Global Policy Forum

By Steven Pearlstein

It's been more than a year since scandals exposed the games corporate insiders routinely played to enrich themselves while hoodwinking investors. Now I have some bad news:

They still don't get it.

The proof can be found in the fresh crop of proxies detailing the compensation received by chief executives last year. It's not just that many of the top guys got big raises despite a lousy year for most investors and negligible pay increases for most of their employees. More significantly, the proxies confirm that directors continue to accept the claptrap that the only way to attract and retain top executives is to lavish them with wealth way out of proportion to what other talented humans seem to require.

Consider chief executives from three defense companies.

At Falls Church-based General Dynamics, Nicholas D. Chabraja's $1 million salary was augmented by a $2.3 million bonus last year and $400,000 in non-cash benefits (including $200,000 worth of personal travel on the corporate jet). Then there's the nearly $4 million worth of GD stock that was put into Chabraja's long-term compensation account and the $7.6 million profit he realized by exercising options on 135,000 shares of stock. All together, a $15.2 million package in a year in which GD's stock price and its earnings per share declined.

Then there's Vance D. Coffman at Bethesda-based Lockheed Martin, which was back in the black in 2002 after two lousy years. Coffman earned a $1.6 million salary, a $2.6 million bonus and $375,000 in benefits. He also received the first $3 million of an eventual $6.7 million payoff under a two-year incentive program. More significantly, Coffman realized $14 million by exercising options on 360,000 LockMart shares. All told, $21 million for Coffman -- not bad considering 2002 earnings per share were about half what they were when he took over in 1998.

My favorite package, however, was that of Kent Kresa of Northrop Grumman, one of the Washington region's biggest employers. Kresa's base salary of nearly $1.4 million was unique in that it included $94,104 for unused vacation time. And in a year in which Northrop's stock price ended the year where it began, and in which net income was a measly $64 million on $17 billion in sales, directors granted Kresa $7.8 million in bonus and incentive pay. Total take: $9.2 million. (Now that he's retired, Kresa's contract calls for an annual pension of $2.7 million, five years of country-club dues and $5,000-a-day consulting fees.)

Let's acknowledge right off that all these guys have performed well at very demanding jobs. But can anyone argue that, having worked their way up the corporate ladder, they would not have taken the jobs, or performed as well, if they were paid half as much?

Academic literature is unanimous in finding that there is no correlation between pay and company performance. And while directors go to elaborate lengths to show how pay varies with performance, their only explanation of why the overall levels are so high is that everyone else does it -- an excuse you wouldn't accept from your 8-year-old. (By the way, directors from all three defense firms declined to comment.)

Nor should anyone buy the argument that these executives "deserve" a small fraction of the billions of dollars in shareholder value they "created." As we have learned, shareholder value is an ephemeral thing that has as much to do with luck, the economy and mob psychology as it does with executive talent. There are also thousands of other people at these companies who can lay claim to that value creation. It's simply absurd to apply the scale of these corporate behemoths to the personal finances of one person, like a gratuity on a restaurant tab.

If we've learned anything from the Enrons and the Tycos, it's that bloated pay packages not only warp the judgment and ethics of corporate executives, they also warp the values of the larger society. Apparently these are lessons that corporate directors have yet to learn.

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