What’s All the Furor Over

Executive Compensation?
What the Critics and Press Say
If we average the CEO compensation of the 100 biggest companies, it
amounts to $18 million per year. Now, let’s assume you accept that
anyone can be worth that much money, will you grant that they should
earn it? Our guess is that about 25% of the furor over executive
compensation is from people who don’t think anyone is worth $18
million per year. Many critics fall in this category – that this level of
compensation can’t be justified under any circumstances. Part of the
argument includes comparisons to other countries. The remainder of
the furor, though, is over the rest of us who need to be convinced that
someone is worth double-digit millions of dollars. One argument could
be that executive compensation is simply a reflection of changes in the
market. Yes, executive compensation has risen dramatically since 1900,
but so has the pay of other groups. Even if you don’t buy these
arguments – and many critics don’t – we can still fall back on a pay-for-
Increasingly boards are trying to make this very argument by linking
pay to performance. Large pay can then be explained by great
company performance. A typical argument would be as follows: If
the company performance exceeds industry standards, big bonuses
and stocks payouts follow. Poor financial performance means much
smaller pay packages. Examples of other companies with at least 40
percent of executive compensation tied to performance targets
include Briggs and Stratton, ConAgra Foods, and Intuit Inc.
Exhibit 14.7 Brief History of Executive
Compensation: The Key Event
Exhibit 14.8 Public Announcements About
the Cuts in Top Pay Structure

• Company • Executive Pay Action

AMD Slashed salaries 15% for vice-presidents
Saks 5th Ave and above

Black & Decker Cut salaried employee salaries 3-7%

Hewlett Packard 10% cut for executives

Gymboree CEO Mark Hurd cut his own salary 20%

Senior executive pay cut 10-15%
Tally Sheet
- gives a comprehensive view on the true value of executive
compensation.

• It’s a simple concept that surprisingly only now is making its way
into the executive board room: Tally up the value of base salary,
annual incentives, long-term incentives, benefits, and perks. Part of
this process includes estimating the current value of stock options.
• An alternative way to rein in executive compensation is to increase
government regulation. In 1992 the Securities and Exchange Commission
entered the controversy. Stockholders are now permitted to propose and
vote on limits to executive compensation. The larger the portion of
stockholders voting “No” the more likely the board is to respond by limiting
CEO salary growth. On another front, the 1993 Revenue Reconciliation Act
limited employer deductions for executive compensation to $1 million and
capped the amount of executive compensation used in computing
contributions to and benefits from qualified retirement plans. Ironically,
this very law may be contributing to the growth of executive compensation.
The $1 million mark now serves as a new standard: Many executives who
had been making less than $1 million are finding their pay quickly rising to
this amount.
What’s All the Furor Over Executive Compensation?
What Academic Say

Social Comparison - Executive salaries bear a consistent relative relationship to pay

lower- level employees

Economic Approach – Value of CEO should correspond to some measure of

organizational success

Agency Theory – Incorporates political motivation

- CEO compensation should be designed to ensure executives focus on best interests of
firm and stockholders
1. If the CEO is truly underpaid: The consultant reports to the board of
directors that the CEO is truly underpaid. Salary is increased to a
competitive or higher level.
2. If the CEO is not underpaid and the company is doing well: Specific
companies are recommended to the consultant as appropriate for
surveying. The consultant reports back to the board that its CEO
appears to be underpaid. Salary is increased.
3. If the CEO is not underpaid and the company is doing poorly: The
CEO laments with the consultant that wages are so low for top
management that there is fear that good people will start leaving the
company and going to competitors. The result is that the consultant
recommends a wage increase to avoid future turnover.
THANK YOU!!!