Executive Pay Executive

Issue: Executive Pay

Executive Pay

By: Barbara Mantel

Pub. Date: July 20, 2015 Access Date: September 27, 2021 DOI: 10.1177/2374556815598978 Source URL: http://businessresearcher.sagepub.com/sbr-1645-96551-2688702/20150720/executive-pay ©2021 SAGE Publishing, Inc. All Rights Reserved. ©2021 SAGE Publishing, Inc. All Rights Reserved.

Are CEOs worth the millions in compensation they receive? Executive Summary

CEOs of some of the largest U.S. companies are paid more than $100 million a year in salary, bonuses, stock and stock options. Stockholders who participate in votes on these pay packages almost always back them, although the occasional company faces resistance. Some analysts say CEO pay levels—which can be hundreds of times higher than those of rank-and-file employees, and don't always reflect company performance—are simply a result of the free market. Others say the system for setting pay is broken. Some of the key issues under debate: Is CEO compensation too high? Are “say-on-pay” votes affecting compensation? Is it a good idea to tie CEO compensation to company performance? Overview

Caterpillar Inc. had barely announced how much it paid to CEO Douglas Oberhelman when the protests began. In early May, the Peoria, Ill.-based manufacturer of heavy machinery told shareholders in its annual proxy statement that Oberhelman's compensation totaled $17.1 million in salary, cash bonus and stock options in 2014, an increase of 14 percent from 2013. Yet, as critics pointed out, sales and revenue were flat, profit was down and the company's stock price had barely budged. In contrast, the Standard & Poor's 500 rose 11 percent in 2014. 1 “It's really almost a case study in how not to structure corporate pay,” said Michael Pryce-Jones, director of corporate governance at Washington, D.C.-based CtW Investment Group, a proxy adviser to union pension plans. 2 Caterpillar lowered Oberhelman's performance goals “significantly,” making it easier for him to receive his annual incentive award, complained Institutional Shareholder Services (ISS), a global corporate governance advisory firm. 3 Within weeks, both CtW and ISS urged shareholders to express their disapproval in a nonbinding vote at Caterpillar's annual meeting in June. 4 And indeed they did so. In a harsh rebuke, a full third of voters opposed Caterpillar's executive compensation package. In response, Caterpillar director Ed Rust promised to “continue to maintain a dialogue with our stockholders.” 5 Such a voting outcome is highly unusual. Of the 2,366 companies that held what are known as say-on-pay votes in the first half of 2015, fewer than 170 received less than 70 percent shareholder support. In fact, roughly three-quarters of the companies received at least 90 percent shareholder approval. 6 That's even as inflation- Douglas Oberhelman, chief executive officer at heavy adjusted median CEO compensation at S&P 500 companies returned to its 2001 peak of nearly $10 million a equipment company Caterpillar Inc., was paid $17.1 million in year, after being buffeted by the 2008 financial crisis and the accompanying recession. In the early 1990s, 2014, even though sales were flat and profit was down. That inflation-adjusted median CEO pay was just under $3 million a year. 7 package sparked resistance among some shareholders, a rare occurrence even as concern about multimillion-dollar CEO pay Boss' Pay Is Rising Again persists among some corporate governance experts. (Scott Olson/Getty Images) Median granted compensation of CEOs of S&P 500 companies, 1993–2013, in 2013 $U.S. millions

Notes: Adjusted to 2013 dollars. Excludes income realized by cashing in on any options or stocks that were granted previously. Companies began reporting data electronically to the Securities and Exchange Commission through its EDGAR system in 1993.

Source: Steven N. Kaplan, “U.S. Executive Compensation and Corporate Governance: Perceptions, Facts and Challenges,” 2013, p.9, http://tinyurl.com/q3fce2p; updated inflation-adjusted data through 2013 provided by Steven N. Kaplan

In inflation-adjusted dollars, the median compensation granted to CEOs of S&P 500 companies has more than tripled over two decades. Pay dropped off somewhat during the 2007–09 recession, but has recovered.

At the largest U.S. companies—those with market capitalization of at least $1 billion—the highest-paid CEOS earn in the nine figures, according to Equilar, a California- based firm that tracks executive compensation, in a study for The New York Times. The biggest CEO pay packages last year went to David Zaslav of cable company Discovery Communications ($156 million, including $145 million in stock and options awards that vest over time); Michael Fries of the cable and wireless group Liberty Global ($112 million, including $96 million in stock and option awards that vest over time); and Mario Gabelli of GAMCO Investors ($88.5 million, all in cash compensation). 8 15 Highest-Paid CEOs

2014 total compensation, in U.S. millions

Note: Includes compensation from salary, bonuses, stock options and other incentives. Source: “Equilar 200 Highest-Paid CEO Rankings,” Equilar and The New York Times, May 2015, http://tinyurl.com/ozphcn7

David Zaslav of Discovery Communications ($156 million) and Michael Fries of international cable company Liberty Global ($112 million) were the highest-paid chief executive officers in 2014. Marissa Mayer of Yahoo ($42 million) was the only female CEO among the 15 top-earning chief executives.

Despite the general show of shareholder approval, there is intense debate about whether eight- and nine-figure compensation packages are the product of an efficient market for CEO talent in an era of larger and more complex companies; the result of corporate boards foolishly competing with one another to pay CEOs higher and higher amounts; or the consequence of the ballooning use of stock and options grants whose values have risen in the bull markets of the 1990s and of the past six years—or some combination of all those factors. There's also wide-ranging discussion about what, if anything, high CEO salaries mean for society. “I would say, in general, CEOs are correctly paid,” says Steven Kaplan, a University of Chicago professor of entrepreneurship and finance. “By and large, it is market-based pay.” The same can be said for lawyers, hedge fund managers and heads of private companies, says Kaplan. “People in business who are probably lucky and talented make a lot of money, and CEOs [at public companies] are the most visible.” But others say historically high CEO pay isn't the result of an efficient market for talented CEOs. Instead, too many companies are benchmarking their CEO's pay to the highest-paid executives in their industry, and that has helped to cause the upward spiral, says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. A public company must have a compensation committee composed of independent members of its board of directors. The committee determines the CEO's pay package and also determines compensation for the company's other executive officers or makes recommendations to the full board. Compensation for CEOs and top executives generally consists of a base salary, cash bonuses and awards of stock and stock options that vest over time and can also depend on meeting performance goals. 9 (An option gives the executive the right to purchase a share of company stock in the future at a fixed price.) There are many ways to measure compensation, including the estimated value when a package is granted or the value when the stocks and options are vested and any gains are realized. Steven Kaplan: “In general, When a CEO's compensation “seems to fall out of whack to the pay scale within the organization itself and the organization's performance,” CEOs are correctly paid.” that's a signal something is wrong, Elson says.

David Zaslav, CEO of cable company Discovery Communications, topped the lists of highest-paid U.S. executives last year, bringing in $156 million. (Alberto E. Rodriguez/Getty Images for Discovery Communications)

Not everyone believes that a board should consider what its company pays other employees when deciding CEO compensation. In any case, making that comparison is not possible for a given company's investors, or the public—at least not yet. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required large public companies to calculate and report the ratio of a CEO's pay to the median pay for the firm's other employees. It was a contentious mandate. Corporate lobbying groups vigorously opposed it, saying the ratio would be too costly to compile, while unions and other supporters said transparency would help bring down exorbitant CEO pay. But so far, the Securities and Exchange Commission (SEC) has not issued a final rule on how to calculate the ratio. And so shareholders, and the public, are left with private analyst, think tank and union analyses that examine CEO compensation at the 350 or so largest companies and rely on government data for industry- or economy- wide worker income. Their estimates for overall CEO-to-worker compensation vary widely. For example, the Washington-based, left-leaning Economic Policy Institute (EPI) calculated the CEO- to-worker compensation ratio to be 303-to-1 in 2014; the AFL-CIO said it was 373-to-1; and Equilar came up with 248-to-1. 10 Much depends on whether worker compensation or household income is used and on how CEO compensation is valued. In any case, for those groups that track data back decades, the general trends are similar, reflecting the run-up in CEO compensation in the 1980s and its explosion through the 1990s, while worker compensation remained essentially flat for the period. For example, EPI says its ratio was about 30-to-1 in 1978, 123-to-1 in 1995 and 376-to-1 in 2000 when it peaked. 11 Pay Gap Continues to Grow After Recession

CEO-to-worker compensation ratio, 1965–2014

Note: CEO compensation is “realized compensation.” Worker compensation is industry averages. Ratio is derived by averaging pay ratios from 350 companies.

