Cashing in on the Corner Office Michael Barbella Managing Editor Irony is not a word often a

Cashing in on the Corner Office

Michael Barbella • Managing Editor

Irony is not a word often associated with Peter F. Drucker. The management guru, for the most part, was a simple, no-nonsense kind of thinker who rarely censored himself, particularly when he was counseling business executives or extolling the virtues of leadership to a spellbound audience. But there is no denying the irony in Drucker’s stance on a topic that has triggered quite an outcry among American consumers and politicians over the last few years: exorbitant executive salaries.

Drucker’s astute advice on effective management and responsible leadership helped dozens of chief executives become extremely wealthy over the course of their careers. Drucker, though, detested that wealth and made no attempt to disguise his disdain for the culprit he believed was responsible for it—excessive administrative pay.

Not one to mince words, Drucker once deemed sky-high CEO compensation a “serious disaster.” In a 1977 article he wrote for The Wall Street Journal, he argued that overinflated corporate salaries inflict “enormous damage” socially, even though they have little economic impact. “Money is a status symbol which defines an executive’s place in the corporate hierarchy,” Drucker said in his Journal commentary. “And the more levels there are, the more pay does the man at the top have to get.”

Such a sense of entitlement really bothered Drucker. In his mind, CEOs should work for the good of the enterprise rather than for the good of shareholders or for their own benefit. Drucker believed that hefty CEO salaries served little purpose other than to undermine the smooth functioning of an organization and tear at the fabric of society as a whole. They also send a clear (albeit mostly negative) message to the average worker about the character of his corporate leaders.

Over the last few years, that message has waivered between greed, self-righteousness and selfishness as the fiscal chasm continued to widen between American workers beset by layoffs, plummeting home prices and obliterated retirement savings and the chieftains who, in many instances, were responsible for their economic misfortune. Outrage over the disparity grew once the public became aware of the multi-million-dollar salaries and enormous payouts of the CEOs who had a hand in annihilating the nation’s economy. Much of the fury was directed at bigwigs such as Richard Fuld, CEO of Lehman Brothers Holdings Inc., who earned a total of $354 million during his last four years at the helm of the global financial services firm and sold about $490 million worth of stock before the company filed for bankruptcy in September 2008. He eventually received about $22 million in various exit packages.

James Cayce, CEO of Bear Stearns Companies Inc., faced similar vitriol for selling his stake of Bear shares for $61 million shortly before the global investment bank was sold to JPMorgan Chase & Co. in March 2008. And few sympathized with Stanley O’Neal, CEO of Merrill Lynch & Co. Inc., when he lost his job in October 2007 after the bank reported huge losses. O’Neal reportedly received a $161 million retirement package.

The outcry over such astronomical payouts prompted some sporadic (but temporary) behavioral reform among chief executives—Stryker Corp. CEO Stephen P. MacMillan, for example, deferred a raise last year despite masterminding a 15 percent rise in the company’s net income. Citing a “challenging business environment,” MacMillan opted to keep his base pay at $1.2 million, the same amount he has taken home since 2008, according to regulatory filings.

MacMillan, however, wasn’t the only chief executive to show some humility amid the remarkably brazen displays of corporate greed over the last several years. As MacMillan’s 26.3 percent salary hike took effect in 2008, the top bosses at both American International Group Inc. and Countrywide Financial Corporation answered the chorus of public discontent about excessive executive pay by sacrificing their respective $22 million and $37.5 million severance packages (Angelo Mozilo, incidentally, held onto his Countrywide stock and sold it for an easy $122 million). Other business leaders soon followed suit—the head honchos of companies that received huge taxpayer bailouts agreed to pay cuts, although they really had no choice in the matter because the federal government mandated the reductions in 2009.

Generally, CEO salaries shrank during the recession, in one case by more than half (UnitedHealth Group CEO Stephen J. Hemsley suffered a 52.2 percent pay cut in 2010, though he still cleared $48.8 million through a combination of salary, stock awards and other options). Wages for former Beckman Coulter Inc. CEO Scott Garrett withered in 2008 and 2009, but the drop was not as significant as the one experienced by Hemsley. Garrett, who resigned in September 2010, earned $6.13 million dollars in total compensation in 2009, a 2 percent decrease compared with the $6.3 million he pocketed in 2007. His salary sank further in 2008, falling 7.4 percent to $5.8 million, regulatory filings show.
Likewise, Gary D. Henley, the former Wright Medical Group Inc. CEO who unexpectedly resigned from his post in April, experienced a similar decrease in his salary in 2008, but it was minimal—less than half a percentage point.

By the time he stepped down, Henley had more than made up for that backward slide in pay (which amounted to a paltry $4,654). He earned a total of $2.03 million in 2009, a 17 percent increase compared with his 2008 salary. Last year, his wages went up another 7 percent to $2.17 million.

