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Debate swirls around CEO pay

Sun Staff

Being a chief executive is a tough job but the pay is pretty good.

Unlike many Americans whose salaries aren't keeping up with inflation, chief executives are seeing their compensation packages rise by 13 percent annually, one study says.

A tight market allows CEOs to command top dollars, since there are so few with the leadership skills needed to run a public company, some experts say.

Critics argue the system for setting CEO pay is flawed and is not based enough on performance. They worry that giving CEOs large percentage increases year after year causes resentment among many workers who have endured earning lower wages, paying more for health care, watching their pensions reduced or seeing jobs sent overseas during a slumping economy.

"We believe all employees should be paid fairly and that includes workers and the CEO," said Brandon Rees, a research analyst with the AFL-CIO, a national association of labor unions. "The trend has been that CEOs take a disproportionate share of compensation."

In 2004, the average chief executive earned $10 million in total compensation, a 13 percent increase over 2003, according a survey by consulting firm Pearl Meyer & Partners for The New York Times.

The average American worker in a nonsupervisory job earned about $27,485 in 2004 - 2.2 percent higher than the year before, according to the AFL-CIO.

Many experts insist that comparing an executive's job with front-line workers is unfair, since the expectations are different. They add that many of the increases in compensation are tied directly to a company's performance in a given year.

That's the case with A.L. "Tom" Giannopoulos, head of information systems company Micros Systems Inc., whose total compensation grew 69 percent, to $3.5 million, in 2004 from $2.08 million in 2003. The increase reflected an 80 percent growth in the value of the company's stock during 2004, said Louise Casamento, a company spokeswoman.

Excluding stock options and other perks, Giannopoulos' annual salary grew 19 percent to $820,000 in 2004 compared with average workers whose salaries increased by 5.5 percent to 6 percent each year, she said.

'Privileged class'

Experts argue that CEOs bring much more to the table than their skills - they become the star and face of the company.

There is a "privileged class" of chief executives who do extraordinary work, said Chuck Pappalardo, managing director, of executive search firm Trilogy Venture Search based in Burlingame, Calif.

"Not everyone is capable of running a truly global company," he said. "Companies pay them for literally giving over their entire lives to the company. ... Yes, they make a lot of money, but you have to compare what it takes to do it."

The problem many critics have with high executive pay is the lack of a direct connection between pay and performance.

"It wouldn't be so bad, if you could prove that the ones who made the most money performed the best," said Graef Crystal, a columnist for Bloomberg News and a former compensation consultant and business professor. "If CEOs are being paid that much, they are taking it from somewhere - shareholders, employees, consumers."

Part of the problem, experts say, is the way executive compensation packages are determined.

At public companies, the board has a compensation committee, which often is composed of peer executives from other corporations. Those committees hire compensation consultants who study what similar companies pay their executives. The committee members and the consultant have an incentive to see compensation increase, experts say.

"What goes around comes around and somebody in turn is going to take care of them," said David Theobald, chief executive of Netshare, a Novato, Calif.-based Web site for people who earn more than $100,000 a year. "It's a vicious circle. ... The consultant is always going to put his best foot forward and more often than not, he's going to make it seem like it's justified. It's absolutely absurd."

Even though compensation committees hire current and former executives, they still have shareholders' interests in mind, said Bill Strahan, a senior consultant with Philadelphia-based Mercer Human Resources Consulting, which helps companies set compensation.

'Not the enemy'

"Finding people who are both capable and willing to do what it takes is difficult," Strahan said. "Executives are not the enemy."

Others believe the talent pool for the top jobs has grown in recent years as the corporate world has expanded to include more managers with the skills to run companies.

"If we have more supply and less demand, you would think that would lead to a decrease in compensation," Crystal said.

People and organizations have tried for years to reform CEO pay with little progress.

During the late '90s, companies made stock options a major portion of executive pay in an effort to tie performance to pay. The practice lost favor after executives focused too much on short-term results, experts said.

Rep. Martin Sabo, a Minnesota Democrat, has proposed legislation seven times since 1991 that would restrict the tax deductions companies can take for salary expenses. Some companies have tried to set limits on CEO-to-worker salary ratios, although that hasn't always worked.

Ben & Jerry's, the Vermont ice cream maker, had a rule during the early 1980s that no employee could make more than five times what the lowest-paid worker was paid. That capped CEO pay at $81,000.

The plan was scrapped in 1994 when Ben Cohen, one of the company's co-founders, retired from the top spot and the company found it needed to pay more to compete for an outside leader, said Ben & Jerry's spokesman Lee Holden.

Pay ratios

The AFL-CIO reports on its "Executive Paywatch" Web site that before 1990, average worker-to-CEO pay ratios were less than 1 to 100. By 2000, ratios were above 1 to 500. They dropped to about 1 to 300 in 2003.

American chief executives receive pay packages that are about 63 percent larger than their European counterparts', according to a 2004 study released by the Hay Group, a Philadelphia-based consulting firm.

But comparisons between executive salaries and those of rank-and-file workers don't make sense given the difference in the jobs, some experts say.

"Executives, because of the nature of the risks that they manage, have a disproportionate impact on the business and the community," Strahan said.

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