Compensation: Motown's Fat Cats

By THOMAS McCARROLL

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.

With reporting by Kumiko Makihara/Tokyo and Joseph R. Szczesny/Detroit