Pay For Performance

If you thought it was LeBron James and Lady Gaga who were skewing the nation's income statistics, you'd be wrong. It's America's top executives.

In 2009, they made 185 times the pay of the average production worker —far more than in the recent past — and a new analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim shows that this disparity may be contributing to a more generalized growth in income inequality.

Income inequality has been rising for decades in the United States. In 1975, the top 0.1 percent of earners took home about 2.5 percent of all income, including capital gains. By 2008, their share had quadrupled to 10.4 percent.

That growing disparity is a strong argument for what's needed: restraint by executives and their boards of directors.

We don't begrudge anyone's right to become rich. The American system works by rewarding risk-taking and innovation. But since the 1970s, when execs made only about 30 times that of their average workers, a winner-take-all attitude has gained purchase in boardrooms and an arms race for top talent has launched pay packages into the stratosphere. In the process, some companies lost any sense of proportion and common sense.

The study by Bakija, Cole and Heim found that 41 percent of the top 0.1 percent of income earners in America — those who make $1.7 million or more, including capital gains — were executives, managers and supervisors at nonfinancial companies. Another 18 percent of these top earners were managers at financial firms or financial professionals — hedge fund managers and the like.

Shareholder pressure and tougher federal rules appear to be having a modest effect.

While CEO pay jumped 11 percent in 2010, the survey conducted by The Wall Street Journal and the Hay Group found that a growing number of companies are cutting executive perks, such as country club memberships and corporate jets. And more companies are trying to tie executive pay closer to performance.

But the so-called "say on pay" that gave shareholders the ability to cast a proxy vote on top executives' compensation has been a disappointment.

Institutional Shareholder Services recommended "no" votes on pay for 293 companies so far this year, but through mid-June, shareholders voted to object to executive pay at only 32 of the nearly 2,000 companies that had held their annual meetings, Bloomberg Businessweek reported. Companies receiving negative recommendations are punching back, defending their compensation packages in separate mailings to proxy voters.

As Robert A.G. Monks, a corporate governance activist, told the magazine, "You only have the appearance of reform, and it's a cruel hoax."

In 2009, the Conference Board Task Force on Executive Compensation recommended five guiding principles for executive pay that we think make good sense. The task force recommended that corporate boards:

_— Link pay, strategy and performance.

_— Give execs pay that is fair, affordable and clearly linked to performance.

_— Do away with controversial practices that fly in the face of pay for performance, such as excessive golden parachutes or severance packages.

_— Actively oversee executive pay.

_— Ensure that compensation practices are transparent and that shareholders have a chance for input.

Not so long ago, societal pressure was a check on runaway executive compensation.

A Washington Post report, recently reprinted by the Journal Sentinel, told the story of Kenneth J. Douglas, the top executive at Dean Foods in the 1970s, who earned the equivalent of about $1 million in today's dollars. He lived in upscale River Forest, Ill., had a free Cadillac and a country club membership. It was a nice gig, but nowhere near as lucrative as what many executives enjoy today.

And there's this: More than once, Douglas turned down a pay increase because he thought it would be bad for the morale of the company's work force. In 1975, an ITT executive told Forbes that he thought he was worth more than he was making but hadn't sought a raise because he "didn't dare do it alone."

Granted, the tenure of top executives often is short, so there is an incentive to cash in while they can. And the market does drive compensation and has led to the run-up in pay and perks. But Douglas set a good example a generation ago for modesty that more of today's executives would do well to emulate.

REPRINTED FROM THE MILWAUKEE JOURNAL SENTINEL.

DISTRIBUTED BY CREATORS.COM