Source: Lawrence Mishel and Alyssa Davis, “Top CEOS Make 300 Times More than Typical Workers,” Economic Policy Institute, June 21, 2015, p. 3, http://tinyurl.com/owwm4ln

Chief executives at the 350 biggest U.S. companies earned 303 times more than typical workers at those firms in 2013 and 2014, according to the Economic Policy Institute. The CEO-to-worker pay ratio ballooned from 20- to-1 in 1965 to 376-to-1 in 2000, before dropping slightly to 345-to-1 by 2007. The ratio fell below 200-to-1 following the 2008 global recession but has since risen above 300-to-1.

The CEO-to-worker pay ratio, particularly the EPI figure, has become a topic in the nascent 2016 presidential election campaign. In April, when Hillary Clinton announced she would seek the Democratic nomination, and again in May, she told supporters: “There's something wrong when the average American CEO makes 300 times more than the typical American worker.” (As a footnote, Clinton was criticized in the media and by watchdog groups for saying “average” because the EPI ratio refers to only the top 350 CEOs, “a fraction of the 246,240 chief executives in the U.S,” wrote FactCheck.org, a project of the Annenberg Public Policy Center at the University of Pennsylvania. 12 ) Some experts say the level of CEO pay shouldn't enter the public debate. The general public, labor unions and elected officials “are third parties to this contracting decision,” says Kevin Murphy, professor of finance and business economics at the University of Southern California. “To a real large extent, it is really none of their business.” If shareholders and boards of directors are happy with a CEO's pay and company performance, “why should we care about the pay of CEOs, any more than we care about the pay of top athletes or entertainers or superstars in most any other field?” Murphy says. Others see a broader social concern. “It is sometimes thought that the rise of CEO compensation is a symbolic issue and does not have consequences for the vast majority,” said EPI researcher Alyssa Davis and economist Lawrence Mishel. However, escalating CEO compensation has worsened income inequality by fueling “the growth of top 1.0 percent incomes” and leaving less income “available for broader-based wage growth for other workers,” they said. 13 Here are some of the key questions being debated about CEO pay: Weighing the Issues Is CEO compensation too high?

Over the decades, regulatory reforms and stock exchange requirements have attempted to impose order on executive pay. All or most of the directors on a company's board who set compensation must be independent, and each year firms must reveal the size and structure of their top executives' compensation and the reasoning behind it. 14 As a result, CEOs and their boards know exactly what their peers are making. But critics say boards are using that information in ways that have ratcheted up overall pay.

Charles Elson: “The peer group can be gamed.”

Boards, often working with compensation consultants, construct a peer group against which they benchmark CEO pay, says Elson at the University of Delaware. “The peer group can be gamed,” says Elson, by including the largest companies with the highest-paid CEOs in an industry. Since 2007, companies have had to disclose in their annual proxy statements the names of the companies in their chosen peer group. “That's certainly a fair comment,” says David Larcker, a professor of accounting at Stanford University who heads its Director's Consortium Executive Program, which runs training programs for corporate directors. But there's another side to the story, he says. “People talk about aspirational peer groups, consisting of companies that they aspire to be like, that are bigger and maybe better,” Larcker says. To join that aspirational group, a firm may have to pay the way those companies do, he says. “They're basically responding to the labor market for these people.” There aren't many who can do these jobs, he says. “I don't think the market for CEO talent works quite like that,” Elson says. “The empirical evidence shows that CEOs don't easily hop from company to company. Their skills are much more company-specific than you think.” Even if a peer group hasn't been “gamed,” there are other problems with using it to set CEO pay, Elson says. “No one wants to pay their CEO in the lower part of the peer group range,” because that makes it look like they have a below-average CEO, he says. “Usually they'll target the median or higher, and that naturally drives pay up every year.” “They are dead wrong on that argument,” says Kaplan at the University of Chicago. “It's not in the data.” Since 2000, “the median CEO compensation is flat and the average is way down,” the result, in part, of increased regulation, more independent boards of directors and more sophisticated shareholders, he says. David Larcker: “They're But the data can be explained, says Craig Ferrere, Elson's co-author on a paper about peer group benchmarking and a former fellow at the basically responding to the Weinberg Center. “We had a major event with the financial crisis that began in 2008, and that helped to interrupt the trend,” he says. After labor market.” the financial crisis, CEO pay dropped but is now rising again, Ferrere says. Ferrere and Elson say firms should never use a peer group as a starting point to determine CEO pay, but instead only as a reality check at the very end of the process. “Shareholders have to demand” that, Elson says. Kaplan and others say the decades-long increase in CEO pay since the late 1970s, and the growing disparity between their compensation and that of most other people, is the result of technology and globalization. Those two developments “have been very good to people at the top. It has not been so good for the average worker in the U.S., and that is a societal conundrum. But that is a very different question from one of, ‘Are CEOs overpaid?’” Kaplan says. “Companies are bigger, competition is more aggressive and it's more international,” Larcker says. “And if you're running a bigger company, you're probably going to get paid more.” Murphy of the University of Southern California is in a third camp. Neither some efficient labor market for CEO talent nor peer benchmarking primarily drives CEO pay, he says. “You can't understand CEO pay without understanding the rise in equity-based pay, whether it was the explosion in stock options in the 1990s, or the switch to restricted stock in the early 2000s or the new movement toward shares tied to performance in the last five or six years,” Murphy says. “That's what has caused the massive increase in CEO pay compared to the pay of other workers, who don't get all these other instruments.” Murphy says directors and shareholders are usually not asking if CEO pay is too high. “They are asking, ‘Is it effectively tied to [the company's] performance?’” Is say-on-pay having an impact on compensation?

Since 2011, shareholders of all large public companies have been weighing in on the compensation packages of CEOs and top-tier executives through nonbinding say-on- pay votes. The votes are a mandate of the 2010 Dodd-Frank Act, which prescribed a series of reforms to corporate governance and executive pay. “But has putting these matters to a vote done anything to rein in executive pay? Not a chance,” wrote New York Times business columnist Gretchen Morgenson. 15 “It's a valid disappointment that say-on-pay has not impacted pay levels, which I think some people expected it to do. If anything, pay has gone up,” says Jack Zwingli, head of compensation business at ISS. “It's been pretty much nothing but good news over the last few years in the stock market, and CEO pay has reflected that.” However, say-on-pay is having an effect in other ways. “While relatively few companies lose their say-on-pay votes, many companies have, in fact, made changes to how they compensate executives to address shareholder concerns,” says Brandon Rees, deputy director of the office of investment for the AFL-CIO, a federation of 56 labor unions. Companies are keen to avoid less than 70 or 75 percent shareholder approval because it would reflect shareholders' lack of confidence in board of director oversight, say compensation experts. Almost All Shareholders Approve Top Executive Salaries at Most Companies

Percentage by which voting shareholders supported executive “say on pay” measures, 2015

Notes: Survey of 2,366 companies in the Russell 3000 Index. Percentages may not add to 100 due to rounding. Source: “2015 Say on Pay Voting Results,” Steven Hall Partners, July 1, 2015, http://tinyurl.com/qaaejyh.

At least 90 percent of shareholders approved pay packages for top executive officers in 2015 at about three-fourths of publicly traded companies surveyed. Five percent of companies had shareholder approval rates ranging from 50 percent to 70 percent in say-on-pay votes, while 2 percent of companies did not achieve majority approval from shareholders. These shareholder votes are not binding.

