The Great CEO Guarantee

Just released research by the Center for American Progress’ Kate Sabatini, Research Associate, and Christian E. Weller, Senior Economist, shows that many companies increased the pay of their chief executive officers (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, say Sabatini and Weller in their report, titled “The Great CEO Guarantee: Get Really Well-Paid Regardless of Your Performance.” Their 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 percent to 35 percent of a CEO’s total compensation, are similar for CEOs of poorly performing companies and well-performing companies. The mean salary of a CEO whose company’s stock underperformed U.S. 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 is 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.

This report will be among the topics under discussion today at the Center in a debate on the role of corporations in 21st century society, featuring Leo Hindery Jr., Managing Partner of InterMedia Partners VII and former CEO of the Yankee Entertainment and Sports Network (YES); and Fred Smith Jr., President and Founder of the Competitive Enterprise Institute. The debate will be moderated by Alan Murray, Assistant Managing Editor of The Wall Street Journal.

For more on the debate, please go to the following link:

To read the full report on CEO pay from the Center for American Progress, please go to the following link:

Dr. Christian Weller is a Senior Economist at the Center for American Progress, where he specializes in Social Security and retirement income, macroeconomics, the Federal Reserve, and international finance.