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 called 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.
The piling-on of stock options and bonuses, which was justified as aligning the interests of top executives with 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 D. Hess, an economist at Claremont McKenna College in California. "I assume he's just trying to reflect the popular opinion" that executive pay has gotten out of hand.
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 John F. 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.
"You don't believe anybody anymore. You don't believe the executives about what they are really paid, or the accountants about what the numbers really are, or the stock analysts about what's really going on."
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.
On their face, McDonough's comments appeared to follow those of Greenspan, who startled the business community this summer by telling a congressional committee that the recent stock crash and corporate scandals were the product of "an infectious greed" and by calling for stiffer criminal penalties for executives who break the law.
But Greenspan stopped well short of demanding any fundamental change in the way American companies are run, or calling for curbs on pay. By contrast, McDonough went straight to the issue of salaries.
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