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What's the deal with the boss's paycheck?

SEAN HARRIGAN: You really look at from the 1980s to today, where-you know, compensation has increased by over five fold.

BRANCACCIO: Are fat executive paydays shortchanging employees?

LARRY OLINGER: All that money comes out of our pocket. And it's so they can put it into the pockets of the CEOs. Where do we draw the line?

BRANCACCIO: And… what will it take to untangle the new Medicare mess?

JUDITH STEIN: People who've gone to get their drugs, they have a letter that says they've been enrolled. The name doesn't come up on the computer, and they can't get their medications.

BRANCACCIO: Welcome to NOW on the road, in Southern California this week.

We're out here talking to people and crunching the numbers on why some folks in America get paid so handsomely for the work they do while other hard-working people get paychecks that leave their families struggling. You know, given that everybody puts on their trousers one leg at a time in the morning, why is it that, according to one survey, CEOs at big corporations make about 431 times the average worker's salary? That's up dramatically from 15 years ago. And it's not just CEO's — thousands of corporate executives are getting sweetheart deals as well.

As producer Peter Meryash and I found out, efforts to fix this problem are hitting roadblocks.

That airplane's made by Boeing — the world's largest aerospace manufacturer. It's also the country's second biggest defense contractor. In the past year, the wind has been at Boeing's back. Orders are up and profits are looking good. You could say Boeing is one of the engines propelling the U.S. economy forward.

In 2005, the company hired a new chief executive, James McNerney. To coax him from his old job Boeing offered McNerney an attractive deal — minimum salary: 1.75 million dollars a year. An annual bonus: probably 3 to 4 million dollars, depending on performance. A one-time stock compensation: valued at more than 25 million. His first year pay package: at least 29 million dollars.

If he stays long enough, there's even a supplemental pension, worth an additional 22 million dollars in retirement.

But to understand the American economy these days you need to know something else about Boeing — a strong year for profits and a banner year for the boss does not mean everyone at Boeing is having such a great year.

Take these folks. About fifteen hundred Boeing workers — members of the Machinists and Aerospace union — are on strike. They've walked the picket lines for almost three months.

LARRY OLINGER: We were shocked when the company gave us this proposal.

BRANCACCIO: Larry Olinger has worked as a machinist at Boeing for 18 years. He's also the president of the local union lodge.

LARRY OLINGER: If the company was not doing well, their profits were down, we would make concessions. We don't have a problem with that because we understand they have to make a profit also. But with them making the money they are making, and then wanting the takeaways for us, it was just not acceptable.

BRANCACCIO: What Olinger means by "takeaways" has to do with Boeing's latest contract offer, which would mean these workers pay more for their health benefits. And for new employees, the company wants to do away with medical coverage when they retire.

BOB VASQUEZ: Here we find ourselves fighting for things for future employees, not just us, ourselves.

BRANCACCIO: Bob Vasquez is one of the Boeing strikers. He's been working here for 28 years.

BOB VASQUEZ: The new kid that comes out of school, college; wants to work for a big corporation; wants to do his job for society; wants to be part of the fabric of America. And here you have a big corporation saying, "These things aren't going to be offered no more."

BRANCACCIO: Yet this is more than a management vs. union story — or a question of fairness. Some of Wall Street's large investors are also worried that the growing gap in how pay is apportioned may also be bad business.

SEAN HARRIGAN: American executives receive, on average, a 12 percent increase in total compensation per year.

BRANCACCIO: That's a pretty good raise.

SEAN HARRIGAN: That's a real good raise, especially when you consider the fact that the average American worker is only getting about three percent increase per year. So, you know, they're doubling their income every six years, the executives, while the average worker doubles their income every 24 years.

BRANCACCIO: And at that rate, average worker pay barely keeps up with inflation. Given numbers like that, Boeing can be seen as an example of the continental divide in the American economy, with top executives getting a sizable slice of the profits even as lower level workers are left fighting to keep what they have.

