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Fed Official Urges Execs to Trim Their Pay

Salaries: William McDonough says overcompensation is bad business as well as a 'bad social policy.'


WASHINGTON — A senior Federal Reserve official Wednesday used a Sept. 11 memorial service on Wall Street to excoriate U.S. corporate executives for paying themselves too much and called on the business leaders to cut their own compensation.

Quoting the biblical admonition to "love thy neighbor as thyself," William J. McDonough, president of the New York Federal Reserve Bank and a possible successor to Fed Chairman Alan Greenspan, said executive pay has ballooned beyond all reason and threatens public support for free-market institutions.

"Sadly, all too many members of the inner circle of the business elite participated in the overexpansion of executive compensation," McDonough told an audience at Trinity Church near the World Trade Center.

The piling-on of stock options and bonuses, which was justified as aligning the interests of top executives with those of their stockholders, has proved woefully misguided, he said.

"It is reasonably clear now that this theory has left a large number of poorer stockholders--especially including employee stockholders--not only unconvinced but understandably disillusioned and angry," he said.

McDonough is not the first financial leader to criticize executive pay--Greenspan and Goldman Sachs Chairman Henry M. Paulson Jr. made somewhat similar comments earlier this year. But by linking the issue to Sept. 11 and framing it in moral terms, rather than as simply a business decision, McDonough may have raised the stakes in the debate over who runs America's corporations for whose benefit.

"It's surprising that a Fed official would wade into these waters," said Gregory D. Hess, an economist at Claremont McKenna College. "I assume he's just trying to reflect the popular opinion" that executive pay has gotten out of hand.

McDonough apparently was motivated by the seemingly incessant disclosures of corporate scandal and greed.

On top of Enron Corp.'s and other debacles earlier this year, there has been a recent rash of disclosures about corporate figures such as former General Electric Co. Chief Executive Jack Welch winning cushy consulting contracts and receiving perks, including the use of corporate jets even after retirement.

"The one thing you hope for from leaders of the business community is that they realize markets don't run on money, but trust and a sense of fairness," said Nell Minow, a veteran shareholder activist. "That trust has been destroyed this year.

"You don't believe anybody anymore. You don't believe the executives about what they are really paid, or the accountants about what the numbers really are, or the stock analysts about what's really going on."

McDonough, 68, has headed the New York Fed, the most powerful of the 12 Fed banks around the country, since July 1993 and is vice chairman of the Federal Open Market Committee, the U.S. central bank's chief policymaking body.

McDonough's comments appeared to follow on those of Greenspan, who startled the business community this summer by telling a congressional committee that the recent stock crash and corporate scandals were the product of "an infectious greed" and by calling for stiffer criminal penalties for executives who break the law.

But Greenspan stopped well short of demanding any fundamental change in the way American companies are run, or calling for curbs on pay. By contrast, McDonough went straight to the issue of salaries.

The Fed official cited a recent study that showed the average chief executive was making 42 times as much as the average production worker 20 years ago and now the same business leader makes nearly 500 times the average employee's income.

"I find nothing in economic theory that justifies this development," McDonough said. "I am old enough to have known both the CEOs of 20 years ago and those of today. I can assure you that we CEOs of today are not 10 times better than those of 20 years ago."

He said the spectacular increases in executive pay turn out to have been not only bad business but also "terribly bad social policy and perhaps even bad morals."

"Looked at from the vantage of the commandment 'love thy neighbor as thyself,' there are some clear questions: Is not my fellow worker my neighbor? Are not other members of the community--such as the widows and orphans of 9/11 victims--my neighbors? Are not the homeless my neighbors?"

McDonough continued: "It is important for those of us who have lives of great comfort and success that we recognize that the reasons for our good fortune, and the reasons for the relative lack of success of the neighbors I have just described, have very little to do with our own virtue....

"Yes, we deserve some credit," he said. "But we should remember that two [of the] most attractive virtues are realism and humility."

McDonough said "any notion of moral balance" requires business leaders to take "corrective action."

The action he recommended: "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."

The average chief executive of a major American corporation made $10.78 million in 2000, or more than 300 times the wage of an average worker, according to the Economic Policy Institute, a Washington think tank that based its figures on a slightly different study than the one cited by McDonough.

"In other words," EPI economist Lawrence Mishel and co-authors concluded in the latest edition of the organization's biennial publication "The State of Working America," "a CEO earned more in one workday ... than an average worker earned in 52 weeks."

McDonough's salary last year was $297,500, according to the Fed annual report.

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