“You've seen promotion of pay-for-performance in the last few years, and that is largely the result of say-on-pay,” says Mark Borges, a principal at San Jose, Calif.-based Compensia, a compensation consultant. In addition to using stock options and restricted stock that vest over time, companies are more frequently tying equity grants to specific performance goals, such as earnings per share, sales, return on assets or stock price appreciation. The chosen goal depends on the industry, say compensation experts. There also have been other changes. “Say-on-pay has eliminated a lot of what we would call problematic pay,” Zwingli says. These are perks that are unrelated to a firm's performance, such as long-term employment agreements, he says, or what are called “tax gross ups.” That's when a company bumps up pay to cover an executive's tax liabilities. “Shareholders don't like it, and since say-on-pay has been put into place, the practice has been declining precipitously,” Rees says. All in all, Rees says, companies are talking a lot more to their institutional shareholders, including the AFL-CIO, which runs a $6 billion equity index fund and has a history of proposing shareholder resolutions. Zwingli says companies are also communicating more with proxy advisory firms. Many compensation consultants and some CEOs complain that say-on-pay has put too much power in the hands of the proxy advisory firms ISS and Glass Lewis & Co., another global adviser. Some studies show that institutional investors rely heavily on advisory firms' voting recommendations. 16 “God knows how any of you can place your vote based on ISS or Glass Lewis,” JPMorgan Chase CEO Jamie Dimon angrily told investors at a financial conference in late May. “If you do that, you are just irresponsible, I'm sorry. And you're probably not a very good investor either.” 17 Rees says that's not true. “This is really a case of compensation committees and compensation consultants blaming the messenger,” he says. Institutional investors share the same concerns as the advisory firms, he says, and besides, “institutional investors don't blindly follow the recommendations of proxy advisory firms.” ISS uses one-, three- and five-year analyses of a company's total shareholder return to evaluate whether executive pay and financial performance are aligned over time, and that's problematic, Borges says. Total shareholder return captures the total return on a share of stock, including stock price appreciation and dividends paid. “In a given year, or over multiple years, companies may not be focusing on stock price performance but may be making investments in longer-term strategic operational objectives to ensure that the long-term prospects of the company are strong and promising,” Borges says. “And that may result in there being an adverse impact on the evaluation they receive on their say-on-pay proposals.”

To avoid such negative voting recommendations from ISS and Glass Lewis, well over 50 percent of S&P 500 companies now tie their CEO's long-term incentive plans to total shareholder return, says Tim Bartl, president of the Washington-based Center on Executive Compensation, which represents corporate human resource officers. “The question is, is that the right metric to drive long-term value for these companies?” Bartl says no. He lauds a report from the New York-based Investor Responsibility Research Center Institute, which recommends that executive incentive plans be tied to metrics such as return on invested capital or economic profit (net operating profit minus a capital charge for invested capital). 18 “We've made it clear that companies should pick performance metrics that they believe are the right metrics and not just move to total shareholder return,” says Zwingli. If the business strategy is sound, it will be reflected in the total shareholder return over time, he says. Besides, ISS does a lot more than just a simple quantitative analysis, Zwingli says. “We'll use the more quantitative, what people would call the cookie-cutter, approach to screen and Jamie Dimon, CEO of JPMorgan Chase, talks with fellow participants at the World Economic Forum in Davos, identify companies that may have executive compensation issues. Switzerland. Dimon this year criticized stockholders for relying on the advice of proxy advisory firms when they Then we'll do a qualitative assessment where we'll look at those cast their votes on executive pay. (Eric Piermont/AFP/Getty Images) companies more deeply.” Is it a good idea to tie CEO compensation to company performance?

It's no wonder that Dimon was annoyed at investors. Only 61 percent of shareholders voted in favor of his pay package. Its $20 million size wasn't the issue. Instead, proxy advisers said JPMorgan Chase didn't provide enough specifics about how that pay was tied to the bank's performance. 19 But some critics say companies shouldn't bother trying to link CEO pay to performance, a practice that began gaining momentum in the 1980s after what some activist investors believed was a decade of corporate mismanagement. Companies should stick to straight salary, these critics of pay for performance say. For one thing, CEOs don't have much impact at large, established companies, they say. “We're not talking about entrepreneurs or founders, people who start with nothing and have a lot of latitude to make a big difference,” says Michael Dorff, a law professor at Southwestern Law School in Los Angeles and the author of “Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How To Fix It.” “Studies have had a lot of trouble finding that CEOs, on average, have much impact either for good or for bad,” he says. 20 “You can't try to prove otherwise with a few counterexamples.” That may be true for a CEO running a stable company that produces a commodity, says Stanford's Larcker. “But in a company where the environment is becoming more competitive and executives are thinking about refocusing the business, CEOs have a tremendous impact on the company's fortune.” He says, “And smart people doing smart things want a piece of the value they create. Those are the kind of people you want to hire.” Besides, getting rid of performance pay wouldn't save much money, says Jesse Fried, a law professor at Harvard and co-author of “Pay Without Performance: The Unfulfilled Promise of Executive Compensation.” “Shareholders have become more demanding, and the CEO who does poorly is more likely to be fired,” he says. “So, to induce someone to step in and run a struggling company, we'd have to pay a massive salary if we didn't pay a performance component.” The key, Fried says, is getting performance pay right—and there's lots of debate about how to do that. One way to link CEO pay to performance is to grant stock options and restricted stock units that vest over time and are not tied to any particular performance measure, such as sales or earnings. Instead, the stock price essentially is the performance metric. About 50 percent of the more than 1,000 companies in an ISS study granted options to their top executives last year, and 70 percent awarded time-based restricted stock. 21 Companies Increasingly Favor Restricted Stock Over Stock Options

Percentage of companies offering each type of incentive, 2006–14

Notes: Based on fiscal year filings by companies for the ISS Incentive Lab Universe. Number of companies surveyed for each year are as follows: 1,349 for 2006; 1,350 for 2007; 1,312 for 2008; 1,297 for 2009; 1,282 for 2010; 1,254 for 2011; 1,246 for 2012; 1,220 for 2013; and 1,018 for 2014.

The Securities and Exchange Commission requires companies to report compensation for the chief executive officer, the chief financial officer and the three other most highly compensated executive officers.

Source: “Trends in Incentive Pay,” data provided by Institutional Shareholder Services

The percentage of companies offering stock options to top executives has declined from 72 percent to 50 percent since 2006, while the share offering performance-based restricted stock has grown from 48 percent to 77 percent. The share of companies offering time-based restricted stock grew from 58 percent to 70 percent.

“I think options are the quintessential performance-based compensation vehicle,” says Borges of Compensia. “In my experience, executives tend to hold onto these arrangements long past the vesting periods. If you are looking for someone to drive performance over the long term, I'm not sure you can come up with a better vehicle than options.” But Fried says a problem with options and restricted stock is that CEOs will be rewarded—or penalized—for factors beyond their control. For example, falling or rising oil prices will have a big effect on an oil company's stock price. “I would like to see something that corrects for industry effects, and some companies do that,” Fried says. One way is to have options and restricted stock vest only if the company's stock price improves more than those of competitors or if it beats the S&P 500. Others say equity-based pay encourages CEOs to manipulate the stock price. “Stock buybacks are the critical way of manipulating the market and getting your stock price up fast and cashing in on it,” says William Lazonick, co-director of the Center for Industrial Competitiveness at the University of Massachusetts, Lowell. When a company buys stock back from shareholders, that reduces the number of shares on the market, automatically increasing the percentage of the company represented by each share, and thus usually hiking the price per share. Such repurchases drain money from a company's treasury that could be spent investing in its workforce, Lazonick says. “Buybacks should be illegal.” But when a firm has more cash than it can use in its current operations, buybacks are a wise move, says Murphy of the University of Southern California. “Managers have a tendency to waste that cash, and giving it back to shareholders who can invest it more productively elsewhere is a good thing.” Murphy characterizes equity-based compensation that vests over time as “the very worst way to pay executives except all the other ways.” He says, “There are no perfect performance measures,” and so it's important to have a very watchful board and strong restrictions on how quickly and when executives can sell their shares. But ISS does not regard stock options and restricted stock that simply vest with time as performance-based pay. For one thing, the CEO “is going to get the restricted stock whether the company does poorly or not,” Zwingli says. And even if the stock price falls, unlike with options, the stock will still be worth something. Institutional investors have been encouraging companies to issue restricted stock that is tied directly to specific long-term performance measures, usually some accounting measure. “For a new company, in the early stages you might look at sales or revenues as a key metric. Some industries might focus on cash flow,” Zwingli says. Earnings- per-share targets are popular. The proportion of companies awarding executives performance-based restricted stock has climbed from less than 50 percent in 2006 to more than 75 percent in 2014, according to the ISS study. 22 “I think that is the worst single development in executive compensation ever,” Murphy says. “Executives can game accounting numbers” much more easily than stock price, he says. For example, the earnings-per-share target can be set too low, and once the target is set, earnings can be boosted by pushing some maintenance or research and development into the following year, he says. Earnings per share can also be boosted through a stock buyback, Lazonick says. Background Origins of Executive Pay

