Writer F. Scott Fitzgerald made his famous observation about the very rich — that "they are different from you and me" — at a time when it was natural to be intrigued by the behavior of America's wealthy. It was the 1920's, and the ranks of the privileged class had ballooned with the expansion of the country's industrial and trading might. The relative wealth of the captains of industry and of Wall Street was truly fabulous in that era. This was happening just before the stock market crash of 1929 and before the rise of organized labor, the social and economic reforms spurred by the Great Depression, and a new sense of equality after World War II, all of which helped drive up the average worker's wages and benefits and make the United States a middle-class country.
Lately, there is reason to be intrigued again. The economic expansion that ended in 2000 — the longest in U.S. history — made many people rich and made the very rich, well, more different from you and me than they've been in a long time. Compensation for CEO's and other high-ranking executives soared, while the rank-and-file worker made meager gains, in fact almost no gain at all when inflation is factored in. And while this trend might have been interrupted for a year or two after the corporate excesses at Enron, WorldCom, Tyco and other fraud-riddled companies were exposed starting in 2001, it appears now to have resumed.
It's been called the "salary gap" — a title given to this widening difference between what an average employee earns and what top bosses take home. According to Business Week's annual survey of executive compensation, which comes out each April, CEO pay rose 15 percent in 2004 to an average $9.6 million, while average worker pay rose just 2.9 percent to $33,176. Using those numbers, CEO's made on average about 290 times what one of their workers made. Some other surveys put the ratio at closer to 400-to-one. A quarter century ago, it was about 40-to-one.
Call this a story, and a big one at that, one that readers and viewers of news care a lot about. But to be accurate, this trend really is about the convergence of a lot of important news stories. This means neither I nor other business editors can simply assign this topic to a single reporter to cover as one story, or as a package of stories focused on only the gap in wages, or even as a running beat. Instead, every business reporter and columnist needs to be on watch for threads of this story and use a variety of approaches to give shape to this historic shift in the distribution of wealth derived from income, as well as in the changing relationships between employer and worker.
Tracking Executives' Expanding Perks
Story angles can no longer be limited to the astonishing sums that CEO's, CFO's and other high-ranking executives receive in wages, annual bonuses and stock options, or in the contrast, dramatic as it might be, with average workers' paychecks. These days otherworldly perks are surfacing in the news, and these often do more to illustrate the expanding executive sense of entitlement than dollar-sums can.
I'm tempted to call this the "shower-curtain approach," named for the $6,000 item that hung in a maid's bathroom of former Tyco CEO L. Dennis Kozlowski's opulent Fifth Avenue apartment and wound up, along with the $15,000 umbrella stand and other examples of excess, as evidence in his trial on fraud charges. But scandals and criminal cases, while they can make great stories, only exemplify how greedy some powerful executives can get. Ultimately, reporters need to investigate more common, generally accepted business practices if they want to be able to explain how a system works in which the top echelon of the U.S. workforce sees its lot in life improve so much more and so much faster than the rest.
With a little digging, evidence leading to such explanations can be found. An Associated Press (AP) business writer, Ellen Simon, uncovered a good example after she heard about a company's practice of paying for executives' personal trainers. She searched corporate filings at the Securities and Exchange Commission (SEC) to turn up other cases and came upon one that stood out: Colgate-Palmolive Co. paid not just for trainers but for a wide range of other personal perks, including karate lessons, fishing gear, swimming pool care, pet sitters, and family video rentals for its top 800 executives. This was an important story to tell, and it became an even stronger story when, just as Simon was finishing her reporting, Colgate announced the elimination of 4,400 jobs in a cost-cutting effort.
Many companies, Colgate included, contend that holding onto talented, hard-working executives requires levels and kinds of compensation that the average worker will never be granted. The argument is most often raised when a company's business turns bad; that is when its top managers are most tempted to flee to a healthier firm.
While the argument might have merit, it sometimes strains the credibility of workers and the public. It is this kind of disconnect that can lead to news stories, such as in 2003 when American Airlines disclosed in an SEC filing that it was creating special benefits for executives, including bankruptcy-proof pensions and bonuses that were, in some cases, twice an executive's annual salary. The disclosure came right after some big unions agreed that workers would take cuts in pay and benefits as part of a deal to keep the airline out of bankruptcy. The intersection of events produced an outcry that led the airline's chairman and CEO to step down. While reducing wages was seen as being essential to the company's long-term future, workers couldn't understand why they had to make this sacrifice while at the same time executives were receiving added security and income.
Lessons aren't learned; the controversy at American Airlines has failed to lead to greater restraint. More recently, auto-parts maker Delphi Corporation asked a bankruptcy court judge to let it lavish $500 million in special incentives on some 600 executives, even as it closes plants and tries to slash wages and benefits for workers. Not only were workers outraged — the plan was so extravagant that even creditors, who generally approve special executive perks in such situations, called it unacceptable.
Tracking Employees' Shrinking Benefits
The salary gap is, of course, a benefits gap, too. Taking measures they see as critical to competing in a global economy, companies are curtailing pension benefits and reducing their role in providing costly health insurance for most workers. In two recent instances, IBM and Verizon, both relatively healthy and growing companies, announced plans to freeze traditional pension programs and replace them with defined contribution arrangements, like 401(k)s.
