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Friday, September 13, 2002 - Page updated at 12:00 AM

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Fed official decries CEO salaries

Los Angeles Times

WASHINGTON — A senior Federal Reserve official on Wednesday used a Sept. 11 memorial service on Wall Street to excoriate U.S. corporate executives for paying themselves too much and to call on the business leaders to cut their own compensation.

Quoting the biblical admonition to "love thy neighbor as thyself," William J. McDonough, president of the New York Federal Reserve Bank and a possible successor to Fed chairman Alan Greenspan, said that executive pay has ballooned beyond all reason and now threatens public support for free-market institutions.

"Sadly, all too many members of the inner circle of the business elite participated in the over-expansion of executive compensation," McDonough told an audience at Trinity Church near the World Trade Center.

Misguided wealth of CEOs

The piling-on of stock options and bonuses, which was justified as aligning the interests of top executives with those of their stockholders, has proven woefully misguided, he said.

"It is reasonably clear now that this theory has left a large number of poorer stockholders — especially including employee stockholders — not only unconvinced, but understandably disillusioned and angry," he said.

McDonough is not the first financial leader to criticize executive pay — both Greenspan and Goldman Sachs chairman Henry M. Paulson Jr. made somewhat similar comments earlier this year. But by linking the issue to Sept. 11 and framing it in moral terms, rather than as simply a business decision, McDonough may have raised the stakes in the debate over who runs America's corporations for whose benefit.

"It's surprising that a Fed official would wade into these waters," said Gregory Hess, an economist at Claremont McKenna College in California.

'Trust has been destroyed'

McDonough was apparently motivated by the seemingly incessant disclosures of corporate scandal and greed. On top of Enron and other debacles earlier this year, there has been a recent rash of disclosures about corporate figures such as former General Electric CEO Jack Welch Jr. winning cushy consulting contracts and perks like the use of corporate jets even after they have retired.

"The one thing you hope for from leaders of the business community is that they realize markets don't run on money, but trust and a sense of fairness," said Nell Minow, a veteran shareholder activist. "That trust has been destroyed this year."

McDonough, 68, has headed the New York Fed, the most powerful of the 12 Fed banks around the country, since July 1993 and is vice chairman of the Federal Open Market Committee, the U.S. central bank's chief policymaking body.

Making more than ever

He cited a recent study showing that while the average chief executive was making 42 times as much as the average production worker 20 years ago, the same business leader now makes nearly 500 times the average employee's income.

"I find nothing in economic theory that justifies this development," McDonough said. "I am old enough to have known both the CEOs of 20 years ago and those of today. I can assure you that we CEOs of today are not 10 times better than those of 20 years ago."

He said the spectacular increases in executive pay turns out to have been not only bad business but "terribly bad social policy and perhaps even bad morals.

"Looked at from the vantage of the commandment love thy neighbor as thyself, there are some clear questions: Is not my fellow worker my neighbor? Are not other members of the community, such as the widows and orphans of 9/11 victims, my neighbors? Are not the homeless my neighbors?"

McDonough continued: "It is important for those of us who have lives of great comfort and success that we recognize that the reasons for our good fortune and the reasons for the relative lack of success of the neighbors I have just described have very little to do with our own virtue. ... Yes, we deserve some credit," he said. "But we should remember that two (of the) most attractive virtues are realism and humility."

McDonough said that "any notion of moral balance" requires business leaders to take "corrective action."

The average chief executive of a major U.S. corporation made $10.8 million in 2000, according to the Economic Policy Institute, a generally liberal Washington think tank.

McDonough's salary last year was $297,500, according to the Fed annual report.

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