Before about 1900, most businesses were small and run by owners. “There was no debate over executive compensation, for there were no executives, at least as we understand the term,” according to Temple University law professor Harwell Wells. 23 That changed around the turn of the last century, when a wave of mergers transformed the industrial sector. “Between 1895 and 1904, nearly two thousand small manufacturing firms combined to form 157 large corporations,” wrote Murphy of the University of Southern California, in a paper tracing executive compensation's evolution. “Management responsibility in many of these new firms shifted from owners to professional executives who had management skills but no meaningful equity stakes.” 24 To align the interests of salaried senior executives with those of owners, boards gave them bonuses tied to profit. While most bonuses were modest, some were extraordinarily high for the times, including Bethlehem Steel CEO Eugene Grace's 1929 bonus of $1.6 million, or about $22 million in today's dollars. Still, in the late 1920s, executive pay was not yet controversial, mostly because the numbers were not public and “the economy was robust, unemployment was low, and shareholder returns were high,” wrote Murphy. 25 Public perception shifted drastically in July 1930, after the October 1929 stock market crash and the beginning of the Great Depression, when a Bethlehem Steel shareholder lawsuit, unrelated to pay, exposed Grace's bonus. Later that year, a lawsuit against American Tobacco disclosed the nearly $2 million that its president, G.W. Hill, was due to receive. And in 1932, congressional hearings into the securities Kevin Murphy: “Executives can industry revealed that National City Bank President Charles Mitchell made more than $1 million annually in the years just before the 1929 game accounting numbers.” crash. 26 These pay packages “were not typical—most executives made far less—but they were taken by the public as representative,” wrote Wells, and they caused widespread outrage in the midst of massive unemployment and wage cuts. The federal government responded by requiring public scrutiny of senior executives' pay. 27 In December 1934, the new Securities and Exchange Commission (SEC) ruled that publicly traded corporations must disclose the names of the three highest-paid executives and their compensation, including salary, bonus, stock and stock options. Companies that did not comply would be delisted from stock exchanges. Several companies, including U.S. Steel, argued that such disclosure would hurt employee morale. 28 Newspapers began to publish annual lists of top executive pay compared with average worker pay in the relevant industries. “Surprisingly, it is not clear that the public outrage, and new disclosure requirements, fundamentally changed executive compensation practices in the 1930s,” said Wells. 29 Bonuses linked to profits disappeared in the first years after the stock market crash; executive compensation declined sharply. 30 But by the mid-1930s, salaries and bonuses began to recover, according to data compiled by then-MIT finance professor Carola Frydman, now at Boston University, and Federal Reserve Board economist Raven E. Saks. 31 Slow Growth in Executive Compensation

“World War II marked the beginning of a new era of executive compensation, one that would stretch into the 1970s,” said Wells. 32 It was characterized by slow growth of executive compensation, little public scrutiny or umbrage and the increased use of stock options as incentive pay for top managers. “The use of employee stock options was almost negligible until 1950,” wrote Frydman and Saks. 33 That year, as part of tax reform legislation, a business-friendly Congress created a new type of option called a restricted stock option. No income tax would be due when executives exercised the options and purchased shares at the specified price. Instead, executives would pay taxes only if and when they sold those shares at a profit, and then not at the ordinary income tax rate but at the much lower capital gains rate—tax treatment more favorable than previously available. Still, “only 16 [percent] of executives in a given year were granted options during the 1950s,” said Frydman and Saks. 34 Then in 1960, as the economy entered a recession, falling stock prices made stock options less attractive. Congress further reduced their appeal when it passed the Revenue Act of 1964. Among other provisions, it: Lengthened from six months to three years the amount of time executives must hold stock acquired through restricted options in order for any gains to be taxed as capital gains. Prohibited the repricing of options if the stock price fell. Lowered the top marginal tax rate on ordinary income from 91 percent to 70 percent. 35 That last change “significantly reduced the attractiveness of restricted options over cash compensation,” wrote Murphy. 36 Later, their popularity collapsed when Congress passed the Tax Reform Act of 1969, which cut the top marginal income tax rate to 50 percent by 1972 and immediately raised the top capital gains tax rate to 36.5 percent from 25 percent. Partly as a result, companies shifted to granting what are known as nonqualified stock options. These are taxed when exercised, and the difference between the exercise price and the market price is taxed as regular income. 37 Between 1950 and 1970, the real median compensation of the three highest-paid executives at the 50 largest public companies grew just 0.5 percent a year, from $740,000 to $820,000 (in 2000 dollars), Frydman and Saks calculated. 38 Social norms and powerful labor unions were likely responsible for this anemic growth, Wells said. It was an era “in which average workers' wages rose relatively rapidly, as political and economic institutions (notably unions) encouraged wide distribution of the fruits of economic growth.” 39 Public Outrage Reignited

In the late 1980s, CEO compensation was increasing more rapidly; it exploded in the next decade. Real median CEO compensation at the nation's largest 50 firms was $1.2 million in the 1970s, $1.8 million in the 1980s and $4.1 million in the 1990s, according to Frydman and Saks. 40 Meanwhile, real median household income rose far more slowly, increasing just 22 percent between 1975 and 1999, from $46,453 to a peak of $56,895 (in 2013 dollars), according to the Census Bureau. 41 Public criticism of CEO compensation resurfaced in the early 1980s, when struggling manufacturers, including the Big Three automakers, asked Congress for protection from foreign competitors and demanded that unionized workers agree to salary “givebacks,” while top executives took home performance-based bonuses. 42 Also in the 1980s, a wave of hostile corporate takeovers meant shareholders of target companies received a premium for their shares and some CEOs were paid large sums to leave—so-called “golden parachutes” that were built into their employment contracts. Perhaps the most controversial example was the $3.9 million paid to Bendix CEO William Agee in the early 1980s when the manufacturer was taken over by Allied Corp. 43 But takeovers frequently led to lost jobs for workers. The takeover wave was part of a movement, supported by a number of academics and big stockholders, to maximize shareholder value: Rather than using excess cash to buy existing companies and build bloated conglomerates as was done in the 1970s, CEOs should focus on higher-risk strategies that would ultimately increase the 44 Page 10 of 18 Executive Pay SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. company's stock price and dividends, proponents said. 44 To align the interests of CEOs with shareholders, boards of directors increasingly issued them nonqualified stock options, whose value rose significantly at the end of the decade when the Dow Jones industrial average hit record highs, interrupted briefly by the stock market bust of October 1987. “By the early 1990s options grants had replaced a base salary as the largest single component of executive compensation,” said Wells. At the same time, “popular discontent with executive pay boiled over,” fueled in part by compensation consultant-turned-critic Graef Crystal's much-publicized 1991 book, “In Search of Excess: The Overcompensation of American Executives,” which claimed that CEOs essentially set their own pay. 45 The SEC responded in 1993 by requiring more disclosure about executive stock options, including stock performance comparisons to peer companies and descriptions of how boards set CEO pay. The SEC believed disclosure would embarrass companies into lowering compensation, wrote Jerry W. Markham, a Florida International University law professor, in “A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform.” But the requirement had the opposite effect, Markham said. For one thing, greater disclosure “created a spirit of competition in which executives vied with each other for the largest compensation package.” 46 During the 1992 presidential campaign, Democrats Bill Clinton, Bob Kerrey and Paul Tsongas and Republican Pat Buchanan railed against excessive executive pay. 47 Once in office, President Clinton signed legislation that limited a public company's tax deduction for compensation paid to the CEO and the next four highest paid executives to $1 million per person. There was one critical exception: Any amount of performance-based pay could be deducted, including stock options, as long as their exercise price was at or above the market price on the date of the grant. 48 (See Expert Views, “Pro/Con: Kyle Pomerleau on Taxing Executive Pay” and “Pro/Con: Susan Holmberg on Taxing Executive Pay.”) Scholars continue to debate the law's impact and whether that exception was responsible for the acceleration in the use of options. 49 Nevertheless, companies awarded ever more stock options to top executives during the long-running bull market of the 1990s. 50 As a result, real median compensation for CEOs at S&P 500 companies peaked at $9.8 million in 2001 (in 2013 dollars). 51 From Accounting Scandals to the Present