Though numbers can be dramatic, often they are dry and difficult to comprehend. More compelling moments play out in the company corridors and on the plant floor at the time when stunned, and at times tearful, workers learn that promises made about benefits owed to them are about to be broken. To tell this story best means finding workers who are willing to talk, even though in doing so they risk the repercussions at work. After Verizon's announcement of its pension freeze for managers (the company must engage in collective bargaining before it can freeze union workers' pensions), AP's labor and workplace writer, Adam Geller, tracked down an employee willing to be quoted on the record and paired her comments with the notice he obtained that the company had sent out to affected workers, noting in his lead the irony he'd found.
Geller's story began:
NEW YORK (AP) The memo to workers made the changes sound almost upbeat: 'Your Work, Your Rewards, Your Verizon,' it read. But to some workers at Verizon Communications Inc., the company's announcement this past week that it will freeze the pensions of 50,500 managers is nothing but an employer breaking a decades-old promise to its own people. 'We're all good people here,' said Maureen Aeckerle, a 25-year Verizon veteran in Maryland, her voice breaking. 'And to be treated this way is just unacceptable.'
Of course, big companies don't offer the only perspective from which to tell these stories. Last year troubled smaller companies terminated most of the 120 pension plans, covering a total of 235,000 workers, which were assumed by the federal Pension Benefit Guaranty Corporation (PBGC). Geller found a riveting tale at Ajax Magnethermic Inc., a small-size company in the rust-belt town of Howland, Ohio. One day its 138 employees found the factory gate padlocked and then, soon after, the company legally vanished along with any legal responsibility for their pension fund, which wound up in the hands of the PBGC.
While tracking a complex paper trail through a series of ownerships, including a venture-capital unit of Citigroup Inc., Geller brought this story to life through the words and circumstances of the company's workers, who described their diminished futures, the stresses they and their families now faced:
… Necastro was expecting to retire at 65 with a pension of $1,600 a month. Instead, he gets $785.70. Hanton, a manager, was expecting $2,300 monthly or a $344,000 lump sum. Instead, at 63, the PBGC is sending him $1,305.85 a month. In the time spent waiting for the first check, he burned through much of his savings. The floor plans he and his wife drew up for a retirement home have been shelved and talk of travel together has been put aside.
Tracking Shareholders' Reaction
Hard-pressed employees are not the only ones upset at these widening gaps in wages and benefits. Shareholders also are getting increasingly vocal, pushing for more restraint and logic in top executive compensation and complaining when it borders on the outlandish. A recent survey by a consulting firm, Watson Wyatt Worldwide, found that 90 percent of institutional shareholders, including those invested in companies that manage big pension funds and mutual funds, feel that executives are "dramatically overpaid."
Executive pay is determined by a corporate board's compensation committee that works out the contract for a chairman, CEO or other top official. What happens here is rich territory for news reporting, a territory that should be — and can be — examined before scandals break. Tracking these transactions does require that a reporter have a good grasp of how corporations work and an ability to ferret out and then break down sometimes arcane and complex dealings into a simple sequence of events. Rachel Beck, with an MBA from Columbia University, does just this consistently in a column she writes for the AP called "All Business."
During last year's proxy season — the springtime period when companies file reports on compensation and other matters before their annual meetings — Beck examined how companies play games in so-called "benchmarking" of CEO pay. Benchmarking involves surveying compensation packages that competitors offer their CEO's. Seems fair enough. But, as Beck noted in a story she wrote about this practice, "there are those who choose to cherry-pick the companies with which they want to compare CEO pay. One is Goldman Sachs Group Inc., which said in its proxy report that the compensation committee had examined executive pay at 'certain of Fortune magazine's list of America's 50 largest corporations' to come up with the nearly $30 million it paid CEO Henry Paulson in 2004 — almost a 40 percent gain from the year before."
Beck went on to write in this story:
Compensation committees usually don't work alone in determining 'appropriate' pay. Human-resource consultants, who mine massive databases with executive compensation information, are often hired to help define industry standards and tax implications. The trouble is that no one wants to be the one to tell the CEO that he or she just deserves only the average salary when compared to others, especially when they keep touting the CEO's above-average abilities. So they agree to pay the CEO above the average and base that compensation against high-profile, high-paying companies rather than those that they might compete for in business and talent. All that ends up being plugged into the consultants' database, which ultimately boosts salary standards across corporate America.
That's different, of course, than how pay gets set for the workers at these companies.
Shareholders are pressuring compensation committees to tighten their purse strings, and the SEC is planning to require companies to report executive compensation — wages, bonus, stock grants, perks — in a more open and straightforward manner instead of the complicated, often ambiguous, fine-print approach that many now use. Journalists have a stake in this reform: This would make it easier for them to track corporate practices and trends in pay. Right now, news outlets often have to lean on professional consultants to decipher and compare compensation among CEO's.
Not everyone thinks the accounting reform will really lead to a reduction in executive pay. There are many in business who, in fact, contend that many of the highest paid top executives aren't earning too much — that even a $50 million annual paycheck isn't too much for someone who raises a company's worth by billions.
But more and more critics seem to be emerging, warning that the short-term gains in the stock market or in a company's balance sheet may not be worth the broader, long-term impact. Financial author and columnist Ben Stein worries about workers losing hope as they find a real pay raise — and social mobility — harder to achieve. At a recent Manhattan breakfast forum, even a vice president of Goldman Sachs & Co. warned of the "corrosive" effect of the salary gap on society in general. Ultimately only time will tell the long-term impact, but the concerns are real and coming from enough quarters that they deserve our serious attention.
Kevin Noblet, a 1991 Nieman Fellow, is business editor at The Associated Press.
