History of Corporate Executive Wages

History of Corporate Executive Wages

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 past several decades, 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 301:1 in 2003. 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 over the past four decades.

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 than pensions promised to ordinary workers. Prior to the 1980s, workers in large corporations were promised a portion of their pay in their last year of employment as a pension after retirement at age 65. Beginning about twenty years ago, many companies began switching to a form of savings, 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, recent pay packages 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.

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