Can Even Heroes Get Paid Too Much? Top performers deserve top dollar--no question about it. But there comes a point where that logic breaks down. Compensation experts and executives, though, have a hard time figuring out what that point is.
By Thomas A. Stewart Reporter Associates Deborah Edler Brown, Tyler Maroney

(FORTUNE Magazine) – PICK SOME NUMBERS BETWEEN 1 AND 500

My editor chose 3, 179, and 401. The chief executive officer of Exxon, No. 3 on the FORTUNE 500, is Lee Raymond, 59. He was paid $26,731,648 last year. That's the sum of his salary ($1,750,000), bonus ($1,500,000), long-term incentives, restricted stock and stock-option grants, and "other" ($131,472).

No. 179 on the FORTUNE 500 is auto-parts maker Dana Corp., whose chief executive, also 59, is Southwood J. Morcott. His 1997 compensation was $3,648,244. Turner Corp., a construction company, is No. 401; its CEO, Ellis T. Gravette, 72, joined the company in 1996 and received $2,747,345, including $1,828,125 in restricted stock. All three companies had good years. In total return to shareholders, Exxon ranked fifth among the 21 petroleum refiners on the FORTUNE 500, Dana fifth among 20 in the motor vehicle industry, and Turner--a turnaround--was tops among 20 engineering and construction companies.

What these men earned in a year, if set aside and invested, would be enough to live on for a lifetime--and live well. I asked my financial counselor to imagine that three men came to her with $26.73 million, $3.65 million, and $2.75 million in cash, each saying, "This is all I have, apart from my home and personal items. I'm going to earn no more. What can I budget to live on each year?"

We made ordinary assumptions about inflation and the stock market, then allocated the money archconservatively: 30% equities, 30% taxable bonds, 30% tax-free bonds, 10% cash. Lee Raymond could budget $1,160,000 a year (before taxes). If he died in 2034, age 95, his portfolio would be worth over $29 million. Woody Morcott would have to make do on $158,000 a year. Gravette, being older, could live about as well as Morcott despite starting with less. Each could live for the rest of his life among the top 2% of Americans if he were able to sock away every penny of just one year's pay. Plus he'd get Social Security.

PICK A NUMBER BETWEEN $1 MILLION AND $106,381,316

The generosity of boards of directors provokes a question: Is there an amount of pay that is obscene, regardless of how it was earned? An amount that's just too much?

"You're asking the wrong guy," says Ira T. Kay, who heads the executive compensation practice for Watson Wyatt Worldwide and wrote CEO Pay and Shareholder Value.

"You're asking the wrong guy," says Gerard Roche, chairman of the search firm Heidrick & Struggles. "Jack Welch and Larry Bossidy, these cats are like Michael Jordan--the basketball Michael Jordan, not the CBS one."

"What does Michael Jordan say? What does Oprah Winfrey say? It depends on every individual," says David Johnson, who retired last year as CEO of Campbell Soup, where he made his board give him tough annual reviews.

"Above $5 million I have serious questions," says Howard Stevenson, professor at the Harvard Business School. "That's the equivalent of earnings on between $50 million and $100 million in capital. That's $13,000 a day."

"'Obscene' is $1,000 more than I am making," says Graef Crystal, a compensation consultant turned compensation critic. "Plato told Aristotle no one should make more than five times the pay of the lowest member of society. J.P. Morgan said 20 times. Jesus advocated a negative differential--that's why they killed him."

"'Obscene' would be over $100 million," says Jennifer Moyer, a computer industry professional from San Francisco, interviewed in the parking lot at Disneyland. Inside, riding the Frontier Railroad, CPA Katie Herbert Douglass, a former CEO herself, says, "One million dollars per year is more than any person can spend."

To Dean Phypers, a director of AIG, Bethlehem Steel, Cambrex Corp., and Church & Dwight, "It's like the definition of pornography--you know it when you see it. There is a limit to what hired hands ought to get, and in the last five to ten years, with stock compensation and a wild market, many CEOs have found it."

Michael Josephson, president of the Josephson Institute of Ethics and the Character Counts! Coalition: "There is an ethical concept of too much. It comes from two different sources: first, when it's disproportionate, when it feels unfair; second, when it's no longer driven by the marketplace but by artificial escalation."

WHAT THE MARKET WILL GRIN AND BEAR

Roche: "To me it's what the market will pay. It's supply and demand. Everyone says, 'Get me Larry Bossidy.' How many Larry Bossidys do you think there are?"

Josephson: "A company like Johnson & Johnson is expanding two, three billion a year. You know how many new leaders they need? But they don't need a lot of new presidents."

Crystal: "Labor economists will tell you that there shouldn't be a major change in pay without a change in supply or demand. Has there been an increase in demand for major-company CEOs? No--they keep merging. A decrease in supply? Hell, no. Harvard Business School turns out more than ever, and we have all these women we keep turning down."