BRANCACCIO: Give me a sense of if the company were successful in forcing workers like yourself to pay more for these medical benefits. Would that have a big impact on your life, on the lives of your fellow workers? Is it that much?

LARRY OLINGER: We're just a blue collar worker. We're not rich. We don't have all this money floating around. We work to make ends meet, to save what we can save to put the children through school, to get college educations for them. As these takeaways come out of our pocket, it means that money's gonna go from somewhere.

BRANCACCIO: Boeing declined an on-camera interview, but says they're in a very competitive business — and given that, they believe the contract offer is fair and generous.

There is also a modest raise for the strikers, on average, around the rate of inflation. And Boeing says, McNerney's pay package is not excessive. He's the best man to run the company, and his compensation only matches what he was giving up at his last job at 3M.

BRANCACCIO: Does this issue of executive pay come up when you have discussions in a room like this with your union membership?

LARRY OLINGER: It will be mentioned. The tremendous package they gave him. And the pension increase they gave him was tremendous. And where is the gap between us and-- and them?

BRANCACCIO: It's a gap that's been growing bigger for workers across the country. According to one report, in 1982, the average large-company CEO made 42 times more than the average production worker. Eight years later, the CEO was making 107 times more. And by 2004, the gap had grown so much, that the average CEO was bringing home an impressive 431 times more than the employee.

LARRY OLINGER: All that money comes out of our pocket. And it's so they can put it into the pockets of the CEOs. Where do we draw the line? 85 percent of us said this is where we draw the line, and we voted to strike at that point.

BRANCACCIO: But it's important to note that Boeing CEO's multi-million dollar salary and stock package is hardly unique. In fact, it wouldn't even rank among the top ten … when compared to BUSINESS WEEK's most recent scorecard of highest paid executives. At the top of the list, guys like Yahoo chief Terry Semel and the Coach Leather CEO Lew Frankfort do better.

Now, while the average pay of top earners has come down a tad since the stock market peaked in 2000, in recent years, it's been heading right back up. A 2005 study by business scholars at Harvard and Cornell found average compensation for the top officers of S&P companies more than doubling in 10 years — way out pacing anything that can be explained by the success of the companies or their size.

But David Chavern, Vice President of the U.S. Chamber of Commerce, says there's a very straight-forward reason for CEO pay.

DAVID CHAVERN: This is a tough, tough job, and companies are trying to find the best possible people to do it. And there aren't many of them in the world, and they ask for a lot of money when you find them.

BRANCACCIO: You look at the data, and it shows that senior management at these companies are making hundreds of times what the rank and file, average pay package is. Much higher multiples than they did when I was a younger man.


DAVID BRANCACCIO: There's gotta be something wrong with that.

DAVID CHAVERN: Not necessarily. I mean, it's very easy to say-- just, that conclusion. Which is, "Man, that's a lot of money." But, there's nothing illegal or untoward going on here, and at the end of the day, people are - most people are okay with executives making lots of money if they produce, if they produce a lot of money for their workers, for their investors, and for the economy as a whole.

BRANCACCIO: But some very large investors are worried that many of these highly-paid executives are not justifying their pay with results.

Recently, 10 big pension funds — managing almost a trillion dollars in retirement assets — sent this letter to the Securities and Exchange Commission, citing studies that found a "disconnect between pay and performance."

SEAN HARRIGAN: Which is a huge concern among institutional shareholders, is that, you know, there's no correlation between compensation and performance.

BRANCACCIO: Sean Harrigan used to head the country's largest public pension fund, CalPERS, which manages about 200 billion dollars of retirement money for state employees in California.

For years, CalPERS and Harrigan, who was also an official with the United Food and Commercial Workers' Union, have crusaded for corporate reform — including reining in what he saw as excessive pay.

Harrigan believes it was, as the lingo goes-his "fiduciary responsibility," since the money going to the executives ultimately comes out of the pockets of the investors.