Beckman Coulter’s Garrett didn’t have to wait long for his wages to bounce back, either. In 2009, his income swelled to $6.13 million, a 5.8 percent increase compared with the total compensation he received in 2008 but still a sliver ($129,077) below his 2007 earnings. Whether Garrett eventually recouped that money last year may never be known—he resigned from the biomedical testing company on Sept. 6 (quite suddenly, by the way) and received a generous send-off package that provided him with his base salary of $960,480, equity awards, and a $1.92 million payment for his promise to refrain from suing or disparaging the firm, according to U.S. Securities and Exchange Commission filings. Terms of the legal agreement require Beckman Coulter to pay Garrett $1.92 million, less taxes and withholding, in 52 bi-weekly checks of $36, 923.08. As if that wasn’t enough, Garrett’s exit package also allowed him to remain on the payroll until Jan. 15 as the “full-time, non-executive advisor to the Chairman of the Board,” and kept him enrolled in the company’s 2010 Management Incentive Plan as well as Beckman’s health and retirement plans.

Such munificence in corporate compensation is indicative of both a comeback in extremely high CEO salaries last year and a continued enthusiasm in the corporate world for rewarding top executives with top dollars. This enthusiasm grew significantly in 2010 as the recovery took hold and businesses logged profits at an annual rate of $1.678 trillion. The good times did indeed return, but only for the bigwigs making the big decisions—executives at 200 major companies took home a median salary of $9.6 million last year, a 12 percent increase compared with their 2009 pay, according to a study conducted for The New York Times by Equilar, an executive compensation data firm based in Redwood City, Calif. By contrast, workers in private industry received a meager 2.1 percent raise last year, U.S. Bureau of Labor Statistics data indicates.

“What’s funny about pay is that when the market is going up, it covers a lot of sins,” David F. Larker, director of the corporate governance research program at the Stanford Graduate School of Business in Stanford, Calif., told the Times.

Sins such as the 31 percent stock slide that occurred during Garrett’s tenure or the spate of recalls that have taken place under the watch of Johnson & Johnson head honcho William C. Weldon. Those recalls—which included contact lenses, over-the-counter drugs and artificial hips manufactured by the company’s DePuy Orthopaedics unit—and the reduction of more than 6 percent of J&J’s workforce landed Weldon near the top of the highest-paid “layoff leaders” list compiled by the Washington, D.C.-based think tank Institute for Policy Studies in its 17th Annual Executive Compensation Survey last year. The organization claimed Weldon pocketed more than three times as much money as the average S&P 500 CEO“at a time when his firm was facing serious charges of violating quality control standards at its drug manufacturing plants.”

Indeed, Weldon has a higher salary than many of his peers (his $1.85 million annual base salary is nearly double the $981,970 Thermo Fisher Scientific Inc. pays its CEO). But in leading the world’s largest medical devices and diagnostics company, with 250 subsidiaries, operations in 60 countries and 115 employees, his responsibilities are supersized compared to those of his peers. Naturally, his salary should reflect the size of his responsibility, no?

Not in the least, Drucker argued in his Wall Street Journal article. He believed that CEOs deserved no more than 25 times the average worker pay (he lowered that figure to 20 times the average in a 1984 essay). Using the 20-1 ratio then, Weldon’s salary would top out at $888,200; to keep the $21.6 million in total compensation that he made last year, though, he’d have to raise the average J&J worker’s salary to $1,081,790 (based on a mean annual pay of $44,410 from the U.S. Bureau of Labor Statistics).

Under Drucker’s rationale, Abbott Laboratories CEO and Board Chairman Miles D. White would have to take a $19.1 million pay cut or give his employees raises of $956,784.95. Similarly, 3M Chairman, President and CEO George W. Buckley would be forced to give up $18.8 million of the $19.7 million he made in total compensation last year or implement an across-the-board raise of $942,506.35 at his company.

While disparity is not as extreme when base salaries are used, the earnings inequity between chief executives and average workers nonetheless still exists. The paycheck of Baxter International Inc. Chairman and CEO Robert L. Parkinson Jr., for example, is 54.2 percent higher than it should be, according to Drucker’s standards. Jeffrey R. Immelt, CEO of General Electric, earns nearly four times as much as Drucker believes he deserves, while the head honchos of both Stryker and Boston Scientific Inc. pocket 35 percent more than they are entitled under the 20-1 ratio.

Drucker, however, conceded that compensation formulas are inherently difficult to develop. “I would be the last person to claim that a ‘fair,’ let alone a ‘scientific’ system can be devised,” he wrote. Yet he never renounced his 20-1 ratio rule for CEOs; on the contrary, he insisted it was the right thing to do for the good of the company as well as society.

Enormous income disparities “corrodes,” he warned. “It destroys mutual trust between groups that have to live together and work together.”