Is the Celtic Tiger a breeding ground for fat cats? The assertion that fat cats prowl corporate boardrooms has become commonplace in the US and the UK. One species of fat cat in particular has attracted much notice - the CEO.
Examples of CEOs paid huge sums of money abound, as do doubts about whether they deserve such levels of remuneration. Last April, Business Week evaluated the extent to which CEOs at the 365 largest US corporations earned their keep.
Total remuneration (salary plus bonus plus stock options) was compared against returns to shareholders, as measured by share price appreciation and reinvested dividends, over a three year period.
In this exercise, Mr Michael Eisner, CEO of Disney, with a total pay of approximately $595 million and shareholder returns of 56 per cent, was named as giving the worst value for money. Dr Anthony O'Reilly, of Heinz, and Mr Jack Welch, of GE, ranked respectively fourth and fifth worst.
On another performance criterion, Return on Equity (ROE), Mr Eisner, with a 9 per cent ROE, has been pushed down to fourth worst place by three CEOs whose companies "achieved" negative returns on equity. Two of the three least deserving on the ROE criterion are CEOs of loss making Internet companies - Amazon.com and America Online.
The debate on whether CEOs like Mr Eisner really merit their pay awards highlights the core issue at stake - what is the best way to reward men and women who run companies in a superior way? Those who try to find some rationale for CEO remuneration have three bases for judgment:
the free market, supply and demand for CEOs
equity in the distribution of rewards
company performance.
In an ideal world the three would be in harmony, but in the real world, distortions prevent this.
The "free market" concept has been used to defend ostensibly exorbitant CEO pay. It is claimed that talent is a rare commodity and there is global competition for a small talent pool. However, others argue that there is not a shortage of well qualified people.
The problem is that there is not a true open market situation with perfect information and easy access between buyers and sellers. Boards are risk averse and tend to go for well known names with high price tags. In the UK, the tendency to opt for high profile CEOs has been manifest.
Half the highest paid executives in UK companies came from American companies, according to Trade and Industry Secretary, Mr Stephen Byers. Examples are Ms Marjorie Scardino, of Pearson Publishing, and Mr Jan Leschly, of SmithKline Beecham, paid respectively £1.6 million sterling and £2.45 million sterling in 1997/98.
This could explain why the UK leads the European league table for CEO pay in a comparison of 9 countries published by Business Week.(Ireland is not included in the table since the data is incomplete due to non-disclosure of individual directors' remuneration.)
Looking more closely at the European figures, the average CEO in companies with annual sales from $250 million to $500 million in Britain would make more than $600,000, in France less than $500,000, and in Germany about $400,000.
Where does Ireland stand in all this? While the full data is not available, some information is at hand from the annual IMI survey of executive salaries.
The 1998 survey shows median CEO compensation of £104,000 in companies with more than £150 million turnover. The 1998 figure is actually down on the 1997 median of £125,000. However, a caveat in these results as compared to those derived from published company reports in other countries, is the fact that it is based on a survey. The response rate to the survey in the £150 million plus turnover category companies was just 14 per cent, covering 22 organisations.
Further hints about Irish CEO earnings can be gleaned from the collective data in annual reports in larger companies. For example, in 1998 Smurfit paid 6 executive directors a total of £11.27 million, down from £12.19 million in 1997.
Elan Corporation paid 3 executive directors $2.4 million in 1998 compared to $1.6 million to 2.5 executives in 1997. CRH reports that its 5 executive directors earned an average of €407,351 (£320,815) in 1998, up 17 per cent from 1997. These figures as such do not tell us whether fat cats are beginning to creep into Irish boardrooms. They really have to be examined in light of the three bases of reward systems. In terms of the market system, it is virtually impossible to know.
Could we get better CEOs for less money on the open market? Or are we lucky to have the calibre of CEOs that we do at the price we are paying. A factor driving the market for CEOs in Ireland is the more than 1,100 multinational corporation subsidiaries here, many of which are substantial units in their own right.
The rest of the world does seem to like Irish born CEOs, as evidenced by the recent appointment of Mr Matthew Barrett to Barclays Bank, Mr Niall Fitzgerald of Unilever, Mr Gerry Robinson of Granada and Dr O'Reilly, recently retired from Heinz.