SEAN HARRIGAN: Executive compensation has taken up a bigger, and bigger, and bigger, and bigger piece of what corporations earn. And that results in-- shareowner-- shareowners like institutional shareowners, and shareowners like individual 401Ks, are earning less and less, in terms of their returns on their investment, because more and more are going to these elite few, top executives of America's corporations.

BRANCACCIO: Look again at that Harvard - Cornell study. It found compensation for top executives was eating up more and more of a company's profits — from less than 5 percent to more than 10 percent — in the last decade. Critics have questioned the calculation there, but what is clear is that top paychecks are adding up to real money.

However, Harrigan says, executives can't do this alone. He believes much of the problem lies with the boards of directors, who are often hand-picked by the executives they are supposed to oversee.

SEAN HARRIGAN: Those boards feel their allegiances to the CEO, and the top officers of the corporation, and feel no allegiance to those who actually own the corporations in which they're serving.

BRANCACCIO: Remember, the owners are the shareholders. Now, the Chamber of Commerce believes if the shareholders don't like the way executives or the boards are performing, there's an easy solution.

DAVID CHAVERN: I mean, there's a very immediate way to express share holder dissatisfaction which is to sell your position--

DAVID BRANCACCIO: Dump the stock.

DAVID CHAVERN: Dock them. And ultimately, the stock price will go down, and management changes. That's how the system works.

BRANCACCIO: But some of the biggest shareholders wonder why that should be their only option. So big institutional investors proposed another solution, asking the SEC for new rules to let shareholders nominate candidates to a company's board of directors and that way, get their views better represented.

DAVID CHAVERN: We objected to that proposal and our concern was that rather than being about shareholder democracy, it was about-- whether a few interest groups-- particularly shareholder-- institutional shareholders that may hold ten or less percent of the stock of a company, gained disproportionate influence.

DAVID BRANCACCIO: But why would it be disproportionate if they only had the ability to maybe nominate names for a board seat or two board seats? I mean, all of us-- as share holders would ultimately get to vote on it, and it would be just a couple of seats?

DAVID CHAVERN: You know, at the end of the day we just thought it was a way for a few people to get a bigger say and we objected.

BRANCACCIO: That proposal didn't survive industry opposition. And so it withered away within the SEC. That frustrated Sean Harrigan.

SEAN HARRIGAN: Democracy does work. I mean, increasing the level of democracy, in terms of corporate boards, and levels of-- accountability does nothing but help with this serious problem of-- these compensation packages that have-- no correlation whatsoever to the performance of the corporation.

BRANCACCIO: Just over a year ago, Harrigan was replaced in his job at CalPERS. He believes it was because of his outspoken calls for corporate reform.

SEAN HARRIGAN: There certainly was, in my opinion, a national-- and is, continues to be a national, concerted effort among the most pro-business entities in America, and a very, very powerful lobby to insure that institutional investors, especially large institutional investors like CalPERS, and others don't threaten the status quo.

BRANCACCIO: Yet just this week, the Securities and Exchange Commission did at least nudge the status quo. The SEC has proposed new rules to force companies to tell investors and the rest of the public just what they're paying top people, perks and all.

CHRISTOPHER COX, SEC CHAIRMAN: It's high time we updated the rules on executive compensation.

BRANCACCIO: But not all companies need this push from the SEC. You must know Whole Foods, the upscale, organic market chain with gorgeous produce and 12-dollar wedges of cheese. Whole Foods has an open-book policy when it comes to what the bosses get paid.

WALTER ROBB: Once a year-- there's-- we put together a report that has what everybody makes in the company. And so, if they wanna find out, they can easily find out. And if they ask me, I would tell 'em. Because I'm not interested in having any secrets.

BRANCACCIO: And so, it's no secret that Walter Robb, the company's co-president And Chief Operating Officer, made about 440,000 dollars last year. He actually earned more, but couldn't collect it all because of a company rule that no one — from the CEO on down — can make more than 14 times the pay of the average worker, or as they say here, team-member.

WALTER ROBB: I think it's a very fair standard-- the fourteen-time cap. And, I think it sets a good connection-- a relationship between-- between senior leadership and the team members.