In 2000, the bursting of the so-called dot-com bubble sent stock prices plummeting. Many stock options were expiring worthless—known as being under water—eventually dampening CEO pay. Partly as a result, companies shifted from granting options to granting CEOs restricted stock that vested after a certain number of years or after achieving a performance goal. (Even if stock prices decline, shares of stock will retain some value.) The stock market soon recovered, and real median pay for S&P 500 CEOs rose, somewhat unevenly, from $8.4 million in 2002 to $9.4 million in 2006. 52 In the early 2000s, accounting scandals engulfed Enron, WorldCom, Global Crossing and several other companies. (The Financial Times concluded that top executives and directors at these collapsing companies were paid a total of $3.3 billion, mostly in options, from 1999 to 2002. 53 ) In 2002, Congress passed the Sarbanes-Oxley Act, which focused mostly on accounting irregularities but also added regulations on executive pay. For example, the law prohibited companies from making personal loans to executives and directors. It also required that CEOs and chief financial officers (CFOs) give back to the company performance-based pay and profit from selling shares if company financial statements had to be restated because of corporate misconduct. 54 The recession that began in December 2007 and the financial crisis that burst into the open soon after with the 2008 bankruptcy of Lehman Brothers reduced real median CEO pay at S&P 500 companies. By 2009, that number had fallen to $7.7 million a year. 55 But it wasn't just the economy. As the government began a massive bailout of financial firms judged too big to fail, Congress passed laws that limited the compensation of executives at those firms. The restrictions were sparked, in part, by public outrage over reports that financially wobbly Merrill Lynch had distributed $3.6 billion in bonuses to its employees just before an emergency merger with Bank of America. 56 In 2010, President Obama signed into law the Dodd-Frank Act, which not only regulated firms in the financial services sector but also imposed “sweeping reform of executive compensation and corporate governance” on all large publicly traded firms, wrote Murphy. 57 The act required the SEC to promulgate rules on: Say-on-pay: Shareholders are to judge a company's executive officer pay practices in nonbinding votes. The final rule is in force.

Clawbacks: Companies are to recoup payments to all current and former executives that were based on financial statements that had to be restated. There is no final rule yet. Disclosures: Companies are to report the ratio of CEO compensation to median employee compensation and explain the relationship between CEO realized compensation and company financial performance. There are no final rules yet. Compensation committees: Compensation committees are to be made up of outside independent directors, according to new stock exchange rules, which have been issued. Proxy access: Certain shareholders are to be able to nominate their own board of director candidates. In 2011, the U.S. Court of Appeals in Washington, D.C., sided with business groups and vacated this rule. 58 Meanwhile, as the economy began its recovery from the recession, real median CEO pay at S&P 500 firms rose again in 2010, stayed level for the next two years and in 2013 returned to its 2001 peak. 59 Current Situation No Final Pay Ratio Rule

Several provisions of Dodd-Frank's executive compensation reforms are in effect. But five years after the bill became law, the SEC has not yet issued final rules on the reporting of CEO-to-employee pay ratios. Unions and congressional Democrats have lobbied hard for the mandated disclosure, which is vigorously opposed by Republicans and business groups. “The SEC has been woefully behind in its proposing and adopting final rules for executive pay disclosure requirements in Dodd-Frank,” says the AFL-CIO's Rees. “They proposed the pay ratio disclosure rule in the fall of 2013, and they've repeatedly delayed their calendar for taking final action.” The mandate would apply only to businesses with at least $1 billion in annual revenue. 60 Nevertheless, it was one of the most controversial executive compensation requirements of Dodd-Frank, and remains so. “Investors don't want it,” says Bartl of the Center on Executive Compensation, which represents corporate human resource officers and has led the opposition to the ratio reporting mandate. “There were, I believe, 14 shareholder resolutions asking for disclosure of the pay ratio between 2010 and 2014. None of them got in excess of 10

Page 11 of 18 Executive Pay SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. percent shareholder support,” he says. “It's a ratio that was designed purely to shame executives into taking lower levels of pay,” says Murphy of the University of Southern California. “It provides absolutely nothing useful to shareholders and the board.” Rees, however, argues that the ratio has value. “First, it's an indication of a company's investment in its human capital,” he says. “Secondly, pay disparities within an organization have a tremendous impact on employee morale and productivity, whether it's between the CEO and the next five executive officers or between the CEO and the median employee on the shop floor.” But Murphy says the research linking pay gaps and productivity is weak. “I know this literature really well,” he says. And business groups say the ratio doesn't say much about a company's investment in its employees, because so much depends on the location of its workforce and the kinds of businesses it operates. 61 In any case, the SEC did take into account at least one specific objection of the business community when fashioning its proposed rule. Multinational corporations had said it would be difficult to collect pay data for workers scattered across countries on different payroll systems and paid in different currencies, and that doing so would be too expensive. In response, the proposed rule would allow companies to statistically sample a fraction of their workers instead, although some critics wonder whether global companies will be able to choose an accurate sample. 62 But the SEC refused to exclude part-time workers and to limit calculations to only U.S. workers, as businesses wanted. “Think about, for example, a technology company that owns all of its manufacturing facilities, domestic and foreign, compared to one that outsources all of its production to Asia,” Bartl says. The former company would have a higher pay ratio because the lower-paid employees in low-cost-of-living countries are directly on the payroll, he says, and thus comparisons of the ratios of the two companies would be skewed. “We encourage companies to provide supplemental disclosure. If they need to explain why their number is what it is by providing a U.S. worker-only ratio, they should do that,” Rees says. Meanwhile, congressional Democrats are putting pressure on the SEC. The Congressional Progressive Caucus co-chairs, Reps. Raúl Grijalva, D-Ariz., and Keith Ellison, D-Minn., along with Financial Services Committee ranking member Maxine Waters, D-Calif., sent SEC Chair Mary Jo White a letter in March urging “the SEC to finalize its strong proposed rule in early 2015.” 63 Sen. Elizabeth Warren, D-Mass., has said White told her in a private meeting that the rule would likely be finalized this fall. 64 Performance Disclosure Waits

In April, the SEC published its proposed rule that requires companies to disclose how executive pay compares to company performance. It is not known when the commission might finalize the regulation. The proposed rule says companies must add a new table in the annual proxy statement that compares CEO compensation to total shareholder return over five years. For comparison, the table must also report the five-year total shareholder return of companies that the firm considers peers. Some say using total shareholder return as the sole metric of company performance could encourage CEOs to focus on the short term. It could encourage CEOs to try “to boost the stock price over one year rather than a long-term goal” that might not have immediate impact on share price or dividends, said Andy Restaino, managing director of Technical Compensation Advisors. 65 In addition, it could penalize new CEOs who take over an underperforming company and turn it around, said Equilar. It could take years for their five-year total shareholder return to measure up to peers. Meanwhile, the CEO's compensation might be relatively high, considering that new CEOs often receive a onetime equity grant for signing on as part of their first-year compensation package. 66 “This potential issue affects a large number of companies, as 42 [percent] of S&P 1500 CEOs have been with their current company for less than five years,” Equilar said. 67 As with mandated pay ratio disclosure, some in the business community say this new table is a waste of time and resources. “If you are a serious shareholder, you know what the stock has done, and you can come to your own conclusion about whether the CEO is the right leader,” said Alan Johnson, managing director of New York-based compensation consultant Johnson Associates. 68 Others say it will make cross-company comparisons easier. Female CEO Near Top of Lists

Marissa Mayer of Yahoo has become one of the highest paid CEOs in the country, with a total compensation of $42.1 million in 2014, Equilar said in May in a report for the Associated Press. It was the first time since 2011 that a female executive had made it into AP/Equilar's top 10. The firm analyzed the compensation of 340 CEOs from S&P 500 companies who had at least two years in the job. 69 (Mayer ranked No. 14 on another Equilar list, prepared for The New York Times based on different criteria. 70 )

Marissa Mayer of Yahoo was the nation's highest-paid female executive last year, with a $42.1 million compensation package. (Ethan Miller/Getty Images)

