By Victoria Thieberger
NEW YORK (Reuters) - New York Federal Reserve President William McDonough on Wednesday called on U.S. corporate executives to take pay cuts, saying their salary packages are bloated and morally hard to justify. ADVERTISEMENT
"Beginning with the strongest companies, CEOs and their boards should simply reach the conclusion that executive pay is excessive and adjust it to more reasonable and justifiable levels," McDonough said in a speech at Trinity Church just steps from the World Trade Center site.
"Should there not be both economic and moral limitations on the gaps created by the market-driven reward system?" McDonough asked in a speech to mark the Sept. 11 attacks.
His remarks were the strongest denunciation yet by any public official of chief executive pay, which McDonough said has swollen in publicly traded companies to 400 times that of production workers on average from 42 times two decades ago.
The New York Fed president said voluntary pay cuts, starting with the best companies, will benefit shareholders and strengthen the United States' market economy.
In recent months, stunning corporate excess during the boom years of the late 1990s has fueled investor outrage as share prices have collapsed but executives walked away with huge riches from stock options, corporate perks and loans.
Tyco International Ltd. (NYSE:TYC - News) ex-CEO Dennis Kozlowski, indicated for sales tax fraud, reportedly funded a lavish lifestyle with $135 million in corporate loans. Just last week, court papers showed that former General Electric Co.(NYSE:GE - News) chief Jack Welch, who earned $16.5 million annually, still lives large in a GE-financed Central Park apartment in New York and has access to a corporate jet and country club memberships.
UNJUSTIFIABLY HIGH PAY
"We must recognize that the leadership of the American economy has made a large number of American citizens, and countless more around the world, question our judgement and/or our ethics," McDonough said in his speech.
One issue in particular that requires corrective action is the inflated levels of executive pay, he said.
"It is hard to find somebody more convinced than I of the superiority of the American economic system, but I can find nothing in economic theory that justifies this development," McDonough said.
With the benefit of hindsight, the policy of vastly increasing executive compensation was also "terribly bad social policy and perhaps even bad morals," the central banker said.
He urged executives to voluntarily trim their pay packages to more reasonable levels, saying government regulations were a blunt instrument.
McDonough was speaking at a day-long commemoration at Trinity Church, on the corner of Broadway and Wall Street, in the heart of the financial center of New York.
No one on Wall Street or in Washington has publicly taken such a strong stand.
While New York Stock Exchange President Dick Grasso has called for tougher corporate governance standards and the heads of Goldman Sachs Group Inc. (NYSE:GS - News) and Merrill Lynch and Co Inc. (NYSE:MER - News) have urged steps to restore investor confidence, pay has been seen as the purview of corporate boards.
Treasury Secretary Paul O'Neill several times has vigorously condemned unethical behavior by executives, saying in June for instance: "I think people who abuse our trust, we oughta hang them from the very highest branch."