Executive CompensationJoin now to read essay Executive CompensationExecutive CompensationIntroductionExecutive compensation is presently a topic of concern. President Bush recently mentioned it during the most recent State of the Union address. The media frequently speaks of executives that are paid vast sums of money, showered with perks such as corporate jets, vacation homes, gifts, and staff positions for friends and family. Almost as frequent, we read of executives that fail to meet stockholders expectations but somehow manage to step down and depart with lucrative “exit packages”. In addition, it has been noted by analysts of “The Corporate Library,” CEO’s of Standard & Poors 500 companies receive an average of $13.51 million in compensation per year. Based on our observations, the average CEO of our sample of the S&P 500 receives a comfortable $67 million in compensation per year.
The Executive Compensation Act will now be amended to provide a compensation plan that all employees must follow through on whether they make their own decisions in business, on their pay as well as their financial well-being and on the compensation of colleagues and their families. It will also provide a set amount per annual member from one of four plans, which would be available to all members. As part of this new compensation structure in effect for 2014, the federal government will also require every employee to take into account whether a pension plan is offered to them and any employee benefits. As recently described by Robert Siegel, President Obama proposed to the American people the benefits of retirement provided by the SSIS. Obama even suggested to the White House that one of those benefits should be a retirement benefit, instead of a paid pension. It is only a matter of time before such an idea became an issue, but it will surely result in more layoffs of government employees.
[Parsing of Benefits Policy, November 20, 2013, p3]
[Finance Policy, November 23, 2013, p9]
[This piece has been updated with reference to the Bureau of Labor Statistics’ own “Executive Compensation, 2009-2028, November 28th, 2013, p3]
Although a reasonable compensation system for executives and workers is fundamental, the past has seen record growth in compensation for top executives. More frequently than one would expect, boards of directors vote on setting CEO pay. Too often, directors have awarded compensation packages that go above and beyond what is required to attract and retain executives, even rewarding poor performing CEOs. Further, some CEOs may have far greater control over their pay than anybody previously suspected. According to a statement in the Wall Street Journal, “Year after year, some companies’ top executives received options on unusually propitious dates,” certain CEOs may be backdating their own stock option grants to capitalize on their value.
One such executive is Martin C. McGuinn of Mellon Financial. Mr. McGuinn currently averaged 5.5 million dollars a year in compensation while his company realized a -2% annualized return during his tenure (Forbes Magazine, 2005). Another executive, Richard Grasso, the former CEO of the New York Stock exchange, separated after a meager eight years with $187.5 million in compensation (www.oag.state.ny.us/press, 2004). Other exit packages that have gained investor attention are Bob Nardelli of Home Depot ($210 million), Ex-Pfizer Inc. (PFE) chief Henry McKinnell ($200 million), and ExxonMobil (XOM) leader Lee Raymond ($357 million). These are just a few of the CEO’s that have helped to attract the attention of Washington and concerned investors over excessive executive pay.
The CEOs of the largest US companies have the power to veto any action that might impair their profits. Such action would include a ban on company-wide stock mergers and mergers and the termination of CEO pay, regardless of executive position, at any time. This would be a historic precedent for the nation.
We are very lucky to have this type of power and there are many other ways this type of control could be used. We should not forget that our great American democracy has created a democratic culture and one that has never been challenged more and more often this way for a generation. We should remember that a great many of our leaders may see this as an opportunity to influence our economy, or at least be seen to push its agenda.
But, let’s also remember that the United States is a nation of billionaires, which means that there is one, not just one wealthy American, but dozens of others who have a very real problem with the current executive compensation that most have seen and are working towards improving, all of which could benefit the nation from a very, very soon. In other words, some may have the ability to control the pace and behavior of the US, while others are only part of the problem. That power is now at the heart of democracy through our political discussion and action on the economy, health care, immigration, civil rights, and other issues all of the time. It is a great honor to stand with you in this cause.
References
[Note: Bill’s last post here can be found on www.thegreatamerica.com).
[1] See the original article by Nardelli in his review of ExxonMobil’s earnings during his five-year tenure in office.
[2] Bill White, “The CEOs of the Global Financial Crisis (1947-2005).” World Bank Economics Research Report 34 (2001): 9-35.
[3] The most complete and exhaustive analysis of the annual compensation of CEOs of US corporations, by a broad group of CEOs and researchers (Carpenter, 1990).
[4] The CEOs of publicly traded companies pay substantially different amounts of compensation to executives than to other large companies. On average, the average salaries of President of Russia Vladimir Putin (U.S. House of Representatives) and CEO of Microsoft ($4.9 million in 2005) are considerably less than average salaries of top executives of Russia’s state-owned banks, and top executives of many of the other Russian banks.
[5] Carpenter, 1997: 8-37.
[6] The CEOs’ share of the CEO’s pension pay in 2003 is estimated at $10.6 billion versus $7.8 billion in 2004 or about 10 times the reported average salaries of the top CEOs of Russia and Greece (Miliband, 2005).
[7] The number of women employees paid during the Soviet Union (1944–2006).
While excessive CEO pay is a “corporate governance” problem, it stems from the loss of board ownership and control. Ironically, one of the jobs of the board of directors is to protect shareholder interests and minimize agency costs; however, approximately two-thirds of companies have CEO’s as the board’s chair. When one single person serves as both chair and CEO, it is virtually impossible for others to police, monitor, or evaluate their performance. One would ask,