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Executive Compensation
Pay for top executives soars
CEO pay continues to set new records. According to Business Week’s
annual survey of executive pay, compensation for CEOs of major U.S. corporations
averaged $12.4 million in 1999, having increased sixfold since 1990. Last
year alone, executive compensation rose an average of 17 percent. The
average worker, in contrast, received a 3.5 percent pay increase. The
chart at left shows how recent pay increases for top executives compare
with those going to the average worker.
Sources for Chart:
"Worker increase" is based on the wage and salary component of the Bureau
of Labor Statistics’ Employment Cost Index for all civilian workers. "CEO
increase" is drawn from Business Week surveys of executive compensation.
More reliance on stock options
The composition of executive pay has changed markedly in the past two
decades. In 1979, Lee Iacocca became the first prominent executive to
receive a major portion of his pay in the form of stock options. Since
that time, and especially over the past 15 years, the use of stock options
has exploded. Long-term compensation (primarily in the form of stock options)
accounted for 81 percent of average 1999 pay for the CEOs of the top 365
U.S. companies, according to Business Week.
Does "at risk" pay improve performance?
Shareholder activists and groups concerned with corporate governance have
generally favored stock options and other mechanisms intended to link
executive pay to company performance. By putting a larger portion of pay
"at risk," they argue, top executives will have an incentive to increase
the returns on shareholders’ investment.
One problem with this argument is that much "at risk" pay is not actually
at very much risk at all. The typical grant of stock options will pay
off even if it is a general bull market, rather than exceptional performance
by the company itself, that boosts the value of the stock. Federal Reserve
Chairman Alan Greenspan, among others, has advocated indexing options
so that a stock would have to outperform the market or a peer index in
order for the options to have value. The practice of repricing options
when a company’s stock falls further weakens the relationship between
executive pay and company performance.
Big raises for job-cutters
There are other problems with the use of performance-based pay to spur
corporate executives. The measures used to gauge performance are typically
short term, raising the danger that executives will be encouraged to pursue
short-term gains at the expense of the workforce – and of the company’s
long-term performance. In fact, it’s not unusual for CEOs to receive big
pay increases while their companies are laying off frontline workers.
For example, American Express fired 3,300 workers in 1997. That same year,
its CEO’s compensation package soared 224 percent, to $33.4 million. That
figure includes $27 million from the exercise of previously-granted stock
options.
Executive pay fuels income inequality
The pay of the average worker has not increased at nearly the same rate
as pay for those at the top, fueling the trend toward greater income inequality.
A worker making $25,000 a year in 1994 would have earned $107,513 in 1999
if his or her pay had grown at the same rate as pay for CEOs. Had the
minimum wage grown as fast as executive pay since 1994, it would be more
than $18 an hour instead of its current level of $5.15.
U.S. out of step with rest of world
CEO pay is much higher in the United States than in other countries. That’s
true both in absolute dollar terms, and relative to pay for the average
worker. According to Business Week, an American CEO earns 475 times
as much as an average blue-collar worker. German CEOs make, on average,
just 13 times as much as a typical manufacturing worker. The ratio in
Japan is 11 to 1. The chart at left shows how pay for U.S. CEOs compares
with that of their peers in other countries.
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