Rich Lowry

High executive pay hasn't quite reached that status of a bipartisan "crisis," but it's approaching it. The Democratic senator from Virginia, Jim Webb, fulminated against it in his response to President Bush's State of the Union address the other day. Bush himself, in a "State of the Economy" speech on Wall Street, urged corporate boards to "step up to their responsibilities" to better manage CEO pay.

Once something officially becomes a crisis, that means that it is certain there will be a raft of foolish proposals to address it, and sure enough, legislative measures to crimp corporate pay already are bubbling up. There are, of course, some abuses in CEO compensation packages, but the broad picture justifies the truism, "You get what you pay for." Skyrocketing CEO pay has coincided with two decades of wondrous economic performance, during which the value of all stocks traded in the U.S. rose from $1.3 trillion in 1981 to more than $15 trillion in 2000.

The scolds of corporate pay yearn, in effect, for the bad old days of the 1970s. Then, CEOs were paid relatively small amounts, but corporations weren't particularly innovative and were run with little concern for the interests of shareholders. The hostile-takeover revolution of the 1980s changed all that. Buyout firms sought out undervalued companies, which they bought and turned around. This required top-notch managers who had to be rewarded handsomely for their performance.

As The Economist magazine puts it, CEOs had been paid like bureaucrats; now they are paid like entrepreneurs. The key innovation was tying compensation to the value of the company's stock through executive stock-ownership plans. A CEO's pay, therefore, was directly related to his performance, and his interests brought into alignment with those of shareholders.

It worked, and this model of pay spread throughout the corporate world. New York University finance professor Roy C. Smith points out that in the second half of the 1980s, 25 percent of mergers were hostile takeovers. In the 1990s, such takeovers declined significantly. "One reason?" he writes. "There were fewer under-performing companies remaining."

The number of people with the management skills, toughness and imagination suited to running a large corporation is small, and competition for their services is fierce. They are going to be paid a lot of money, especially when a profit or loss of billions of dollars depends on how they perform.

Rich Lowry

Rich Lowry is author of Legacy: Paying the Price for the Clinton Years .
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