BRANCACCIO: But, how does it help you from a business point of view--


BRANCACCIO: --if the cashier knows you have the salary cap, and that you only make 14 times what she might be making?

WALTER ROBB: I think that leads to them feeling like they have a true stake in this business and the success of the business, and therefore I think they work harder. I think they work longer. I think they work more creative-- more creatively around possibly, you know, solving problems and serving the customer. And I think the results speak for themselves.

BRANCACCIO: And the results have been impressive … this is not just some do-gooder operation. Co-founded in Austin, Texas by Robb's colleague, CEO John Mackey … Whole Foods is now a chain of 181 markets. Since its stock first traded in 1992, the company has increased profits by nearly 20 percent a year on average … making it a hot stock on Wall Street.

BRANCACCIO: You think that if you walked into this store--


BRANCACCIO: As one of the bosses, and they knew that you were making 400 times what a cashier here might make that you think that would be destructive in some way?

WALTER ROBB: I do. I don't know if I would use the word "destructive". I would prefer to frame it in positive terms. We have built our company on keeping faith with one another, and, I think, part of that is having a pay package that's reasonable.

BRANCACCIO: Robb does get stock options, which last year brought him an additional 1.8 million dollars, but even that seems pretty modest compared to other big company execs.

And while Whole Foods is non-union, turn-over is extremely low for this kind of business. Part of the reason may be that the "regular" employees here hold more than 90 percent of the company's stock options.

Just a couple of California freeway exits away are some of those Boeing strikers, who are dealing with a very different corporate philosophy.

BOB VASQUEZ: You find yourself here now facing a 60- going into the 60, 70 day-- period now of a strike-- you kind of like-- wonder what we got ourselves into.

BRANCACCIO: For Bob Vasquez and his wife Adelle the strike has been tough. Taking care of seven of their grandchildren during workdays while the parents work … they're surviving on the $150 a week they get in strike pay from the union and a helping hand from their children.

ADELLE VASQUEZ: It's very hard for us. We're the ones that are supposed to help our kids, and now we're in the spot where our kids are helping us out right now.

BRANCACCIO: But they're both committed to see the strike through, because they say, it's ultimately about placing a fair value on work and about closing the growing pay gap between those down on the lines and those up in the executive suite.

BOB VASQUEZ: They've been doing this since I guess, since the Roman times, you know. The king gets everything.

BRANCACCIO: You can link to more on this story by visiting our Web site at

And speaking about executive compensation, we're not paying this next guest one red cent.

Judith Stein knows better than most just what a dangerous mess the brand new Medicare prescription drug program is in. She's with the Center for Medicare Advocacy in Connecticut, one of 20 states that have scrambled to cover the needs of tens of thousands of poor and elderly who got a rude shock when they went to pick up their medicine.

Judith Stein, thanks for coming in.

JUDITH STEIN: Thanks for having me.

BRANCACCIO: How is it possible that their names are aren't on the proper lists when they go into the pharmacy?

JUDITH STEIN: Computer doesn't have the information. And federal government hasn't gotten the system in place to require-- that's required in order for the pharmacists to know that the person in front of them actually does have Medicare prescription drug coverage. And as a consequence, if the computer doesn't have their name, they won't get their prescriptions, even if they've got a letter that says that they've been enrolled in a particular plan. And that's been happening all over the country, and they can't get their medications.

BRANCACCIO: Well, they often call you in this situation, and you've been taking some of the calls?

JUDITH STEIN: Case in point. A son calls us from the pharmacy with his-- went to the pharmacy to get his mother's cancer pain medication. The pharmacist did not have the information in the computer. He said he would not dispense the drug.

The problem with the design of this program is that because it's private plans, because it's fragmented, you have to sit and counsel one on one, a person, to see what they should enroll in. And now one on one to know what they've got and see what the solution should be for them.

BRANCACCIO: Depends on your state? Depends on which particular company you might have chosen?

JUDITH STEIN: And your income.

