A long post, but worth reading. How did we let things get this bad? best, Don Monkerud Trebuchet_MSSJ Mercury News Posted at 12:28 p.m. PDT Saturday, June 17, 2000 Gap between executives and rank-and-file grows wider BY JENNIFER BJORHUS Mercury News ``Way too many CEOs in Silicon Valley make way too much money. It's unbelievable.'' -- Ernie, 43, inventory control clerk, Hewlett-Packard Co. ``I think it's great that they're making that kind of money.'' -- Sheila Hilton, customer service representative, Cisco Systems Inc. ``It doesn't really matter to us. It's pretty much `They make what they make.' They're doing their job. We do what we do to make our money.'' -- Askia, 19, customer care representative, Yahoo Whether they voiced outrage, approval or indifference, workers were hardly surprised by news that their Silicon Valley bosses collected more in 1999 than the workers could earn, in some cases, in 4,000 years. They know firsthand what income watchers are tracking: the top-to-bottom pay gulf in U.S. corporations continues to grow even as the economy steams ahead. The United States has long had the widest CEO-to-worker pay difference among industrialized countries. But the differences have become even more pronounced lately as the surging stock market created a stock options windfall for the top brass. ``It just gets worse and worse,'' said Graef ``Bud'' Crystal, an expert in executive compensation who is a columnist for Bloomberg News.``At some point this could become a real national issue. It's absolutely sick. It's crazy.'' In 1996, the typical chief executive of a large corporation in the United States earned 24 times what a manufacturing worker made, according to annual salary data collected by New York-based consultants Towers Perrin. By last year, the CEO was taking home 34 times what a factory worker collected. That spread is far larger and growing faster than ratios in European countries. The U.S. gap would probably be even larger if the survey measured service workers such as janitors or cafeteria cooks. In Germany, CEO salaries are only 13 times greater than that of manufacturing workers, estimated Towers Perrin. In Japan, executive compensation is just 11 times greater. The United States, by contrast, is fast creating enormous inequities in pay at the top and bottom of the corporate ladder. The inequalities put the United States nearly on par with countries like Mexico, Brazil and Argentina, where CEO compensation is more than 40 times the pay of workers at the bottom. The growing chasm is acutely evident in Silicon Valley. Compensation among the 767 Silicon Valley executives in the Mercury News survey of large companies shot up 70 percent in 1999 after a 21 percent jump the year before. By contrast, the average annual wage around San Jose crept up a mere 5.87 percent to $51,509 from 1997 to 1998, the latest date available from the Bureau of Labor Statistics. It would take about 11,845 years for someone making the federal minimum wage of $5.15 to earn the $121.7 million that Cisco Systems Chief Executive John Chambers collected last year. A typical U.S. executive at a large corporation earned $1.35 million last year, according to Towers Perrin, which tracks compensation at large corporations worldwide. Not only do U.S. executives earn higher base salaries than in other countries, but they get a richer packages of perks and bonuses and long-term incentives such as stock options. On the shop floor, however, it's a different story. The average manufacturing worker in the United States earns $39,437 a year -- less than factory workers in Switzerland, Japan or Germany, according to Towers Perrin. One of the big reasons for the yawning American pay gap is the U.S. style of paying relatively conservative base salaries and then larding on stock options. Proponents of the U.S.-style compensation system argue that it's good to link pay to stock prices and shareholder returns. Driven by the global investment community, other countries are beginning to follow the American system, said Tom Kelly, a Towers Perrin executive compensation consultant. The model may be getting out of whack and reaching its limit in the United States, Kelly suggested. Angry shareholders are starting to make headlines. At a Mattel Inc. shareholders meeting in Manhattan Beach earlier this month, angry investors grilled the toymaker's new chief executive about his own pay and the $40 million golden parachute of ousted Chief Executive Jill Barad. Critics charge that U.S. executive pay packages focus too much on stock price performance without taking into account how the entire market performed, said David Levine, an income expert at the University of California-Berkeley business school. In other words, top executives, including those in Silicon Valley, have been merely riding the irrational exuberance of the stock market, the critics contend. ``There's no reason to reward executives based on the performance of all the other companies. You want to reward them on what they're doing,'' Levine said. It would be smarter and more equitable to link stock options to an industry index, and to measure a company's performance over a substantial period of time, Crystal suggests. If company X exceeds the index, pay the executive for it. But if the company matches it or falls short, adjust the pay. Stock options alone don't account for the growing wage disparities in the United States however, Crystal and others say. A variety of other factors are widening the pay gap. The fierce war in the United States for superstar executives is driving up pay, said Towers Perrin's Kelly. New Economy companies are probably fighting the hardest, he said. ``There's 100 really great executives and that's what everybody's fighting for,'' he said. Crystal argues that weak-spined corporate board members, many of them CEOs of other companies, cave in to the excessive salary demands. There are other forces at play in the modern U.S. economy. Union membership, for instance, has declined in the past 30 years. The deregulation of industries such as trucking and airlines stifled workers' wage increases in those industries, according to John Schmitt, an economist at the Economic Policy Institute. Meanwhile, the $5.15 per hour federal minimum wage, earned mostly by the less skilled, hasn't kept up with the compensation for more skilled workers. It's lower than base wages in European countries. ``We're different from other industrialized countries in that the U.S. doesn't place as much emphasis on social cohesion and keeping disparities between the people at the bottom and top narrow or reasonable,' Schmitt said. ``The business elite in Germany probably looks at the situation in the U.S. with a mixture of envy on the one hand and distaste on the other.'' Indeed, generous U.S.-style pay packages became a thorny issue after German-based Daimler-Benz and Chrysler merged. The Daimler-Benz management team of 10 reportedly earned $11 million altogether in 1997. By contrast, Chrysler's top five executives took home about $35 million. Simply put, the appearance of greed is more acceptable in the United States than in other countries, notes Towers Perrin's Kelly. Pay packages that might stun Europeans are a fact of life in Silicon Valley. The fact that Yahoo President Jeffrey Mallett collected nearly $104 million last year ``doesn't really matter to us,'' said Askia, a 19-year-old Yahoo customer care representative who asked to be identified only by his first name. Askia, who's single and taking time off from UC-Berkeley, said he earns less than $40,000, excluding his stock options. The job helped him buy a new used Mustang, he said. Sheila Hilton, a Cisco customer service representative who works in Utah, said she thinks ``it's great'' that executives such as Chambers get the money they do. Hilton figures that Chambers brings a lot to the company. ``You should at least get out what you put in,'' Hilton figured. ``If you put in the time and effort, you should be compensated.'' Other valley workers are less sanguine. The Service Employees International Union recently highlighted the wage gulf between the haves and have-nots in Silicon Valley's booming economy as part of its ``Justice for Janitors'' campaign. The union won a 70-cent hourly increase for janitors, and decrease in employee contributions toward health insurance, among other things. Ernie, a 43-year-old Hewlett-Packard inventory control worker who asked to be identified only by his first name, called his job good. Ernie likes the job's stock options, handy credit union and good benefits, he said. He's been able to save money and even bought a new car. Still, he said he resents the multimillion-dollar salaries of Silicon Valley executives. He shook his head when he learned that the company's highly publicized woman chief executive, Carly Fiorina, took home $69.44 million last year. ``It's unbelievable,'' he said as he headed to his car at quitting time. ``A working person like me goes in every day making less than $20 an hour, busting our butt. I can't afford to buy a house here.'' ------------------------------------------------------------------------ Contact Jennifer Bjorhus at 0000,0000,00FFjbjorhus@sjmercury.com or (408) 920-5660.