Kay: "I am a labor market economist, and I look at efficiency in markets. In the history of capitalism people frequently ask, What are the ethics of how these markets work? The minute you ask that, you damage the market. A piece of evidence that this market seems to be working is that the Japanese seem to be starting to imitate our high-stakes labor markets."

Roche: "Outside the U.S., boy, they're salivating. They see what the Gerstners and Golubs and Goizuetas get. I had one guy, the best CEO in the world in his industry, sitting in London, and he says to me, 'I'm getting screwed.' "

Robin Ferracone, president of SCA Consulting, compensation experts in California: "One reason pay is high is that the market for executive talent has become more efficient. Barriers to switching are lower. Loyalty is down. Search firms make the market fluid. Pay is published."

Josephson: "If we had to freeze pay at $3 million, could you get 500 good CEOs? I think so."

Robert W. Lear, Columbia Business School, former CEO of F&M Schaefer Corp.: "You have to pay your CEO above average or you're admitting you have a below-average CEO."

SHIRTS AND SKINS

"The entrepreneur has skin in the game, so he has a downside," says Stevenson. "If you are Ken Olsen, you put in everything you have and you're in the game for 27, 30 years. It's not like when you sign up for Disney and don't stand to lose even a million if it goes wrong, and it does go wrong, and you make $70 million after nine months."

Josephson: "There's a difference between an entrepreneur, a dealmaker, and a manager. We're giving entrepreneurial profits to people who aren't entrepreneurs."

Ferracone: "When they move jobs, executives perceive themselves at risk because the risks of termination and losing control are higher than they were."

Roche: "The CEO is no more at risk than you or any worker. They're just more visible."

Kay: "We have the first ten-digit wage earners in history. We have employee billionaires--Eisner, Sandy Weill, Goizueta. Steve Ross would have gotten there. If Gary Wendt had $200 million, Jack has to be halfway there. Is that too much? Are you demoralizing the larger employee population? I think the answer is no."

Josephson: "Dilbert is the revolution. That kind of cynicism about management says something."

PAY FOR PERFORMANCE OR PAY FOR VIAGRA?

Johnson: "The starting principle should be pay for performance. In my last year as CEO, 1997, I delivered a knockout year, but my total remuneration went down because performance has to be tested against the plan--you pay for performance and give tough targets."

Ferracone: "There's a lot of discussion now around the issue of retention. Market caps are so high, boards are afraid of losing someone good and exposing the shareholders to risks. I say paying for performance is your best retention vehicle. The question is, Do you pay before or after the performance is delivered?"

THE LEADER OF THE CLUB THAT'S MADE FOR YOU AND ME

Crystal: "Why doesn't the Disney board say, 'Let's hire a recruiting firm to see if we can find someone to do just as good a job for less money?' "

Ferracone: "With options, you can pay huge amounts for substandard performance. If Disney's stock goes up just 5%, he's still making $89 million."

At Disneyland, Mindy Henfer, an office manager for a small company in Utah: "Michael Eisner makes hundreds of millions. That's disgusting. There are people who are poor out there, and these people are hoarding all the money. I make barely enough to come to Disneyland."

Kay: "One of the great things about the U.S. is that Michael Eisner and Sandy Weill can come out of Brooklyn and get a big return on human capital. The British model--where you don't see large stock-option grants--puts a cap on returns on human capital. To them it's dirty money--but they don't cap returns on financial capital, which is old money."

Lear: "I begrudge a Bill Gates or a Michael Dell less than I do the CEOs who haul in a big number and didn't deserve it. Eisner didn't deserve it because he didn't prepare for the future, when he did it was the wrong guy, and his board is one of the lousiest."

THIS WAY TO THE EGRESS

Stevenson: "If CEOs were forced to reinvest in the company and keep their money in, I'd have no problem. I have no problem with a John Reed making a lot of money."

Ferracone: "If the stock doubles, options should have to be exercised. I've put it on the table, but it's never gotten legs."

Johnson: "We must be big enough to say, 'That's not right,' when it's money for jam that was never contemplated. You might give a person 1% of the profit increase from when he came in--that might begin reasonable but then become wildly stupid. You need to check every year or two."

Phypers: "A lot of boards don't have the guts to renegotiate. So you should set a ceiling in advance for the total value of a compensation contract. Anything above that should go to charity. Nobody will do it."

Roche: "I had a situation a few days ago where I had the candidate the client wanted and the job the candidate wanted. And he told me, 'I've done an analysis with my financial guy, and to make it significantly better for me, good enough for me to come, you'd have to pay me an obscene number. And I won't go into the company with that kind of negative perception.' So he says no."

REPORTER ASSOCIATES Deborah Edler Brown, Tyler Maroney