There's a constant stream of financial articles detailing the good fortune of the nation's CEOs. Whether companies prosper or not, it seems that corporate leaders are very well paid, a reality which raises a thought: Perhaps one way to increase homeownership rates would be to reduce executive pay. This would leave more dollars for employees and corporate shareholders. More importantly, it would have a symbolic value that should not be overlooked.

Speaking on September 11th, William J. McDonough, President and Chief Executive Officer of Federal Reserve Bank of New York, made this observation:

"A recent study shows that, 20 years ago, the average chief executive officer of a publicly-traded company made 42 times more than the average production worker. Perhaps one could justify that by the additional education required, the greater dedication, perhaps even the harder work. The same study shows that the average present day CEO makes over 400 times the average employee's income.

"It is hard," he continued, "to find somebody more convinced than I of the superiority of the American economic system, but I can find nothing in economic theory that justifies this development. I am old enough to have known both the CEO's of 20 years ago and those of today. I can assure you that we CEO's of today are not 10 times better than those of 20 years ago."

McDonough is the head of the Federal Reserve Bank in New York, about the most-conservative, pro-business institution you can find. If McDonough can figure this out, perhaps there's hope for others.

The study to which McDonough refers, Executive Excess 2001: Layoffs, Tax Rebates and the Gender Gap, makes two important points:

• "Executive pay jumped 571 percent between 1990 and 2000. CEO pay rose even in 2000, a year in which the S&P 500 suffered a 10 percent loss. The explosion in CEO pay over the decade dwarfed the 37 percent growth in worker pay."

• "If the average annual pay for production workers had grown at the same rate since 1990 as it has for CEOs, their 2000 annual earnings would have been $120,491 instead of $24,668. Likewise, if the minimum wage, which stood at $3.80 an hour in 1990, had grown at the same rate as CEO pay over the decade, it would now be $25.50 an hour, rather than the current $5.15 an hour."

Can talented leaders be found for fewer dollars? Sure. Just look at the military.

The U.S. military is plainly lead by enormously able and talented people, professionals by every possible measure. One may disagree with various policies and approaches, but let's be fair: The nation's overwhelming military superiority is not an accident.

And yet, magically, it doesn't take a king's ransom -- or even a tenth of a CEO's annual take -- to find good people for the military.

Let's say you walk into basic training as an entry-level enlisted person, an "E1". According to the most recent military pay scales, your monthly salary is $1,022.70 -- plus you get free room, meals, and healthcare. After four months you automatically get a 10 percent raise to $1,105.50.

Now let's look at the other end of the scale. You're a general. You've been in the military for at least 26 years. You've moved 14 times in your career and have risked life and limb for your country. The odds are that you have a masters degree or a doctorate. You have 26,000 people and assets worth $4 billion under your command. Your basic pay? That would be $11,516.70 a month -- about 10 times the going rate for a newly-minted private or seaman.

Yes, there are perks associated with being a general. So what. Generals are not making 400 times the base pay received by the newest recruit. They're not making 400 times the average pay for an enlisted person. They're not making 400 times what you earn. They're not making 400 times as much as the President.

The fact is that when a corporation pays $100 million to a CEO, that money is now unavailable to compensate workers, re-pay investors for the risk they have taken, or help the company when times are lean. Fewer dollars for wages and dividends mean that workers and shareholders have less ability to save for a downpayment, finance a home, or reduce debt -- financial options which are good for both individuals and the economy in general.

The military has shown that great competence is available at a reasonable cost, an example which civilian executive committees might want to consider.

For more articles by Peter G. Miller, please press here.

Published: September 17, 2002

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