Executive Pay: Overview
Executive pay refers to the compensation packages received by corporate chief executives, which have surged dramatically over recent decades, particularly in the United States. Historically, the pay ratio between CEOs and average workers has escalated significantly—from 40 times the average worker's salary in 1960 to over 360 times by 2018. This growing disparity has prompted widespread discussions about its implications for economic inequality and democratic values. CEO compensation often includes not just salary, but also stock options, bonuses, and deferred payments, with stock options allowing executives to purchase company shares at predetermined prices, potentially leading to substantial profits if share values rise.
Critics argue that the lack of transparency in reporting executive pay, coupled with potential conflicts of interest within corporate boards, can result in compensation packages that do not correspond to company performance. Additionally, the shift from traditional pension plans for everyday workers to more variable retirement savings accounts has highlighted the growing chasm between the benefits provided to executives and those available to average employees. The concentration of wealth among top executives reflects a broader trend of increasing economic inequality in society, raising questions about its sustainability and fairness, particularly in light of recent global events that have exacerbated these disparities.
Executive Pay: Overview.
Introduction
The total compensation of corporate CEOs in the United States is rising much faster than the compensation of hourly workers at the other end of the pay scale. Since 1960, the difference has escalated dramatically. In 1960, the average CEO was paid 40 times as much as the average worker; by 1990, the figure had risen to 107 times as much. This trend continued into the next century, and by 2018, CEOs earned, on average, more than 360 times as much as their average employee.
In addition to annual pay, CEO compensation also includes the value of stock options, and questions have been raised about the details of this compensation. Specifically, it has been suggested that option prices have been set retroactively at a low point in the stock’s value, in order to maximize the value of the option. A common example given is that of Apple founder and CEO Steve Jobs, who in 2006 took a salary of $1 but earned $647 million in stock profits.
The dramatic rise in executive compensation is in line with a jump in the wealth of the top 1 percent of Americans compared to the middle class and has raised questions about whether such dramatic differences in compensation and wealth are compatible with a democracy. In addition, the high-profile failure of companies whose top executives leave with prenegotiated lucrative compensation packages seems unscrupulous while most workers lose their jobs, benefits, and retirement savings often with no severance package.
Understanding the Discussion
Board of directors: A committee elected by shareholders in a corporation to oversee the company’s operation.
Chief executive officer (CEO): The top executive in a company. CEOs often, but not necessarily, also have the title president. The CEO is ultimately responsible for directing a corporation and reports to the board of directors.
Compensation: The total value of the pay given to a worker.
Deferred compensation: The promise of payment (compensation) in the future. A company-funded pension is one example; stock options are another.
Productivity: The value added as a result of worker or company activity. For example, if a company buys a raw material (steel) for $1 million and fashions it into machinery sold for $2.5 million, the productivity is $1.5 million. The term productivity usually measures the value of a company’s workers. Thus, if a worker is paid $20 an hour, and adds $25 in value as a result of the work, his/her productivity is $5. Over time, companies like to see the productivity increase. Whether or not this added productivity benefits only the company or is shared with workers is often an issue when workers negotiate their compensation.
Stock options: The right to purchase a company’s stock at a fixed price (the option price). If the price is set on January 1, 2007, for example, and the company’s stock rises by $5 a share over the next two years, an executive with an option to buy 100,000 shares can buy shares at the option price and immediately sell them, pocketing a $500,000 profit.
Wealth: The value of one’s assets. People can inherit wealth, or they can create it by earning large amounts of money. Wealth is also generated by the rising value of owned property (like real estate or company shares) without regard to the actions of the owner.
History
In any discussion of executive compensation, it must be remembered that many reports in the news media focus on extreme cases, and that the compensation for executives of the top 200 companies is likely to be much higher than for smaller companies, of which there are tens of thousands. In addition, the term "compensation" and how to value it is itself the subject of controversy. For example, should a stock option be counted as compensation before it is exercised?
In the twentieth and early twenty-first centuries, the difference between the compensation of corporate chief executives and the pay earned by the average employee has increased dramatically. In 1960, the average chief executive earned 40 times as much as the average worker. By 1990, the average CEO earned 107 times as much. In the following decade, this ratio rose to 525:1 before settling back to 300:1 in 2013. Various sources give slightly different ratios, but all are in general agreement that the ratio of executive compensation to the pay of ordinary workers has grown dramatically during this span.
