TIME: Almanac 1993/TIME Almanac 1993.iso/time/012092/0120200.000

Text File | 1992-10-19 | 9.3 KB | 189 lines

                                                                                BUSINESS, Page 34

COMPENSATION

Motown's Fat Cats


An unseemly spat over the salaries and perks of American and
Japanese auto chiefs points up a weakness in the U.S. case for
fair trade

By THOMAS MCCARROLL -- With reporting by Kumiko Makihara/Tokyo
and Joseph R. Szczesny/Detroit


    The trip was billed as a global showdown, an expedition
designed to "level the playing field," as American businessmen
are wont to say. Yet even before George Bush's new 747 touched
down at Tokyo's Haneda Airport, Japan and its supporters had
deftly weakened the American campaign to win trade concessions
by raising a touchy issue: large disparities in the money paid
to American CEOs and their Japanese counterparts.

    Under particular scrutiny, naturally, were the salaries
and perks of the three U.S. auto-company chiefs -- Chrysler's
Lee Iacocca, Ford's Harold Poling and GM's Robert Stempel --
all of whom accompanied the President to Tokyo. The three were
paid a total of $7.3 million-plus in 1990, including more than
$4 million in stock incentives.

    By contrast, the heads of Japan's Big Three -- Shoichiro
Toyoda of Toyota, Nobuhiko Kawamoto of Honda and Yutaka Kume of
Nissan -- earned a total of $1.8 million, counting bonuses.
Moreover, while the Japanese execs are presiding over thriving
enterprises, the U.S. auto industry is coming off one of its
worst years ever. Sales of American-made cars plunged 12.6%, to
8.7 million, in 1991; more than 40,000 autoworkers lost their
jobs, and GM announced plans to eliminate 74,000 jobs by 1995;
and the Big Three rolled up financial losses that analysts
predict could exceed $6 billion.

    Put immediately on the defensive, the American auto
executives were quick to argue that while they made a lot of
money (Iacocca even admitted his pay was "too high"), their
Japanese counterparts got more in compensation than met the eye.
Claims Iacocca: "Don't feel sorry for the Japanese
[executives]. They make a lot of money. They have a lot of
perks. They get bought $3 million houses. They have
million-dollar golf-club memberships." His clear implication:
when everything is tallied up -- salaries, bonuses and perks --
Japanese and American executives are neck and neck.

    Not so. To be sure, Japanese companies offer executives
substantial perks. And Japanese securities laws do not require
companies to report details of such compensation. But the
available evidence does not point to the hidden trove that the
men from Motown suggest.

    At Toyota, Shoichiro Toyoda is provided with membership in
several elite golf clubs. Kume of Nissan receives a
company-rented house in a posh Tokyo neighborhood. Nissan also
provides its 47 board members with free use of a vacation home
in Hakone, a mountain and lake resort area south of Tokyo.
Liberal expense accounts routinely cover pricey meals and bar
bills that can add up to $1,000 a head for a night out.

    But those perks are not excessive when compared with the
benefits granted the American CEOs. All three U.S. auto chiefs
fly on corporate jets, a perk that is not available to any of
the Japanese auto executives, who fly first class commercially.
Chrysler picked up the $1.6 million tab for Iacocca's home
outside Detroit and his condominium in Boca Raton, Fla. At GM,
Stempel gets home-security services and a chauffeur. Ford's
Poling receives club memberships and financial counseling. All
three American CEOs are also granted generous stock options that
in 1990 accounted for up to 80% of their total compensation. Of
Iacocca's $4.5 million in pay in 1990, about $3.6 million came
from stock incentives. Although Japanese executives are paid
bonuses that can equal about half their salaries, they get no
stock options.

    And the Big Three CEOs are not the highest-paid of the 18
corporate managers who accompanied Bush to Japan. Tops was C.J.
Silas, chairman and chief executive at Phillips Petroleum ($5.2
million). Lowest: Winston Chen, head of Solectron, a
manufacturer of circuit boards ($317,000). Collectively, the
original group of 21 executives who left with Bush (three did
not go as far as Japan) were paid $25 million in salary and
extras last year, for an average of $1.2 million each.

