Global Policy Forum

By Nicholas D. Kristof

In Russia, those who manipulate capitalism to gain fabulous wealth are called the oligarchs, and they sometimes end up in prison. Here we just call such people C.E.O.'s, and we put them in prison less often. This is the time of year when corporate financial statements offer snapshots of their executives' mugging shareholders. Over the next few weeks, we'll find out precisely how much public companies overpaid their chief executives, but the news filtering out so far underscores the market failure in the boardrooms.

Carly Fiorina was fired last month as chairman and chief executive of Hewlett-Packard. So why did the board reward her with a total of $8.15 million in her last full year before booting her out? Then there's Michael Eisner, who is finally being pushed out of the Walt Disney Company's chief executive post for running his company almost into the ground. Yet the Disney board recently gave him a $7.25 million cash bonus.Both instances are a reminder that the executive suite in America is the last bastion of socialism in the world today. If Kim Jong Il traveled to America, he would be bewildered by most of corporate America but would immediately feel at home on a board's compensation committee.

A study for The Wall Street Journal by Mercer Human Resource Consulting found that at 100 major U.S. corporations, bonuses for C.E.O.'s last year rose more than 46 percent, to a median of $1.14 million. Both the amount and the percentage increase were the highest since comparable studies began five years ago. Companies have shaved costs by laying off workers and reducing health care coverage - and then using those savings to slather more pay on top executives. It's true that companies are now cutting back on stock options for C.E.O.'s, but it's hard to be impressed by that restraint when bonuses are soaring.

Since 1993, the average pay for C.E.O.'s of the S.&P. 500 companies has tripled to $10 million at last count, while the number of Americans without health insurance has risen by six million. If America's chief executives really earned their money, I'd be more sympathetic. But in 5 of the 100 companies in The Journal's study, bonuses rose as the companies' income dropped. As John Kenneth Galbraith once put it: "The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."

Indeed, C.E.O. pay increased most rapidly at companies with weak governance and few shareholder rights, according to a study this year by Lucian Bebchuk of Harvard and Yaniv Grinstein of Cornell. That study also found that public companies devoted about 10 percent of their profits to compensating their top five executives, up from 6 percent in the mid-1990's. That's a hijacking of corporate wealth by top managers.

Companies typically claim that C.E.O.'s are rewarded highly only when they outperform their peers. Poppycock. One study found that when companies didn't outrank their peers, they just redefined their peers. Another study found that of the 1,000 largest companies, two-thirds claimed to have outperformed their peers. That's the "Lake Wobegon effect": All C.E.O.'s in America are paid as if they were above average. If only my buddies determined my compensation: I'd like my earnings "peers" to be a New York journalism figure and someone with an interest in the third world - people like Rupert Murdoch and Bill Gates. What a bonus that would be!

Boards sometimes argue that they need to pay huge sums to hang on to talent. Really? Consider Mr. Eisner, who did a great job in his early years but has been a walking pay scandal ever since Disney earnings fell 63 percent in 1993 (after an accounting change) and he received $203 million. He has been so desperate to stay at Disney that he virtually Super-glued himself to his chair. If the board had wanted to pay the market price necessary to keep him, it could have offered a penny.

Or less. Brian Halla, the C.E.O. of National Semiconductor, received a $5 million bonus last year. But he told The Wall Street Journal, "I feel I should pay somebody for doing this job." Now there's a smart suggestion. So I called to ask Mr. Halla why, since he feels that way, his board shouldn't save the shareholders a bundle and charge him a fee to keep the job. He didn't take my call.

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