CEO Compensation Learning Objectives: To understand the trends in CEO compensation, proposed remedies for those who believe pay levels far exceed notions of fairness, and to establish your own informed opinion regarding the issues that surround CEO compensation. Key Findings: Results from the “Executive Excess – 2005 Report” Defining CEO compensation: salary + bonus + other perks + stock grants + stock options • 431 : 1 Ratio of CEO pay to average production worker pay • CEOs of largest defense contractors are profiting from the war • CEO pay correlates with company bad behavior (under- funded pension liability, tax dodgers, book cookers) • No relationship between CEO pay and firm stock performance War Profiteers: CEOs of Defense Contractors Score Big Pay Increases • Defense CEO pay up 200% since 9/11, compared to 7% for other CEOs • Defense CEO mean pay of $11.6 m far exceeds $433k benchmark allowed under government contract Have these large defense contractors done a good job in the war effort ? Do they bear great responsibilities ? Do they take great risks ? Some Examples of War Profiteers • DHB Industries – maker of faulty armored vests; CEO pockets $70m in pay + $186m stock sales • Halliburton - $1.4b in “questionable” or unsupported charges; CEO earned $11.4m in 2004, up from $4.2m in 2003 • United Technologies – Air Force cancels Comanche helicopter; CEO earns $88m • CACI – scandal over employees involved in Abu Ghraib; CEO pay jumps 170% CEO Pay Trends Ratio of CEO Pay to Average Production Worker Pay 600 500 400 300 200 100 0 1990 2000 2004 How does this compare to other economic indicators ? S & P 500 ? Corporate profits ? Minimum wage ? CEO Pay Trends – cont’d. • Firms with the largest under-funded pension plans pay their CEOs 70% more than other large firms • Large firms that avoided paying federal corporate taxes paid their CEOs 12% more than other large firms • Large firms forced to restate earnings or accused of “cooking the books” paid their CEOs 70% more than other large firms. • Stock portfolio based on highest paid CEOs would have lost money since 1990 Which of these seem most disturbing to you ? Reducing the CEO Pay Gap: Proposed Congressional Actions • Limit CEO pay for proposed $15m bailout of airline industry • Define “reasonable business expense” at less than 25 times pay of lowest full-time employee • Limit deductibility of executive pay and perks if corporate pensions are under-funded • Limit deductibility of stock-based pay if overly concentrated in the hands of a few employees Which, if any, seem appropriate to you ? Reducing the CEO Pay Gap: Proposed SEC Actions • Foster competitive corporate board elections • Increase shareholder participation in governance of executive compensation Why have these initiatives failed to gain ground ? Are the examples of voluntary corporate actions compelling ? • “I didn’t do it alone award” (Best Buy CEO, Anderson) • “Horatio ratio award” (Whole Foods Markets) • “shared sacrifice award” (no winners) CEO Compensation: Some Final Thoughts Do the trends in CEO compensation violate your sense of fairness ? Can these trends be blamed on our capitalist economy / society ? Which of the proposed remedies, if any, would you like to see advanced ? Is this reading too “left-winged” to be credible ?
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