Unheard of pay, so-so performance
Are superstar salaries justified for business CEOs?
Gary Crooks - Staff writer
For superstar performers, you need superstar pay. That's the rationale behind the stratospheric compensation for top officers at U.S. corporations.
This defense is generally followed by a comparison to sports, because the stars get much more than the other players. Let's stick with this useful analogy.
Phil Jackson is a head coach in the National Basketball Association. He makes a great deal more than the other NBA coaches. Jackson has led his teams to six championships.
Superstar pay for superstar performance.
Two years ago, Avista Corp. wooed superstar manager Tom Matthews with an unprecedented pay package: $750,000 a year, a $1 million signing bonus and stock options worth potentially millions. In two years, Matthews was gone, saying "he wanted to spend more time with his family." Nothing turns an executive into Mr. Mom faster than losing $126 million in a single quarter.
Nobody can blame Avista for accepting Matthews' resignation, but what was behind that $1.9 million severance check? Superstar pay for superstar performance?
Kaiser Aluminum CEO Ray Milchovich was paid $1.6 million in salary and bonuses last year, excluding stock options. Kaiser has had unending problems and its performance lags behind that of its competitors. Just ask its workers here. When Milchovich took over, Kaiser's stock was worth $7 to $8 per share. Now, it is selling for about $3. Superstar pay for superstar performance?
According to Business Week, CEO pay was 45 times that of blue collar workers in 1989. Now, it is 475 times greater, or an average of $20 million a year. If you think CEOs have become 10 times more valuable, consider this:
United for a Fair Economy, a nonprofit group, studied the performance of firms led by top-paid CEOs from 1993 to 1999. In six of seven one-year time periods following a CEO's appearance on the top 10 lists, at least half the companies trailed the S&P 500.
Management specialist Peter Drucker notes that widening pay gaps within organizations cripple morale and lower productivity. In short, they're bad for business.
A merit-based system for CEO pay only works if there are consequences for the losers. But as a pension-fund investor once pointed out, "It's heads, they win; tails, let's flip again."
Gary Crooks/Staff writer