The median pay for all female CEOs on the AP/Equilar list was $15.9 million, a 21 percent gain from 2013. It was significantly higher than the median pay for male CEOs, which was $10.4 million in 2014, a 0.8 percent drop from 2013. 71 However, only 17 women CEOs were among the 340 chief executives studied. The next highest paid after Mayer was Carol Meyrowitz of apparel firm TJX Cos., with compensation of $23.3 million, followed by Margaret Whitman of information technology company Hewlett-Packard, who earned $19.6 million. 72 Mayer's compensation was up 68 percent from 2013. She had negotiated onetime stock options and signing bonuses when she took over Yahoo in 2012 that paid out in 2014. And they paid out big: Yahoo's stock price tripled in that time, “mostly due to its giant stake in Alibaba,” the monster Chinese e-commerce business, according to CNN Money. Mayer's compensation could have been even higher last year if Yahoo had met its revenue and profit goals. She missed more than $13 million in cash bonus and equity-based awards because those results fell short of the targets. 73 Looking Ahead Waiting for the Effects of Disclosure

While past disclosure rules do not seem to have affected rising CEO compensation, Rees of the AFL-CIO expects that once companies start reporting their CEO-to- median employee pay ratios, the growth in CEO pay will slow. “I think it will provide a measure for reasonableness that boards of directors can take into consideration when setting CEO pay targets. And investors will likewise use it as a data point,” Rees says. Fried at Harvard sees a different outcome. “Congress regulates executive pay to sort of score points with constituents, and there is nothing that they can do that would fundamentally change things,” he says. “So they do things at the margins that don't actually make much of a difference, like the pay ratio rule in Dodd-Frank.” There won't be an opportunity to see if pay ratio reporting affects CEO compensation, according to Murphy of the University of Southern California. Once finalized, “the rule will last about a month,” he says. Murphy expects that business groups, such as the Business Roundtable and the U.S. Chamber of Commerce, will challenge it in court and win. In 2011, they successfully fought the SEC's final rule that required proxy materials to include director nominees put forward by a shareholder or a shareholder group owning at least 3 percent of company stock for at least three years. 74 “The SEC … has an explicit requirement that it has to compare the costs and benefits of any rules that it makes. Since there really are no benefits to the pay ratio rule and there really are costs, the SEC is sunk in the water,” Murphy says. In any case, continued scrutiny from the media and investors will keep CEO pay from growing too rapidly over the next decade, says Stanford's Larcker. “There are costs to explaining a big increase, either public relations costs or interacting-with-your-investors costs, so I don't think you'll see CEO pay go up, say, 20 percent annually.” Zwingli of ISS expects the composition of CEO compensation to continue to evolve. “I expect that we will continue to see the trends of recent years continuing—specifically a shift in pay mix toward more performance-based pay, long-term pay and equity pay,” he says. And he says long-term pay will most likely be linked to a wider period of performance, from three years to five years. “Until we get rid of the use of the peer groups, nothing is going to change,” says Elson of the University of Delaware. But he's heartened that the National Association of Corporate Directors, a membership organization of more than 15,000 directors, recently recommended that compensation committees use peer group comparisons at the end of the process when determining a CEO's pay, rather than as the starting point. 75 “I think a group as respected as that will add a lot of weight to the argument,” Elson says. About the Author

Barbara Mantel is a freelance writer in New York City. She was a 2012 Kiplinger Fellow and has won several journalism awards, including the National Press Club's Best Consumer Journalism Award and the Front Page Award from the Newswomen's Club of New York. She is a contributing writer for CQ Researcher, sister publication of SAGE Business Researcher. She holds a B.A. in history and economics from the University of Virginia and an M.A. in economics from Northwestern University. Chronology

1920s–1930s CEOs break the $1 million mark just before the Great Depression. 1929 Bethlehem Steel CEO Eugene Grace receives $1.6 million bonus; other execs also reported to make more than $1 million. … The stock market crashes, and the country enters the Great Depression. 1934 Securities and Exchange Commission (SEC) requires public companies to disclose the names of the three highest-paid executives and their compensation. 1938 Pan American Airways becomes first known company to reprice its stock options when its share price falls, thus protecting executive compensation. 1950s–1970s Stock options rise and fall in favor; CEO pay remains flat. 1950 Median compensation for top executives at the 50 largest companies is $740,000 (in 2000 dollars). … Congress creates restricted stock options, which provide favorable tax treatment to executives who receive them; 16 percent of executives each year are granted restricted options in the next decade. 1964 Revenue Act requires executives to hold stock at last three years after exercising restricted options, prohibits repricing options if the stock price falls and lowers income tax rates. 1969 Tax Reform Act cuts income tax rates further and raises the capital gains tax rate, causing the appeal of restricted stock options to collapse. 1970 Median pay for top executives of top 50 companies reaches $820,000 (in 2000 dollars). 1980s–1990s Use of stock options explodes as boards try to align executive and shareholder interests; CEO pay more than doubles during bull market. 1983 Bendix CEO William Agee receives a $3.9 million “golden parachute” payment when Allied Corp. acquires his company, causing public outrage. … Companies increasingly grant executives stock options taxed as regular income. 1991 Compensation consultant-turned-critic Graef Crystal publishes “In Search of Excess: The Overcompensation of American Executives,” saying CEOs essentially set their own pay. 1992 Stock option awards account for nearly half of total CEO pay at the beginning of the long-running bull market. 1993 Inflation-adjusted median CEO pay at S&P 500 companies is nearly $3 million. … SEC requires companies to describe how CEO pay is set. … President Bill Clinton signs legislation limiting a public company's tax deduction for top executives' annual pay to $1 million per person, exempting performance-based pay; use of stock options grows further as a result. 1999 Median CEO pay at S&P 500 companies is nearly $8 million, adjusted for inflation. 2000s–Present CEO pay peaks; after 2008 financial crisis, Congress passes sweeping financial reforms. 2001 Median compensation for S&P 500 CEOs is nearly $10 million, adjusted for inflation. … Companies pay executives with restricted stock after dot-com bust and falling stock prices make many options worthless. 2002 Median CEO pay falls to $8.4 million. … Sarbanes-Oxley Act regulates executive pay, for example prohibiting company loans to executives and directors. 2007 In December, the deepest recession since the 1930s begins. 2008 Global financial markets totter after investment bank Lehman Brothers declares bankruptcy and insolvency threatens other firms; the financial crisis was set off by the implosion of mortgage-backed securities held by financial institutions worldwide. 2009 In June, the recession officially ends but its effects linger for several years. 2010 The Dodd-Frank Wall Street Reform and Consumer Protection Act mandates sweeping rules on executive compensation, including requiring companies to hold nonbinding say-on-pay shareholder votes on top-executive compensation and to publish CEO-to-median employee pay ratios. 2011 The U.S. Court of Appeals in Washington, D.C., sides with business groups and vacates the Dodd-Frank provision requiring that certain shareholders be able to nominate their own board of director candidates. 2013 Median CEO pay at S&P 500 companies approaches $10 million. 2015 SEC issues proposed rule for how companies are to explain the relationship between CEO compensation and company financial performance. … The SEC has yet to issue its final rule requiring companies to report CEO-to-median employee pay ratios.

Resources Bibliography

Books

Dorff, Michael B., “Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It,” University of California Press, 2014. A professor at Southwestern Law School argues performance-based executive pay has not improved corporate performance. Markham, Jerry W., “A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform,” Routledge, 2015. A professor at Florida International University College of Law recounts the collapse of Enron Corp. and other 21st-century financial scandals. Thomas, Randall S., and Jennifer G. Hill, eds., “Research Handbook on Executive Compensation,” Edward Elgar, 2012. Top scholars contribute essays on executive compensation, assessing research in the field.

Articles

Cahill, Joe, “Caterpillar shareholders speak. Directors should listen,” Crain's Chicago Business, June 13, 2015, http://tinyurl.com/qyj7h9z. One-third of Caterpillar shareholders vote against the executive compensation program. Gelles, David, “For the Highest-Paid C.E.O.s, the Party Goes On,” The New York Times, May 16, 2015, http://tinyurl.com/k7xbl3g. The highest-paid CEOs still make out well—as much as $156 million in total compensation. Goldman, David, “Marissa Mayer docked $13 million and still made $42 million,” CNNMoney, April 30, 2015, http://tinyurl.com/nakejbx. Yahoo's female CEO breaks into the top 15 highest-paid CEOs even though her company did not meet its goals in 2014. Hiltzik, Michael, “JPMorgan's Jamie Dimon is fed up with you ‘lazy’ investors voting against him,” Los Angeles Times, May 29, 2015, http://tinyurl.com/o98dqf2. A bank CEO accuses investors of lazily relying on advisory firms to tell them how to cast their votes on executive pay. Morgenson, Gretchen, “Shareholders' Votes Have Done Little to Curb Lavish Executive Pay,” The New York Times, May 16, 2015, http://tinyurl.com/lhtv9pa. Say-on-pay voting has not curbed rising CEO pay despite the Dodd-Frank Act, which required companies to put their compensation plans to nonbinding shareholder votes. Rothwell, Steve, “The top 10 highest-paid female CEOs,” The Associated Press, May 29, 2015, http://tinyurl.com/qym3mov. Among large companies, the median female CEO makes more than the median male CEO.

