high road, it could be left to the AFL-CIO and community watchdogs to do so — with far more negative consequences for the business community.

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