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US Congress Probes Pay of Top Executives - 2003-05-21

The debate in the United States about how much company chiefs should be paid continues. Many believe reform is necessary if business leaders are to become more accountable to shareholders in their corporations. Congress is trying to determine if it should act, and how.

U.S. Senator John McCain says corporate greed is making a lot of Americans angry. At a Senate committee hearing about compensation for chief executive officers, or CEO's, he said the issue has become a crucial matter of public concern.

Mr. McCain said that over the past three years, hundreds of companies have gone bankrupt, about three million Americans have lost their jobs, and shareholders have lost $7 trillion in stock value.

"Despite these dismal economic statistics, the median pay of CEO's has continued to increase and we continue to see many examples of enormous pay packages awarded to top executives," said the senator. "There appears to be a disconnect between CEO pay and performance at many of America's corporations."

He spoke with a handful of experts at the hearing. Many agreed that reform of pay packages for company chiefs and top executives must take place.

Damon Silvers, of the AFL-CIO, a federation of America's labor unions, said CEO compensation in the United States was comparable to other major industrialized countries in the 1960s, but has since ballooned.

"Today of course, CEO pay stands at over 500 times the pay level of the average worker, and the pay of the median CEO continues to rise, even though by every measure, corporate performance is falling," he said.

But a lawyer who has represented several company chiefs and executives, Joseph Bachelder, says CEO pay actually fell last year. He also says salaries and bonuses have increased by only two percent over the past 50 years when inflation is taken into account.

Mr. Bachelder says high executive compensation is necessary because the free market economy demands companies pay hefty prices for these business leaders.

"If asked, the vast majority of directors ... likely would say that the single most important factor to a company's success over the next several years is the CEO," argued Mr. Bachelder. " This is one reason why CEO's have the leverage they command over their pay."

Apart from Mr. Bachelder, other critics agreed that CEO pay is out of control. They mentioned the debacle last month at struggling American Airlines as a recent example of excessive CEO pay. The air carrier's labor unions agreed to pay concessions, and then found out the chief and other top executives would be guaranteed bonuses and pensions even in the case of bankruptcy. CEO Don Carty resigned because of the incident.

They also stressed the need for companies to have to count so-called stock options as expenses on their balance sheets. The options allow executives to buy or sell stock at a certain discount price within a specific amount of time. They are often issued to CEOs as part of their pay, but are not calculated against the company's expenses.

In 1993, the big U.S. accounting firms said these options should not be considered as expenses. But this year they told the Financial Accounting Standards Board they now believe they should be expensed.

Mr. Silvers from the AFL-CIO says U.S. markets will be damaged by the corporate scandals of the past two years, including inflated CEO salaries, if the Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC) don't take action.

"FASB and the SEC have the power and the tools to do something about runaway executive pay," said Mr. Silvers, "but both bodies need the support of Congress."

Senator McCain says although he does not think Congress is prepared to act legislatively at this time, he says the hearing reinforces the need for greater stockholder involvement in deciding CEO pay, and greater disclosure of what company chiefs are earning.