Reports and Studies

“Report of the NACD Blue Ribbon Commission on the Compensation Committee — Executive Summary,” National Association of Corporate Directors, June 9, 2015, http://tinyurl.com/nkynq22. A membership association of corporate directors makes recommendations for setting CEO pay. For example, boards should take peer group compensation into account only at the end of the executive compensation-setting process. “200 Highest-Paid CEO Rankings,” Equilar, May 16, 2015, http://tinyurl.com/ozphcn7. A research firm tabulates the 200 highest-paid CEOs in 2014, with David Zaslav of Discovery Communications coming in first at $156.1 million. Frydman, Carola, and Raven E. Saks, “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005,” The Review of Financial Studies, Feb. 2, 2010, http://tinyurl.com/pdg8wnc. Academic researchers analyze the long-run trends in CEO pay. Mishel, Lawrence, and Alyssa Davis, “Top CEOs Make 300 Times More than Typical Workers,” Economic Policy Institute, June 21, 2015, http://tinyurl.com/n9egga9. A liberal policy group calculates the ratio of CEO pay to the typical worker and says that chief executives at the largest firms earn at least 10 times more than they did 30 years ago. Murphy, Kevin J., “Executive Compensation: Where We Are, and How We Got There,” Social Science Research Network, Aug. 12, 2012, http://tinyurl.com/pzl5dvg. A professor of finance and business economics at the University of Southern California traces the evolution of CEO pay. The Next Step

Compensation

Gavett, Gretchen, “Is Your CEO's High Salary Scaring Away Customers?” Harvard Business Review, June 4, 2015, http://tinyurl.com/psxgnp9. Consumers favor companies with fair and transparent CEO-to-worker pay ratios, according to researchers at the Harvard Business School. Hamilton, Jesse, “Fannie, Freddie CEOs Get Pay Raises as White House Objects,” Bloomberg Business, July 1, 2015, http://tinyurl.com/ojxoq5v. The CEOs of Fannie Mae and Freddie Mac may receive pay raises, but the Obama administration advises directors to continue limited compensation plans. Melin, Anders, “How Companies Justify Big Pay Raises for CEOs,” Bloomberg Business, June 4, 2015, http://tinyurl.com/pjn3wz9. When deciding pay for senior executives, directors attempt to match the compensation programs of “peer” companies.

Pay and Performance

Canipe, Chris, and Sarah Slobin, “CEO Pay vs. Performance,” The Wall Street Journal, June 24, 2015, http://tinyurl.com/pbndr6o. Executives of companies with weak shareholder returns in 2014 were still highly compensated, with some even receiving raises. Delevingne, Lawrence, “Wall Street CEO pay vs. shareholder gains: Who won?” CNBC, May 28, 2015, http://tinyurl.com/o64og7g. A new ranking by recruitment firm Charles Skorina & Co. aligns CEO pay with stock performance, as will be required under the Dodd-Frank Act. Gordon, Sarah, “Top managers' pay reveals weak link to value,” Financial Times, Dec. 28, 2014, http://tinyurl.com/pxtv97s. Studies at the Chartered Financial Analyst Society of the United Kingdom and Lancaster Business School show a weak correlation between CEO compensation and company performance.

Pay Ratios

Kerber, Ross, “U.S. pay gap also problematic in C-Suite,” Reuters, June 19, 2015, http://tinyurl.com/o95kr8y. After the financial crisis, a larger percentage of CEO compensation was delivered in the form of stock awards, leading to greater pay disparities between CEOs and executives.

Morgenson, Gretchen, “Despite Federal Regulation, C.E.O.-Worker Pay Gap Data Remains Hidden,” The New York Times, April 10, 2015, http://tinyurl.com/m9sfomm. In 2013, the Securities and Exchange Commission proposed a regulation requiring companies to disclose CEO pay ratios, but the rule met opposition and is in limbo. Rudegeair, Peter, “Pay Gap Between Wall Street CEOs and Employees Narrows,” The Wall Street Journal, April 5, 2015, http://tinyurl.com/ps38q7x. At the five biggest Wall Street firms, workers' paychecks reached new highs in 2014 while the firms' CEOs are earning less in the wake of the 2008 financial crisis.

Say-on-Pay

Shecter, Barbara, “Canadian shareholders increasingly aggressive on ‘say-on-pay,’” Financial Post, May 1, 2015, http://tinyurl.com/ntdjw85. Canadian shareholders have begun to challenge the pay practices of major companies, following U.S. strategies for the “say-on-pay” movement. Syre, Steven, “Nuance Communications one of nine US companies to flunk 'say on pay,'” The Boston Globe, May 19, 2015, http://tinyurl.com/nonu64j. One of nine companies to fail the “say-on-pay” vote has lost the support of stockholders, after the CEO received a pay raise while the company's stock was losing value. Waters, Richard, “Salesforce shareholders protest vote against Benioff pay deal,” Financial Times, June 10, 2015, http://tinyurl.com/nf99hqu. A growing number of investors criticize the compensation awarded to the CEO of cloud software company Salesforce. Organizations

AFL-CIO 815 16th St., N.W., Washington, D.C. 20006 202-637-5000 www.aflcio.org Umbrella federation for 56 U.S. unions that monitors corporate governance. Center on Executive Compensation 1100 13th St., N.W., Suite 850, Washington, DC 20005 202-408-8181 www.execcomp.org Represents human resources executives at large U.S. companies on executive compensation issues. Corporate Governance Research Initiative Stanford University, 655 Knight Way, Stanford, CA 94305 650-723-2146 www.gsb.stanford.edu/faculty-research/centers-initiatives/cgri University institute that conducts research on corporate governance. Economic Policy Institute 1333 H St., N.W., Suite 300, East Tower, Washington, DC 20005 202-775-8810 www.epi.org Think tank that researches the economic status of low- and middle-income workers. Equilar 1100 Marshall St., Redwood City, CA 94063 877-441-6090 www.equilar.com Private firm that compiles executive compensation data for clients, including companies and institutional investors. Institutional Shareholder Services 702 King Farm Blvd., Suite 400, Rockville, MD 20850-4045 301-556-0570 www.issgovernance.com Private firm that provides research to institutional investors and corporations; advises investors on proxy voting. John L. Weinberg Center for Corporate Governance University of Delaware, 303 Alfred Lerner Hall, Newark, DE 19716 302-831-6157 www.lerner.udel.edu/centers/weinberg Academic center that conducts research and holds forums on corporate governance. National Association of Corporate Directors 2001 Pennsylvania Ave., N.W., Suite 500, Washington, DC 20006 202-775-0509 www.nacdonline.org Membership organization of more than 15,000 corporate directors; conducts research and runs education programs. Securities and Exchange Commission 100 F St., N.E., Washington, DC 20549 202-942-8088 www.sec.gov Federal agency that requires public companies to disclose meaningful financial and other information; also regulates securities exchanges, securities brokers and dealers, investment advisers and mutual funds. Notes

[1] Joe Cahill, “Caterpillar shareholders speak. Directors should listen,” Crain's Chicago Business, June 13, 2015, http://tinyurl.com/qyj7h9z.