    By current standards, that is handsome but not excessive.
The group's financial performance, however, was underwhelming.
The average return to shareholders for 13 of the 21 companies
whose stock is publicly traded was 3.7% a year since 1988, in
contrast to 9.4% for the 500 largest U.S. corporations. "Bush
couldn't have picked a less stellar group of business
executives," says Graef Crystal, a leading compensation
consultant and author of the book In Search of Excess. "They're
overpaid and underperforming and represent all that's wrong with
corporate America."

    Yet even a more representative group would have been
vulnerable to criticism on the pay issue. By Crystal's
calculation, the average chief executive officer at a major U.S.
corporation received about $2 million last year, counting base
salary, bonuses and stock options. The average Japanese top
executive earns $550,000, including bonuses, while the typical
German CEO makes $800,000 in salary and benefits. On top of the
rich pay, U.S. executives are awarded perks, like corporate jets
and interest-free or low-interest loans, that are virtually
unheard of anywhere else. Says Peter Chingos, director of
compensation practices at the accounting firm KPMG Peat Marwick:
"For American CEOs, the road to power and status is paved by
compensation."

    Meanwhile, as a growing number of critics are pointing
out, the competitive position of U.S. industry is eroding and
the overall economy sagging. Since January, American companies
have laid off an average of 2,600 workers a day. And though
corporate profits slipped last year an estimated 21%, to $133
billion, the average base pay -- minus bonuses and stock
incentives -- of American top executives increased about 6%, to
$690,000. Even though the outlook for U.S. companies remains
bleak, CEO pay is expected to increase at least 5% this year,
while bonuses are expected to jump as much as 10%. Such an
anomaly has given rise to a sense that while American executives
make more than European and Asian CEOs, they have done less to
earn their pay.

    Critics argue that excessive pay is just another
indication of Detroit's financial shortsightedness. Analysts
charge that the Big Three squandered a golden opportunity to
catch up with their overseas rivals during the past 10 years as
Japanese car companies -- under pressure by the Americans --
agreed to limit exports voluntarily. Rather than invest in new
plant and equipment, the U.S. companies went shopping. GM spent
$8 billion on nonautomotive acquisitions, including $5.3 billion
to purchase Hughes Aircraft and $2.5 billion to buy EDS, a
computer-services concern. Ford plunked down $500 million to buy
a savings and loan, and Chrysler invested $1.6 billion on
Gulfstream and American Motors. Says Ronald Glantz, an analyst
at Dean Witter Reynolds: "If the Big Three didn't go on an
acquisition binge, they might not be in the shape they're in
today."

    No one questions that the trade deficit with Japan is
serious business. And automobiles and car parts account for 75%
of the current $41 billion gap. To reduce the deficit, U.S.
executives have called for several remedies, including greater
access to Japanese markets and a limit on Japanese auto exports
to the U.S.

    In a speech before the Economic Club of Detroit
immediately upon his return last Friday, Iacocca, citing an
unnamed American financial company as his source, claimed that,
between 1987 and 1990, Japan's automakers lost an astonishing
$11.7 billion selling cars in America. Those losses were
effectively subsidized, charged Iacocca, by profits of more than
$36 billion made in their home market. Wall Street, however,
expressed bafflement at Iacocca's claims. One analyst, Maryann
Keller of Furman Selz, questioned whether the Chrysler chief was
referring to the Japanese companies' start-up costs rather than
actual losses, which "have nothing to do with dumping."

    In a larger context, Iacocca had a point when he labeled
the pay issue "a red herring." Even if the outspoken Chrysler
chairman were stripped of all compensation, the savings would
amount to only a few dollars per car. And for many industries
in which American companies have a far stronger case than do the
automakers for claiming they are competitive in both price and
quality, the spat was an unfortunate diversion from their
substantive complaints.

    But the dispute is not entirely irrelevant. According to
the Hay Group, Washington-based compensation consultants, about a
third of the CEOs at major U.S. corporations saw their
compensation cut last year as the recession pushed down company
profits. Citicorp CEO John Reed took a 22% cut because of his
company's flagging fortunes. Some management experts, like
Donald Hambrick, a professor at Columbia University Business
School, suggest that such sacrifices by CEOs might even help
boost sagging employee morale. It might also avoid the kind of
public relations debacle Detroit's fat cats endured last week.