Time to Police CEO Pay

Christian E. Weller and Kate Sabatini parse executive pay package numbers and show most CEOs are well paid regardless of performance.

The House Financial Serivces Committee will mark up the Shareholder Vote on Executive Compensation Act (H.R. 1257) on Wednesday, bringing shareholder oversight of CEO pay one step closer to implementation. The proposed legislation would require companies to offer shareholders a nonbinding vote approving or disapproving of executive pay plans. Corporate executives continue to counter that their companies’ share prices, not shareholders, should determine their compensation levels.

When the House Financial Services Committee meets this week we strongly suggest that committee members carefully examine the arguments presented by the defenders of over-the-top CEO pay. The reason: the relationship between share prices and executive pay in fact reveal that most CEOs are well-paid regardless of their performance.

Christian E. Weller and Kate Sabatini of the Center for American Progress detailed what is largely a non-relationship between share prices and executive compensation in a study released in July last year. The report, “The Great CEO Guarantee: Getting Really Well-Paid Regardless of Your Performance,” shows that many companies increased the pay of their CEOs from 2001 to 2005 even when these companies’ stocks fell short of basic benchmarks such as the S&P 500 stock price index, and even when these companies’ stocks failed to outperform staid U.S. Treasury bonds.

Performance-based pay is meant to set a company’s stock performance apart from the broader market, and certainly best the basic cost of capital reflected in the performance of Treasury bonds over five years. This has hardly been the case, according to the CAP report. Instead, the analysis of this five-year stock and bond data shows that total compensation for CEOs of well-performing companies tended to be higher than compensation for CEOs of poorly-performing companies, yet the differences are small. Cases in point:

  • Salaries, which account for 25 to 35 percent of a CEO’s total compensation, are similar for CEOs of poorly-performing and well-performing companies. The mean salary of a CEO whose company’s stock underperformed Treasury bonds during any five-year period ending between 2001 and 2005 was $982,757, compared to $943,445 for CEOs whose stocks performed better than Treasury bonds.
  • The bulk of CEOs’ compensation comes in forms other than salaries in order to inspire good performance, yet CEOs of companies whose stocks performed poorly still received very high compensation beyond their salaries. CEOs whose companies’ stocks failed to do better than Treasury bonds during any five-year period ending between 2001 and 2005 received compensation in addition to their salary to the tune of $2.1 million.
  • A substantial share of companies with underperforming stocks still chose to bump up their CEOs’ compensation. For example, 16.5 percent of CEOs whose companies’ stocks did not rise faster than Treasury bond yields during any five-year period ending between 2001 and 2005 still received raises in their total compensation.

Such unjustified growth in CEO pay deserves serious attention. This rising share of corporate resources is diverted away from other uses, such as long-term corporate investment, that are critical to the future competitiveness of our economy and job growth throughout the country. Ever-escalating CEO pay also contributes to rising income inequality in America. In the interest of a healthy and more equitable economy, it is time to rethink corporate policies and practices that can result in pay without performance for a substantial share of corporate executives.

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