New Business

CEO Pay: Is It Still Out of Sync?


It has been a tough year for the American worker, with unemployment hovering near 10% and cuts in pay or benefits for many of those who still have their jobs.

But one category of worker is still doing pretty well: the chief executive officer. Job stability has improved for corporate leaders since the recession began. And many still enjoy hefty compensation even as they cut the salaries and positions of their staffs.

To be sure, many leaders are sharing the pain. Total compensation for the average CEO at an S&P 500 company declined last year by 7.5%, or $700,000, according to data tracker Equilar. And executives such as General Electric's (GE) Jeffrey R. Immelt have declined their bonuses, while the CEO of bailed-out Citigroup (C), Vikram Pandit, has sworn to take no more than $1 per year until the bank returns to profitability. Charles G. Tharp, executive vice-president for policy at the Center on Executive Compensation, says "companies are making sure they are aware of risk and incentives."

But there are some notable exceptions: Michael Jeffries of Abercrombie & Fitch (ANF) saw his pay climb 39% last year, even though the retailer's stock fell 72% and it has trimmed staff. (Abercrombie declined to comment.)

Directors face a difficult balancing act amid the recession. They must retain top executives and reward those who make the hard choices that will boost the bottom line. Often that means job cuts and labor concessions.

But directors also need to be sensitive to perceptions. Problems can emerge when leaders appear to be reaping high rewards at a time when they're demanding sacrifices from their workers. Wharton School professor Peter Cappelli says such moves can seem "patently unfair" and argues they can undermine morale. Umesh Ramakrishnan, vice-chairman of executive recruiter CTPartners, says many senior executives still view their pay primarily in light of "how they will be perceived as ranking vis-à-vis their peers, and how that will affect their next move." Even though some CEOs seem focused on staying ahead in the pay stakes, leadership guru Warren Bennis warns that "employees are extraordinarily wary and watchful" right now.

Consider ConocoPhillips (COP). In January, CEO James J. Mulva cut 4% of the Houston oil giant's workforce. Two months later the company announced that Mulva had earned $29 million in 2008, on top of nearly $100 million he had made in the two prior years. In Bartlesville, Okla., where a chunk of the layoffs hit, many are still looking for work. The fact that Mulva took a $10 million stock grant in 2008 instead of the $38 million he got the year before hasn't been much comfort to former employees there, some of whom lost their homes. Conoco did not respond to repeated requests for comment.

Not Enough Many of the recent headlines about CEO compensation have focused on companies like American International Group (AIG) and Merrill Lynch (BAC), where bailout money hasn't stopped big bonuses. But even at far healthier companies there is resentment over executive pay. Hewlett-Packard (HPQ) CEO Mark V. Hurd's total compensation last year was $42.5 million, thanks in part to a three-year package that paid out last year. With HP stock up 22% this year, vs. about 14% for the S&P 500-stock index, many would say he's on the right track. Hurd laid off about 6,000 employees in May and imposed salary cuts of 5% to 15% among the rest; he also took a 20% salary cut in 2009.

For some, that's not enough. Richard Tauchar, a systems engineer for EDS, acquired by HP last year, says some employees were not reassured by Hurd's salary cut. "In reality, he's not sharing the pain," he says. And it bothers Tauchar that CEOs are getting richly rewarded—justifiably so, investors might argue—for cutting costs at the expense of colleagues. "Executives aren't merely making their millions while paying employees less," he argues. "They are making their millions because they have chosen to pay employees less." Through a spokesperson, HP and Hurd declined to comment.

One way to gauge the long-term impact of such moves is to look at morale in the airline industry, which has been battling economic woes for years. In 2003 workers at American Airlines (AMR) took pay cuts of up to 50% in an effort to save the carrier from bankruptcy, a move that management sold in part through an internal slogan "Share the Pain, Share the Gain." Now pilots, mechanics, and others say they've only seen the pain, a perceived double standard they think is starting to affect employee performance. "It's hard to be motivated to go above and beyond your normal duties when you don't feel appreciated at work," says American Airlines pilot Scott Shankland, who also acts as a spokesman for the pilots' union. In recent years, American's record of on-time arrivals has slid, as has customer service.

Meanwhile, Gerard J. Arpey, CEO of American Airlines' parent company, AMR, has seen his base salary rise every year since 2005, though he won't this year. Shankland says pilots are working, on a wage-adjusted basis, for the same amount they were in 1992 while the airline's executives have received $330 million in stock grants and option awards since 2005. And by the end of this year, the airline will have laid off as many as 1,600 workers. Still, company spokesperson Missy Latham says that American's rank-and-file are highly paid compared with peers while executives are not, and management has worked hard to minimize layoffs.

Long-Term Costs? While it's difficult for employees to take home less money, especially when they meet their targets, even the perception of inequity can damage a company. Organizational psychologist Ben Dattner argues that "concerns about employees and retention and organizational culture have been pushed aside by the demands of the global economic crisis." Once the economy stabilizes, he says, leaders who put themselves first may see a talent drain. Costco Wholesale (COST) CEO James D. Sinegal has received the same $350,000 salary since 1999 (his total 2008 package, according to the company's proxy, was $4.9 million). Sinegal says that keeping a long-term focus requires satisfying employees with pay levels that seem fair. "They feel better about their company and where the company is going if they know…someone is not just raking everything off the top."

This year will be the true test of the equity of CEO pay, says Edward E. Lawler III, director of the Center for Effective Organizations at the University of Southern California's Marshall School of Business. If the stock market's recent gains hold up, CEOs "may be the only people who've come through the downturn in good shape," he says.
Jena_mcgregor
McGregor is BusinessWeek's management editor.
Nanette_byrnes
Byrnes is a senior writer for BusinessWeek.

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