Storm Brews Over Executive Pay

Renewed concern about executive pay--stoked by news reports about the retirement perks offered to former General Electric Co. Chairman Jack Welch and allegations of millions in secret loans made to Tyco International Ltd.’s top officers--is pressing government officials, shareholders and stock exchanges to act.

On Tuesday, the Conference Board, a business think tank, will issue proposals to rein in executive pay. This follows a high-profile speech last week by a top Federal Reserve official, who blasted executive compensation levels and called on business leaders to take voluntary pay cuts. And by year’s end, the giant California Public Employees’ Retirement System will consider ways to exert influence over the pay policies of the companies in which it invests.

Some lawmakers and institutional investors want to force companies to run the cost of providing employee stock options through corporate income statements--a move hotly opposed by many firms.

Meanwhile, the AFL-CIO is trying to embarrass executives by pointing out the inconsistencies in what they say and do and to exercise the group’s considerable clout as a pension fund manager by opposing management in certain proxy battles.

Though the prescription may be debated, analysts say it’s clear the financial world is now focused on problem pay.

Some experts believe that investors have become so disenchanted and distrustful of company managers--some of whom appear to be running firms for their own enrichment rather than the good of shareholders--that it’s undermining faith in the stock market, which already is suffering through a 2 1/2-year slump.

“This causes a lot of anger and public mistrust and will play itself out in people not investing, people sitting on their savings,” said Warren Bennis, a USC professor and an authority on leadership.

Discontent initially arose earlier this year as stories spread about the lavish rewards reaped by executives at failing companies such as Enron Corp., WorldCom Inc. and Global Crossing Ltd. But the issue flared up again recently.

On Thursday two former Tyco executives were accused of systematically looting the company, partly by secretly borrowing money and then having the company “forgive” the loans.

Days earlier, company-paid perquisites to former GE Chairman Jack Welch hit the headlines, when Welch’s estranged wife alleged in court filings that GE continues to pay millions of dollars to keep Welch in private planes, company-paid apartments and limousines.

As the evidence of excess mounts, so do the calls for change. On the anniversary of the Sept. 11, 2001, terror attacks, William J. McDonough, president of the New York Federal Reserve Bank and a possible successor to Fed Chairman Alan Greenspan, said in a speech that executive pay has gotten out of hand and urged chief executives to cut their own compensation.

Tuesday, the Conference Board will unveil a set of specific salary recommendations produced by a blue-ribbon panel of regulators, business leaders and investors that includes John C. Bogle, founder of mutual fund giant Vanguard Group and Andrew S. Grove, chairman of Intel Corp.

The Conference Board wouldn’t tip its hand to precisely what would be proposed, but Carolyn Brancato, its director of corporate governance, said the cycle created by basing executive salaries on an ever-escalating average of top-paid people has to be broken.

Meanwhile, the New York Stock Exchange and the National Assn. of Securities Dealers have imposed requirements aimed at reducing the potential conflicts of interest that could affect corporate directors who decide on executive pay.

Congressional leaders, including Sen. John McCain (R-Ariz.), have proposed legislative solutions. McCain wants to force companies to account for the cost of stock grants given to employees on corporate balance sheets. Rep. Martin Sabo (D-Minn.) has proposed limiting corporate tax deductions for executive pay that exceeds 25 times the income of the company’s lowest-paid worker.

AFL-CIO officials--shareholders in a wide array of corporations by virtue of the labor group’s $400-billion pension system--said Friday that they intend to use their clout to push proposals at 300 large companies to tighten up corporate governance and scale back executive pay.

William Patterson, director of the AFL-CIO’s office of investments, said the labor group plans to press a four-point plan to “decouple” CEO pay from short-term price movements and overreliance on stock options.

With nearly two-thirds of U.S. equity holdings in the hands of mutual funds, pension managers or other institutions, it is pivotal that those organizations become active in the debate, experts said.

Yet, in the past, it has been difficult to get big institutions to speak out against excessive executive pay because many of the nation’s largest mutual fund companies are hired by company managers to operate corporate pension funds and 401(k) programs. For these institutions to publicly criticize executive pay is tantamount to biting the hand that feeds them, said Ken Bertsch, director of corporate governance at TIAA-CREF, the big New York-based mutual fund and pension administrator.

“There is a perceived pressure on mutual fund companies to be quiet,” Bertsch said. “They often don’t take a public stance, even when they’re tougher in their proxy voting than people realize.”

That, too, is changing.

CalPERS, the nation’s largest public pension fund, with nearly $140 billion in assets, has instructed its staff to present formal initiatives about executive pay to the group’s board by year’s end, for example. Though CalPERS has occasionally spoken out about executive compensation in the past, it generally has been content to let others take action, said spokeswoman Patricia Macht.

“Executive pay has not been a formal program, but that’s going to change,” Macht said. CalPERS now is looking at CEO pay as a “diagnostic tool” that can signal when a company’s business conduct is out of whack.

Big mutual fund companies, such as Vanguard and Fidelity Investments, also have revealed plans to get more involved in targeting the ways companies set executive pay.

Some companies already are beginning to buckle by voluntarily agreeing to some investor demands--such as recording stock options as an expense--and making it tougher for executives to reap windfalls from stock gains when the company’s stock does no more than simply keep up with the stock market as a whole, said Judy Fischer, managing director of Executive Compensation Advisory Services of Alexandria, Va.

Bank of America Corp. recently awarded options to executives that vest only after the shares reach $30 over the market price on the date of grant, she said.

However, legislative reforms are certain to meet an uphill battle. Though investors are lining up in support of reining in pay, powerful corporate organizations ranging from the Business Roundtable to groups representing the technology industry are almost equally steadfast in their determination to stop any strict dictates.

An official with the U.S. Chamber of Commerce in Washington, for example, bristled at McDonough’s remarks about restricting executive pay.

If Fed members stuck to tending monetary policy “instead of worrying about how private-sector companies and private-sector individuals determine private-sector compensation, the whole country would be better off,” said Martin Regalia, the chamber’s vice president for economic and tax policy.

“CEO pay is a private market decision between the company board of directors and the individual that is offered the job,” Regalia said. “We don’t suggest that baseball players that bat .260 or go 5 for 13 should have their pay limited.... Singling out one particular group and saying this group is paid too much or too little is totally inappropriate.”

On the other hand, some contend that the threatened baseball strike was averted largely because fans became outraged enough to threaten a strike of their own. Investors may well be headed into the same type of empowering revolt.

“The only way you are going to stop this is if owners [shareholders] start getting involved,” said shareholder activist Bob Monks. “The only way to get owners involved is if they get so revolted that they stand up en masse and say, ‘What the heck are you doing with my money?’ ”

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Times staff writer Richard Simon in Washington contributed to this report.