A dog by any other name is still a dog. This is true for chief executive pay, too. For years, surveys of how much CEOs are raking in have shown large additions to already outrageously high pay packages. The trend in 2006 was no exception.
All currently available data on CEO pay trends show sharp increases for 2006, outpacing the wage gains of 3.8 percent for the majority of workers. What is especially important is that surveys of the pace of CEO pay are similar even though the data sources rely on different definitions of CEO compensation. These surveys examine vastly different numbers of companies and gather information from company data developed under two disclosure rules set by the Securities and Exchange Commission.
The biggest difference in the definition of CEO compensation is the methodology by which corporate chieftains’ ubiquitous stock options are valued. Some surveys value stock options at the time they are given to an executive. Others include the value of an option when CEOs decide to exercise their options, which of course happens when they can make a ton of money via this particular compensation vehicle.
The Corporate Library, a research organization on corporate governance and CEO pay, for instance, included the value of options when they were exercised. According to this survey of 1,048 firms, released on April 2 of this year, the compensation for the typical CEO rose by 9.3 percent from 2005 to 2006.
In comparison, The New York Times on April 8 published a special report on CEO pay based on a survey of executive compensation at 200 large U.S. companies conducted by Equilar Inc. The data in this survey valued options when they were given to the executive and not when they were exercised. Still, the survey showed average CEO pay increases of 9.8 percent from 2005 to 2006 at companies that reported under the new SEC disclosure rules, and an average increase of 7 percent for companies that reported under the old, less comprehensive disclosure rules.
Similarly, The Wall Street Journal earlier this month reported in its annual survey of executives at 350 large companies—based on a survey conducted by Mercer Human Resource Consulting Co.—that the typical CEO saw his or her compensation increase by 7.1 percent last year. Again, these figures value options at the time when they were given to the corporate executive and not when they were exercised.
Although the definition of what should be counted in CEO pay does not influence the pace at which CEO pay goes up, it makes a huge difference on the level of the overall pay package. The Corporate Library, for example, includes the value of stock options when CEOs take advantage of them. Its survey shows the maximum pay package of 2006 to be $119 million. The Wall Street Journal survey, which values stock options when they are given to the executive, shows a maximum compensation of $55 million.
Interestingly, The Wall Street Journal survey allows readers to calculate their own preferred definition of CEO compensation. If one were to subtract long-term incentives, such as stock options, when they were granted and then add their value back to CEO pay when the gains were realized, then the maximum CEO pay package would stand at $319 million instead of $55 million for 2006.
The data released by The Wall Street Journal also offers a breakdown by industry. Importantly, CEO compensation varies widely by the industry in which a company operates. For instance, the typical CEO in the telecommunications industry received a pay package of $17 million, while at the low end the typical CEO for a consumer service company such as H&R Block garnered only $4 million.
Similar disparities are evident in the growth rate of CEO pay. In all industries except one, CEO pay rose between a low 6.4 percent among utilities and a high of 15.3 percent among industrial corporations, such as Boeing. The exception: chief executives at oil and gas companies, whose compensation increased by only 1.3 percent.
This anomaly, however, reflects, a comparatively high typical compensation package in this industry of $11 million in 2006 and sharp increases in the previous years following the run-up in oil prices. It probably was time for these CEOs to take a break in the pay race.
Not so other industries. Such high levels of CEO compensation year after year are eye-popping. The gains recorded in the past year still far outpace the wage gains seen by the average worker. That is, in two words, still egregious.
Christian E. Weller is Senior Fellow at the Center for American Progress. To speak with him about these issues, please contact:
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