Executive compensation includes much more than simply a paycheck. Most important is the value of stock options, which give executives the right to buy shares in a corporation at a given moment at the price the share sold for on that day. Over time, if the share price rises, executives have a chance to buy the stock at the old, set price and then sell it at the new, higher price. Since the value of corporate shares, and the hope that the price will rise over time, is the reason investors buy stock in the first place, stock options are widely viewed as a means of assuring that an executive’s personal incentives are in line with the goals of investors.
On the other hand, the disproportionate ratio of executive pay to the pay of ordinary workers usually includes options not exercised; if the stock price falls below the option price, these options become worthless. In addition to options, executives are typically paid a year-end bonus (an extra sum of money on top of their salary, often linked to the company’s financial performance or other goals) and given perks (such as company resources for personal use, such as cars, expense accounts, and residences).
Another large element in CEO compensation is a lucrative pension. Over the past few decades, executive pensions have taken a distinctly different direction from pensions promised to ordinary workers. Prior to the 1980s, workers in large corporations were promised a percentage of their pay in their last year of employment as a pension after retirement at age sixty-five. Beginning around the 1990s, many companies began switching to a form of savings, such as 401(k) plans, in which a percentage of a worker’s pay was put into a personal account that would be handed over upon retirement. For corporations, this meant that pensions were a fixed cost; the company contributed to a worker’s employment account and avoided the need to make pension payments that could stretch out to thirty years or more. For CEOs, on the other hand, pay packages often continue to include deferred compensation in the form of guaranteed payments after retirement. In some cases, executives continue to get perks after retirement for life. Some are even reimbursed for professional financial advice.
Executive Pay Today
Several trends have developed in the modern debate over executive compensation packages. The media has uncovered a number of instances in which executive compensation at publicly held corporations was not obviously disclosed. Critics maintained that this information should be transparent for the benefit of shareholders. Annual reports are complex documents and it is possible to bury the information in these reports making it difficult to determine what the actual executive compensation packages include. Thus, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act included a provision requiring that CEO compensation be disclosed along with median employee compensation; however, this has not on the whole resulted in the moderation of CEO pay.
In theory, a corporate board of directors represents the interests of the stockholders. In practice, however, many board members often owe their position to the very CEO whose actions they are supposed to oversee, creating a conflict of interest and raising questions about corporate governance.
News reports have suggested that the pay of some executives has not reflected their success in leading their companies. In early 2007, Robert Nardelli, the CEO of Home Depot, was forced out of his position due to stockholder unhappiness with the company’s seemingly stagnant stock price. His severance package was valued at over $200 million, a figure pointed to as evidence that executive pay is not always linked to performance or productivity.
CEO compensation is just one element in the larger social trend in the United States toward the concentration of wealth in the hands of a relatively small number of people, sometimes described as the top 1 percent (or about three million people, plus their families). Based on research by economist Edward N. Wolff of New York University, in 2001, the top 1 percent of households owned 33.4 percent of all privately held wealth; the next 19 percent owned 51 percent, which left about 16 percent of the wealth in the hands of the bottom 80 percent of the population. In 2012, the wealthiest 160,000 American families owned as much wealth as the poorest 145 million families; from the late 1970s until 2012, the share of total household wealth owned by the top 0.1 percent increased from 7 percent to 22 percent. When Wolff updated his numbers in 2017, he found that the share of wealth in the hands of the top 1 percent had grown to 40 percent.
Following the COVID-19 pandemic that began in 2020, a multitude of media outlets and other agencies reported that the pandemic caused the wealth gap between the world’s rich and poor to widen even further. For instance, CNN reported in 2021 that the average net worth of the world’s billionaires grew by $3.6 trillion in 2020, while in 2022 the World Economic Forum reported that the richest 10 percent of the world’s population owned more than 75 percent of the world’s wealth.
In 2024, a Delaware judge ruled that Elon Musk, the CEO of electric vehicle company Tesla, was not allowed to keep a compensation package worth nearly $56 billion dollars after shareholders protested that Musk had too much control over the Tesla executives who awarded the package to him.
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