The second rationale of reward is that of fairness or equity. The issue of relativity is important, as it is not necessarily absolute figures that are important, but that some people should not be unduly rewarded compared to others.
This calls for a reasonable sharing of rewards and pain among all levels in companies. In Ireland, this basis of deciding on rewards is obviously not one that would be favoured by those who object to the disclosure of individual directors' pay. The objectors suggest that such a disclosure would only invite jealousy on the part of workers and a spiral of pay increases.
The difficulty is deciding what is a reasonable distribution. For example, Ben & Jerry, the founders of the eponymous US ice cream company, were initially determined that the chief executive should earn no more than seven times the average worker's salary.
On an aggregate basis, in the US, the Business Week survey shows that the CEO received 419 times the average wage of a blue collar worker.
British statistics are not quite as drastic. A Trades Union Congress study of 362 companies showed that the salary of the top director, excluding bonuses, stock options, etc., equates to 16 times the salary of the average worker. However, in FTSE 100 companies, the CEO's salary is 48 times the salary of the average worker. In both the US and the UK, the disparity has been rising.
In Ireland, another perceived form of inequity is the gap between public and private sector CEO pay. It is generally accepted that pay restrictions in the state sector have ensured a leaner sort of top cat (although a few exceptions broke through, notably in Aer Lingus and Telecom Eireann).
Recently, the Government announced a significant pay rise for CEOs of some commercial semistate companies, linking their pay to rates in the private sector. The revised packages are to have "demanding objectives and searching performance reviews" attached to them.
Basically the Government move recognises the three bases of reward in this new approach. This acknowledges the market system, that more attractive remuneration is more likely to entice candidates away from the private sector. It has a built-in performance incentive element, and it removes the public versus private sector discrepancy.
There are certainly national differences in CEO remuneration that is another form of inequity as seen in the European comparisons mentioned already. This is highlighted when US companies merge with companies from continental Europe.
There is the infamous example of Daimler Benz CEO Mr Jurgen Schrempp's discovery, after the takeover of Chrysler, that Mr Robert Eaton, the Chrysler CEO, who received more than $11 million in 1997, made more than the whole Daimler's management board. This results in the anomaly where the American reports to a boss who earns less than half of his subordinate's pay.
The trend to mega-mergers on a global scale causes another discrepancy. CEOs who engineer mega-mergers get rewarded. For example, Mr Sanford Weill, of Citigroup, received $167 million in salary, bonus and stock options in 1998, after the merger of Travellers and Citigroup.
However, often the justification for mergers is cost saving and rationalisation, with many staff made redundant. Even when a CEO loses his job following a merger, the benefit of a golden parachute is there to ease his pain.
Probably the basis that is most accepted as a way of rewarding executives and junior staff alike is that of performance. Underlying the pay-for-performance notion is the simple belief that the prospect of being rewarded for superior performance will incite executives to perform better. This ensuing motivation in itself should produce superior performance in companies.
Despite the general approval of performance as a basis of reward, the evidence in the US and the UK suggests that there is little correlation between performance and CEO pay. In Ireland, we are not privy to enough information to assess the relationship. The validation of pay-for-performance depends on clarity of what we mean by pay and what we mean by performance. These are complex phenomena in their own right. Justification of pay rewards also requires transparency in the relationship between pay and performance, as well as trust in those making the specific award decision.
Presumably, those who object to publishing individual directors' pay would be in favour of performance as a criterion. They cannot logically claim to uphold the pay-performance principle while concealing the pay element.
Perhaps the most disingenuous statement from the anti-publication lobby was made by the chairman of the Irish Stock Echange in a letter to the Tanaiste, Mary Harney. He stated that it is desirable to pay different amounts to individual directors (presumably he meant on merit) without public information "or even known by the individuals concerned".
The writer of this statement obviously believes that trust and co-operation in a management team takes second place to the possibility of jealous rivalry over pay differentials. The answer is not to conceal the pay differentials but to arrange them in such a way that they can be disclose and justified to all stakeholders concerned.
Dr Eleanor O'Higgins is a lecturer in strategic management and business ethics at the Graduate Business School, UCD.