[2] James R. Hagerty, “CtW Investment Group Calls for ‘No’ Vote on Caterpillar Pay,” The Wall Street Journal, May 18, 2015, http://tinyurl.com/qgarlp4. [3] James R. Hagerty, “ISS Urges Rejection of Caterpillar CEO Douglas Oberhelman's Pay Package,” The Wall Street Journal, May 26, 2015, http://tinyurl.com/nw5p6jj. [4] Hagerty, “CtW Investment Group Calls for ‘No’ Vote on Caterpillar Pay,” op. cit.; Hagerty, “ISS Urges Rejection of Caterpillar CEO Douglas Oberhelman's Pay Package,” ibid. [5] Steve Tarter, “Tarter: Caterpillar takes heat for CEO pay,” Peoria Journal Star, June 19, 2015, http://tinyurl.com/pzfmp6z. [6] 2015 Say On Pay Voting Results, Steven Hall Partners, July 1, 2015, http://tinyurl.com/qaaejyh. [7] Steven N. Kaplan, “U.S. Executive Compensation and Corporate Governance: Perceptions, Facts and Challenges,” 2013, p.9, http://tinyurl.com/q3fce2p; Updated inflation-adjusted data through 2013 provided by Steven N. Kaplan. [8] “200 Highest-Paid CEO Rankings,” Equilar, May 16, 2015, http://tinyurl.com/ozphcn7; David Gelles, “For the Highest-Paid C.E.O.s, the Party Goes On,” The New York Times, May 16, 2015, http://tinyurl.com/k7xbl3g. [9] “Compensation Committee Guide,” Wachtell, Lipton, Rosen & Katz, 2015, pp. 3–6, http://tinyurl.com/nwvxc8n. [10] Lawrence Mishel and Alyssa Davis, “Top CEOs Make 300 Times More than Typical Workers,” Economic Policy Institute, June 21, 2015, pp. 1–2, http://tinyurl.com/n9egga9; Executive Paywatch, AFL-CIO, undated, accessed July 13, 2015, http://tinyurl.com/qe8yx3d; and “Anticipating the CEO Pay Ratio — CEO Pay vs Median Income,” Executive Compensation Blog, Equilar, May 20, 2015, http://tinyurl.com/nlyq7lu. [11] Ibid., Mishel and Davis. [12] “Clinton Misuses Stat on CEO Pay,” May 21, 2015, FactCheck.org, http://tinyurl.com/pjw6s9a. [13] Lawrence Mishel and Alyssa Davis, “CEO Pay Continues to Rise as Typical Workers Are Paid Less,” Economic Policy Institute, June 12, 2014, p. 10, http://tinyurl.com/nuz5hna. [14] “Compensation Committee Guide,” op. cit., pp. 1–13. [15] Gretchen Morgenson, “Shareholders' Votes Have Done Little to Curb Lavish Executive Pay,” The New York Times, May 16, 2015, http://tinyurl.com/lhtv9pa. [16] David F. Larcker et al., “Outsourcing Shareholder Voting to Proxy Advisors,” Rock Center for Corporate Governance, Stanford University, June 2014, Abstract, http://tinyurl.com/pye3mvy. [17] Michael Hiltzik, “JPMorgan's Jamie Dimon is fed up with you ‘lazy’ investors voting against him,” Los Angeles Times, May 29, 2015, http://tinyurl.com/o98dqf2. [18] Mark Van Clieaf et al., “The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design,” Investor Responsibility Research Center Institute, Nov. 17, 2014, pp. 7–8, http://tinyurl.com/nsyujee. [19] Jena McGregor, “Shareholders are less and less happy about JPMorgan's executive pay,” The Washington Post, May 19, 2015, http://tinyurl.com/p47qgkv. [20] For background, see Robin M. Hogarth and Gueorgui I. Kolev, “The ‘wicked’ environment of CEO pay,” Interfaces, Dec. 6, 2013, http://tinyurl.com/pflxqvb. [21] “Trends in Incentive Pay,” data provided by Institutional Shareholder Services. [22] “Trends in Incentive Pay,” op. cit. [23] Harwell Wells, “U.S. Executive Compensation in Historical Perspective,” Research Handbook on Executive Pay, Randall S. Thomas and Jennifer G. Hill, eds., 2012, p. 41. [24] Kevin J. Murphy, “Executive Compensation: Where We Are, and How We Got There,” Social Science Research Network, Aug. 12, 2012, p. 43, http://tinyurl.com/pvp2pqr. [25] Ibid., pp. 43–44. [26] Wells, op. cit., p. 43. [27] Ibid., pp. 43–44. [28] Murphy, op. cit., pp. 45–46. [29] Wells, op. cit., p. 45. [30] Ibid. [31] Carola Frydman and Raven E. Saks, “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005,” Feb. 2, 2010, p. 2107, http://tinyurl.com/pdg8wnc. [32] Wells, op. cit., p. 46. [33] Frydman and Saks, op. cit. [34] Ibid., p. 2108. [35] Murphy, op. cit., p. 52. [36] Ibid. [37] Ibid., pp. 53–54.

[38] Frydman and Saks, op. cit., pp. 2104–2105, 2109. [39] Wells, op. cit., p. 55. [40] Frydman and Saks, op. cit., p. 2113. [41] “Table H-6. Regions-by Median and Mean Income: All Races,” U.S. Census Bureau, undated, accessed July 7, 2015, http://tinyurl.com/aq9hleq. [42] Wells, op. cit., pp. 49–50. [43] John Carney, “Executive Pay Regulation: The History of a Failed Policy Initiative,” Dealbreaker, Oct. 12, 2006, http://tinyurl.com/pc235sm. [44] Murphy, op. cit., pp. 64, 69. [45] Wells, op. cit., p. 50. [46] Jerry W. Markham, “A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform,” 2006, p. 30. [47] Murphy, op. cit., p. 75. [48] 26 U.S. Code § 162 (m), Legal Information Institute, http://tinyurl.com/me2ub3m. [49] Nancy L. Rose and Catherine Wolfram, “Regulating Executive Pay: Using the Tax Code to Influence CEO Compensation,” National Bureau of Economic Research Working Paper, 2000, http://tinyurl.com/o69tllj. [50] Murphy, op. cit., p. 87. [51] Kaplan, op. cit. [52] Ibid. [53] Markham, op. cit., p. 33. [54] Murphy, op. cit., p. 88. [55] Kaplan, op. cit. [56] Murphy, op. cit., pp. 103–106. [57] Ibid., p. 112. [58] Ibid., pp. 112–115. [59] Kaplan, op. cit. [60] Dina ElBoghdady, “SEC narrowly votes to require firms to disclose CEO pay ratios,” The Washington Post, Sept. 18, 2013, http://tinyurl.com/oedj33c. [61] “House Progressive Caucus Urges SEC to Complete Pay Ratio Rule,” HR Policy Association, March 20, 2015, http://tinyurl.com/odnd3f6. [62] “CEO to Median Employee Pay Ratio Disclosure: 5 Key Considerations,” Equilar, undated, accessed July 13, 2015, http://tinyurl.com/nlr5kgh. [63] “Grijalva, Ellison and Waters Call for Implementation of Dodd-Frank CEO Median Worker Pay Ratio Rule,” press release, Rep. Maxine Waters, March 17, 2015, http://tinyurl.com/q3ky285. [64] Patrick Temple-West and Ben White, “Did Elizabeth Warren go too far this time?” Politico, June 2, 2015, http://tinyurl.com/qdk93qw. [65] Gregory J. Millman, “The Morning Risk Report: New SEC Pay for Performance Rules Promise Confusion,” The Wall Street Journal, May 4, 2015, http://tinyurl.com/qbsqhlx. [66] “Pay Versus Performance Rule Faces Potential Issues,” Executive Compensation Blog, Equilar, June 18, 2015, http://tinyurl.com/pz3f9cf. [67] Ibid. [68] Michael Corkery, “S.E.C. Proposes Rules on Executive Pay and Performance” The New York Times, April 29, 2015, http://tinyurl.com/ouhbyrj. [69] “Equilar/Associated Press Pay Study,” May 26, 2015, http://tinyurl.com/plewzb8. [70] “200 Highest-Paid CEO Rankings,” Equilar, op. cit. [71] Steve Rothwell, “The top 10 highest-paid female CEOs,” The Associated Press, May 29, 2015, http://tinyurl.com/qym3mov. [72] Ibid. [73] David Goldman, “Marissa Mayer docked $13 million and still made $42 million,” CNNMoney, April 30, 2015, http://tinyurl.com/nakejbx. [74] “U.S. Chamber Joins Business Roundtable in Lawsuit Challenging SEC ‘Proxy Access’ Rule” Business Roundtable, Sept. 29, 2010, http://tinyurl.com/qfqtcab; “U.S. Chamber and Business Roundtable Applaud Court's Decision to Vacate Proxy Access Rule,” Business Roundtable, July 22, 2011, http://tinyurl.com/nrdm5ng. [75] “Report of the NACD Blue Ribbon Commission on the Compensation Committee–Executive Summary,” National Association of Corporate Directors, 2015, p. 5, http://tinyurl.com/nkynq22.

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