BRANCACCIO: And your income also.

JUDITH STEIN: None of that was true prior to this time. So it requires more, not less resources, to help people get what they're entitled to. The fact is that the states-- I think it's now 26-- are in fact, scrambling and paying their dollars to fill these needs.

BRANCACCIO: There were governors of 14 states around the country, all of them Democratic governors, who signed a letter to the administration, calling this program well intentioned, but saying that they're seeing signs of mismanagement, and suggesting that this is actually dangerous, what's going on. It's not just a partisan issue. There's Mike Huckabee, the Governor of Arkansas. He's a Republican. He declared-- I think he called it a public health state of emergency over this. Arnold, out on California, also a Republican, not looking happy. Earlier this week, apparently it was 200,000 people that were having trouble with this system.

JUDITH STEIN: Jody Rell, the governor of my state, of Connecticut, has just authorized the Department of Social Services to extend for a third week payment for-- so that people don't go hopefully without their medications. The state is paying. Millions of dollars. I think it's almost four million dollars already in Connecticut.

BRANCACCIO: State's going to end up holding the bag on that money?

JUDITH STEIN: I hope not, and it shouldn't be. This is my concern, however. We've been-- we have been told that Medicare doesn't have the authority to pay back the states, and that the states are going to have to look to each of these hundreds of private plans to get their money back, part of the problem in the way this program is structured. I think that's completely untenable.

BRANCACCIO: Now, the Bush administration is recognizing there are some early problems here. The Secretary of Health and Human Services, Mike Levitt, has brought on thousands of case workers to deal with some of this. He himself, with his staff, has been going around the country this week trying to work out some of these problems.

And he points out something important. That to date, more than three million, almost four million new names are getting subsidized drugs through this Medicare program than before the new program. He points to that as a very positive development.

JUDITH STEIN: But the fact is that that's less than 10 percent of the entire Medicare population. I'm not pretending people haven't enrolled. We have helped people enroll. We want this program to work. But it doesn't help to say everything's fine and just to do this as a marketing-- a matter of marketing. There are major problems, and people who have enrolled should get the coverage that they're entitled to.

BRANCACCIO: So if you don't want to tear down, give me a suggestion for getting us out of this mess, please?

JUDITH STEIN: I-- just the night before last, I went out for Chinese food and I got a fortune cookie. And-

BRANCACCIO: All right. What did it say?

JUDITH STEIN: --my fortune said don't find fault. Find a remedy.

BRANCACCIO: A remedy? Okay. So?

JUDITH STEIN: First I would suggest that we slow down enrollment. People should wait until these initial glitches, and some of them will be resolved, are resolved, before we continue to encourage people in droves to enroll in the Medicare program.

Further, if people have enrolled in a Medicare program, Part D plan, they are currently able to make only one change, and after that they're what's called locked into their choice. Congress should suspend that lock in. And they should recognize that we have a system that is this complex with this many problems.

Finally, yes, I believe Medicare should offer a prescription drug program within the context of the traditional Medicare program, as an option at the very least. Put that in place for 2007.

So slow down enrollment, eliminate the penalty or at least suspend it for now for those who don't enroll. Allow people to make a change if they find that the plan they've entered doesn't meet their needs. And make Medicare, the traditional Medicare program, have a Medicare drug benefit, at least as an option.

BRANCACCIO: Well, Judith Stein, just in from the Medicare trenches in Connecticut, thank you very much.

JUDITH STEIN: Thank you. Thank you for having me.

BRANCACCIO: Next week on NOW we'll be back in New York and we'll be looking into a fascinating new documentary, WHY WE FIGHT, a film that looks at the business… of war.

I'll be talking about all that with director Eugene Jarecki and with a fellow who's been on our air before: former Pentagon whistleblower Chuck Spinney.

CHUCK SPINNEY: It's the military industrial Congressional complex and this is their way of life. They live on the money flow.

BRANCACCIO: And that's it for NOW. From California, I'm David Brancaccio. We'll see you again next week.

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