Where's the Beef?

Back in the mid-1980s, Wendy’s, the fast-food hamburger chain, went head-to-head with Burger King and McDonald’s through its nationwide television ad campaign, which featured three little old ladies peering at an enormous hamburger bun with a teeny little burger inside. I still chuckle thinking about the 4-foot, 11-inch octogenarian yelling, “Where’s the beef?”

This image came to mind when I recently read an article in the New York Times that had the headline, “Top Hedge Fund Managers Earn Over $240 Million.” Compensation for managers of hedge funds has been lucrative for some time, but to make the list of the top 25 managers in 2006, a manager had to earn at least $240 million—nearly double the amount it took to make the list in 2005. To make the list in 2002, hedge fund managers had to earn more than $30 million. All together, the top 25 hedge fund managers in 2006 earned $14 billion. According to the International Monetary Fund, that is more than the total gross domestic product of Bahrain, Jordan, Ethiopia, Jamaica, and many other developing countries!

Now before my friends in the business community think that I’ve crossed over to the “dark side,” or that I’ve enjoyed a few too many beers before writing this article, let me say that I’m a firm believer in the American system of capitalism. But isn’t this getting a bit out of control? Excessive executive compensation has been a thorn in my side for some time, but I’ve always endured the pain quietly, hesitating to write about it for fear that I might lose credibility with the business leaders to whom I direct my monthly column. However, this list of wealthy hedge fund managers was the straw that broke this camel’s back.

Lest we think that oversized compensation packages are granted only in New York or Chicago, let’s consider some of our state’s business leaders, including executives at Northwest Airlines. The airline’s board of directors recently announced that it would reward its CEO for doing a good job of steering the airline through bankruptcy with $26.6 million in equity in the restructured airline. Executive vice presidents at the airline will receive almost $45 million in equity grants as well.

I’m usually not on the same side as the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), which at the time of this writing is planning to oppose Northwest’s executive pay plan in court. And I am aware that Northwest executives lost equity in the airline that they had earned before the restructuring.

Nevertheless, the union’s position seems reasonable. Much of the burden of restructuring Northwest Airlines was placed on the backs of its employees and its customers. It is hard to see how the executive pay packages will improve employee relations—and, in turn, how they will improve customer relations.

Now, I agree that most CEOs work very hard and deserve to be paid reasonably well. I also realize that to attract a top-notch CEO to your company, you have to offer an attractive compensation package that’s better than the one he or she could get somewhere else.

However, it seems that the compensation system and its governance is broken. The average CEO of a Standard & Poor’s 500 company received $14.78 million in total compensation in 2006. This put the average pay ratio of CEO to average worker at 411:1. Compare that to the CEO-to-worker pay ratio in 1980 of 42:1. Do you really believe that the value we’re getting from America’s CEOs has increased that much? I don’t.

American workers are losing jobs to outsourcing, losing benefits to rising health care costs, and losing pensions and retirement funds to outdated systems. Doesn’t it seem a bit inequitable that executives are getting superrich—especially in the instances where executive performance doesn’t correspond with executive compensation? Last year, departing CEOs Henry McKinnell of Pfizer and Robert Nardelli of Home Depot both received exit packages of more than $200 million, and both companies underperformed during their tenures.