The AFL-CIO says CEOs have been too cozy too long with the men and women who decide their pay.
Carnival Corp. CEO Micky Arison sits on the compensation committee that created his nearly $6 million pay package. The CEO of Hillenbrand Industries and his uncle serve on a company compensation committee.
Conflicts of interest like these are too common across Corporate America, the AFL-CIO complained last week in a report that blames cronyism for helping fuel skyrocketing executive paychecks.
Partly due to spiraling stock options, the average CEO of a major corporation made $7.8 million, or 326 times more than the $24,000 earned by a typical U.S. factory worker in 1997 -- a trend that is drawing mounting ire. In Germany, in contrast, the average CEO makes just 25 times the average worker's wage, according to the AFL-CIO.
Even the inscrutable Federal Reserve Board chairman Alan Greenspan took an unusual poke at executive compensation, saying in February that a lot of CEO pay is "not directed to the value they are producing for their shareholders, who are paying the bill."
Naming friends, relatives and business partners to compensation committees helps fatten pay stubs, many believe.
Keeping such committees independent is "truly the first line of defense against inappropriate pay packages," said Ann Yerger, director of research at the powerful Council of Institutional Investors, an association of 100 of the nation's largest pension funds.
Many companies are trying to remove cronies from their compensation committees. For example, company lawyers and investment bankers aren't as prevalent on such panels, Yerger said.
"That's a step in the right direction," she said. "Unfortunately, there's room for improvement."
The AFL-CIO agrees. "CEO pay is clearly out of control and conflicted 'country-club' boards are some of the main culprits," said Richard Trumka, AFL-CIO secretary-treasurer.
The AFL-CIO based its report on data from the Investor Responsibility Research Center, which found that nearly 150 directors of companies on the Standard & Poor's 500-stock index had conflicts of interest. The Center studied the companies' 1998 and 1999 proxy statements, which by law must report committee members' conflicts.
Some of the companies cited in the report, however, saw no problem with their committee composition.
"We don't think it poses any conflict of interest, or we wouldn't have him there," said Tim Gallagher, spokesman for Miami-based Carnival, referring to CEO Arison's slot on the compensation committee.
Hillenbrand Industries CEO W. August Hillenbrand serves on one of two company compensation committees: the body that decides if pay packages -- including his own -- are competitive, said David Robertson, human resources vice president at the hospital equipment and casket maker.
But when the committee decides matters related to the CEO, Hillenbrand excuses himself, said Robertson, adding "he's in no way involved in any decision in any adjustments to his own salary."
One academic has recently argued that cronyism doesn't lead to inflated CEO pay. Although abuse of position occurs, directors are under too much scrutiny to act unprofessionally, says Catherine Daily, a professor of management at Indiana University.
Her study of 194 Fortune 500 companies suggests that affiliated directors are not systematically "more generous in awarding CEO compensation than more independent committees," she said.
But many in Corporate America are concerned, saying CEOs have been too cozy too long with the men and women who decide their pay.
John Lauer, CEO of shipping company Oglebay Norton, has taken a stand on the issue by drawing no salary and getting a bonus capped at $200,000.
And although two members of the Cleveland company's compensation committee do business with the firm, he plans to forbid such connections when the two members step down.
"There has to be an absolutely clean (relationship), no friendship, no business deals," he said. "I don't want any perception that we have any kind of a linkage that way."
SEE FOR YOURSELF
The AFL-CIO's Executive Paywatch report can be seen on the Internet at www.paywatch.org/