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CEO Pay Needs Some Sanity

September 16, 2002

Senior Federal Reserve official William J. McDonough's denunciation of exorbitant executive compensation at a Sept. 11 memorial service on Wall Street must have come as a jolt to his audience. Fed Chairman Alan Greenspan has already attacked excessive compensation unrelated to company performance as part of the "infectious greed" that seized Wall Street in the last decade. But McDonough went a step further in declaring that "any notion of moral balance" requires that business leaders curb their financial appetites. Those appetites appear more insatiable almost every day.

L. Dennis Kozlowski, former chief executive of Tyco International, and his second-in-command, Mark H. Swartz, are under New York state grand jury indictments alleging stock fraud, bribery and the use of improper loans for goodies ranging from a Park Avenue apartment to Tiffany's jewelry. The company's former general counsel, Mark A. Belnick, was also indicted for allegedly concealing improper loans to himself. John Rigas, former CEO of Adelphia Communications, which is under bankruptcy protection, allegedly used company funds to pay for everything from an African safari to luxury apartments.

Executives who didn't do anything illegal have been exploiting their firms as well. Jack Welch, who retired last year as CEO of General Electric, has been living lavishly on the company dime, according to court papers filed by his wife in their divorce case. During Welch's time at GE, the firm paid more than $7.5 million of the $32.5 million that the Welches spent on their homes, the papers said. Welch, now a consultant to GE, is said to even have the company paying for his postage and toiletries.

Some companies seem to be getting the message. Adelphia, for example, has stated that it will not hand over $4.2 million in severance pay to Rigas.

But rescinding a few executives' payments, while a good start, is not enough. Fundamental changes are needed. McDonough lamented that the average CEO, who 20 years ago would have made 42 times as much as an average production worker, now makes almost 500 times as much. These inequities have not created better CEOs but, instead, an atmosphere of entitlement and contempt for the law. The onus is on corporate boards, which too often have been rubber stamps, to demand that compensation not exceed justifiable levels.

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