DaimlerChrysler will Face Wide Gap in Executive Pay

It's no secret that German executives are paid far less than their American counterparts, and that could be a disincentive for Chrysler managers to stay around after the mega-merger is consummated, says Graef Crystal, an executive compensation analyst and consultant.

"I definitely foresee problems," says Mr. Crystal, who advised Volkswagen of America 20 years ago after it opened its assembly plant in Westmoreland, PA. "You're going to have a real crisis over time at Chrysler over what DaimlerChrysler is willing to pay."

In the U.S. the Securities and Exchange Commission requires a detailed disclosure of what corporations pay their five highest-ranking executives. German law requires almost no disclosure.

For example, we know that Chrysler Chairman Robert J. Eaton was paid $4,908,803 in salary, bonus and other compensation for 1997. In addition, he exercised options on which he realized a gain of $5,259,600. Vice Chairman Robert A. Lutz was paid $2,661,103 in salary, bonus and other compensation. He made an additional $13,083,352 on the exercise of stock options. So together Chrysler's top two executives pulled down $25,912,858.

WAW could not obtain comparable data for Daimler-Benz executives. But on p.80 of the company's 1997 annual report it states that "total remuneration . . . to the members of the Board of Management of Daimler-Benz AG amounted to DM20 million." There are 10 people on the management board. Using a recent exchange rate of DM 1.77 to the dollar, that means Daimler's top 10 people collectively made $11.3 million last year, or nearly $2 million less than Mr. Lutz alone realized on his stock options.

But Frank Glassner, managing director of Compensation Research Group Inc. in San Francisco, contends that experts like Mr. Crystal tend to overstate the pay gap. German tax rates are higher. Therefore, German companies tend to weigh a larger portion of their pay packages toward tax-free pension and non-monetary benefits.

"Daimler is well aware of the differences, and it realizes that in order to maintain a competitive edge it will need to provide the same type of pay-for-performance incentives that have worked well at Chrysler," he says.

Daimler and other German companies are beginning to use stock options more broadly because they have seen how well they work in the U.S.

Executive pay in Germany must be reviewed by the Supervisory Board, which includes German union leaders, bureaucrats and bankers. In American companies, executive compensation is set by a small committee of directors, many of whom sit on each others' boards.

"If someone goes to Stuttgart and suggests they match the packages Chrysler has been paying its people, these union leaders are going to go crazy," Mr. Crystal says. "The political heat would be too severe."

Balderdash, says Mr. Glassner. "Over time, you'll see the DaimlerChrysler executive pay practice evolve into something much closer to what Chrysler management is used to."

Time will tell who's right.