New and Improved Inequality

Lisa & Ian Murray seamus at
Mon Aug 30 16:45:51 PDT 1999

Pay Gap Widens Between Worker, Boss

By Tim Smart Washington Post Staff Writer Monday, August 30, 1999; Page A06

The gap between the pay of the average worker and that of top corporate executives widened into a gulf during the 1990s, according to a study to be released today by two pro-labor think tanks. "A Decade of Executive Excess," the sixth annual survey of executive compensation by the Institute for Policy Studies and United for a Fair Economy, finds the ratio of top executive to factory worker pay has exploded this decade to 419 to 1 last year from 42 to 1 in 1980.

Had worker pay risen at the same pace as executive pay, the average production worker would earn more than $110,000 a year today, compared with the $29,000 the worker actually makes. And the minimum wage would be $22.08 an hour, rather than the current $5.15.

"It just keeps growing," said Sarah Anderson, a fellow at the Institute of Policy Studies who helped write the report. "There seems to be no limits to what American society will accept."

The report said average annual compensation for a chief executive of a large company was $10.6 million last year, a fivefold increase from the $1.8 million of 1990. In 1998 alone, executives saw their pay rise 36 percent, compared with 2.7 percent for the average blue-collar employee.

Much of the massive gains in executive pay during the 1990s can be attributed to the huge rise in the stock market, as most corporate leaders now rely on exercising stock options for the bulk of their annual compensation. But boards of directors also have been increasing the amount of options they grant to senior executives, pay experts said.

"The size of the grants are getting somewhat larger," said Yale Tauber, a principal with management consultants William Mercer & Co. Grants in 1998 were from 35 percent to 50 percent higher than a year earlier, Tauber said.

Gains in stock values have accounted for much of the biggest annual payouts in recent years, such as the $575 million Walt Disney Co. chief executive Michael Eisner earned last year or the $167 million paid to Citigroup CEO Sanford Weill. The explosion in values of Internet stocks has also swelled pay packets, with America Online Inc. head Steve Case taking home $159 million last year and Ebay Inc. chief executive Margaret Whitman earning $43 million.

Companies such as General Electric Co. have defended large executive compensation packages, such as that awarded to GE's chairman and chief executive, Jack Welch, by pointing to the huge gains in share values that have occurred under their leadership.

Defenders of the big packages also say there is tremendous competition for talent, and that drives compensation upward in much the same way that free-agency has led to eye-popping payouts in professional sports.

Critics of the current state of executive pay, as well as corporate pay consultants, say the dramatic rise in compensation is also driven by an American culture that worships wealth and a booming economy that has brought about higher wages for most workers.

"We're really a capitalistic society," said Diane Posnak, a partner with Pearl Meyer & Partners in New York, an executive pay consultancy. "But we demand a lot of our leaders, too."

The beneficent state of the economy helps explain why there is little public outrage at the moment about the outsized pay packages, Anderson said, but that doesn't mean there isn't a need to be concerned about those who are not prospering from the rise in the stock market.

"I do think the expanding pay gap is being masked by the overall economy," she said. "But even in times of relative prosperity, we need to ensure everybody gets their fair share."

AFL-CIO research analyst Chris Bohner offered another explanation for the lack of outcry: "People are just beaten down, hearing it year after year."

Still, Bohner said when the labor organization launched its Paywatch Web site in 1997, it received an overwhelmingly response, netting 4 million "hits" from visitors.

The growth in compensation paid to top executives has come about in part because of pressure earlier in this decade from activists, institutional investors and labor unions.

Back in the early 1990s, when many large companies were in the midst of restructurings and massive downsizing of their work forces, chief executives were goaded into accepting pay packages tied more to the company's financial performance. In most cases, this involved large grants of stock and options. The theory was that if the company was doing well under a chief executive's leadership, both the boss and workers would presumably make out okay, and if a company's results sagged, the CEO would share the pain.

But even though corporate profits and stock prices have both risen sharply in the 1990s, the pay gap has widened. According to the AFL-CIO, executive pay has risen an average of 500 percent over the past 15 years, a pace three times faster than corporate profits and seven times greater than wages on the factory floor.

© 1999 The Washington Post Company

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