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Originally published Saturday, June 19, 2010 at 10:00 PM

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Sound Economy

Don't look for high CEO compensation to change any time soon

Average shareholders usually lack the power to rein in excesses or demand accountability. Instead, power is centralized among big shareholders who are members of the same club as the chief executives.

Special to The Seattle Times

Are they really worth that much?

Starbucks Chief Executive Howard Schultz made 377 times the average Starbucks employee's pay, according to the Executive Paywatch Database operated by the AFL-CIO.

Nike's Mark Parker came in at 227 times that of his average workers, while at Cell Therapeutics the ratio was 374 for James Bianco.

They're pikers compared with the nation's top-paid CEO, Occidental Petroleum boss Ray Irani, who made 979 times the average worker (and that estimate is a lowball compared with other compensation surveys). And even this is low compared with the scratch some bosses received during the go-go years.

Admittedly, these are all estimates because compensation in stock options may go up or down depending on the market, but nobody disputes the astronomical rise in executive pay.

Ask shareholders, at least as their will is expressed by corporate compensation boards and major institutional holders, and the answer is probably "yes." Top executive talent is hard to find and retain and, at their best, they have provided strong returns to stockholders.

Critics see if differently. "Managers rise to something akin to royalty when their compensation is at unjustified levels and when the rewards of employment are not more commonly and fairly shared with the general employee base." This was not a shareholder-rights activist or union member, but Leo Hindery Jr., former chief executive of AT&T Broadband and also Tele-Communications Inc. (TCI).

Don't look for high CEO compensation to change any time soon, despite popular anger, especially over the paychecks and bonuses of the big bank chiefs. Or even because of the stress of high unemployment and income inequality.

Indeed, without Washington Mutual's Kerry Killinger around any longer, examples of egregious executive pay for dismal performance are hard to find among Northwest companies.

Schultz, for example, has guided Starbucks back from its torpor despite recessionary downdrafts. Shares are trading near a 52-week high. Over this stormy decade, Paccar has delivered a 19.3 percent average annual return to shareholders. No surprise then, that Paccar's board handsomely rewarded CEO Mark Pigott.

Northwest corporations have also adopted some practices advocated by reformers to make executive pay more transparent, improve pay-for-performance measures and give shareholders more of a role in setting compensation. Microsoft adopted a "say on pay" rule where shareholders can vote every three years; its just an advisory vote, but still progressive for U.S. corporations.

Still, executive compensation has radically changed when contrasted with the way the boss was paid in the 1950s through the 1970s, when the American economy was also at its high-water mark.

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Then, top execs at major corporations typically made 40 to 50 times the pay of workers at the bottom rung of the pay scale.

Now such a number seems quaint.

You can find it at Microsoft, for example, where Steve Ballmer makes 39 times the average worker, or Portland-based Columbia Sportswear where the ratio is 47.

But for 2009, the average top-to-bottom ratio was 319 compared with 525 in 2000. (It's difficult to ascertain, however, how outsourcing of making products to developing countries really affects the pay picture for a company such as Columbia.)

The reasons behind the shift include the decline of unions, the rise of low-paid service jobs, deregulation, more political power wielded by big corporations and changes in the structure of compensation for top executives. Tax policy was different.

For example, in the Eisenhower years, top earners paid rates of 70 to 90 percent. Wharton professor Wayne Guay also makes the point that today's corporations are much larger and more complex to run.

Yet another cause is changing norms in society. The superrich and captains of industry that emerged from the Great Depression were low-key and often motivated by noblesse oblige.

The chief of General Motors in 1960 would have blanched at making so much more than average Americans.

Rosabeth Moss Kanter of the Harvard Business School wrote about this change, trying to channel her old friend, the late management guru Peter Drucker.

"Drucker was not against wealth accumulation, but he was a pragmatic about the work of organizations and society," Kanter wrote. "He held that pay should be associated with performance; that was a major point of management by objectives, perhaps his best-known practical management contribution."

Following Drucker would have avoided the worst examples of highly paid executives running companies into the ground. Drucker also "defined performance broadly, to encompass responsibilities to a wide range of stakeholders in addition to shareholders. He stressed that ensuring the long-term health of the company — and eschewing short hits that jeopardize the future — is an executive's primary job.

Unfortunately that's not how capital markets work now. They demand short-term gains, even if it means taking excessive risk or entering into an ill-advised merger. The shareholder, not society, is king.

Yet average shareholders usually lack the power to rein in excesses or demand accountability. Instead, power is centralized among big shareholders who are members of the same club as the chief executives.

A shareholder proposal to prohibit any current or former CEO of a public company on the compensation committee was defeated at Paccar's annual shareholders meeting in April.

The proposal backed by the AFL-CIO pointed out the potential of a conflict of interest by a group of CEOs setting the pay for another CEO, resulting in overly generous compensation that could eventually boost their own pay. The company called the claims baseless.

The occasional "activist investor" isn't outraged about compensation, but lack of immediate returns.

It is a sweet club. Consider Randy Talbot, suddenly ousted as CEO of Symetra Financial. He received a $3.3 million performance bonus.

That may enrage millions of Americans living off unemployment or dipping into their savings to survive.

But the majority won't be willing to force the changes to bring back more modest executive pay.

Outrage only goes so far.

You may reach Jon Talton at jtalton@seattletimes.com

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About Sound Economy

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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