Are CEOs worth the millions in compensation they receive?

Executive Summary

CEOs of some of the largest U.S. companies are paid more than $100 million a year in salary, bonuses, stock and stock options. Stockholders who participate in votes on these pay packages almost always back them, although the occasional company faces resistance. Some analysts say CEO pay levels—which can be hundreds of times higher than those of rank-and-file employees, and don't always reflect company performance—are simply a result of the free market. Others say the system for setting pay is broken. Some of the key issues under debate: Is CEO compensation too high? Are “say-on-pay” votes affecting compensation? Is it a good idea to tie CEO compensation to company performance?

Resources

Bibliography

Books

Dorff, Michael B., “Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It,” University of California Press, 2014. A professor at Southwestern Law School argues performance-based executive pay has not improved corporate performance.

Markham, Jerry W., “A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform,” Routledge, 2015. A professor at Florida International University College of Law recounts the collapse of Enron Corp. and other 21st-century financial scandals.

Thomas, Randall S., and Jennifer G. Hill, eds., “Research Handbook on Executive Compensation,” Edward Elgar, 2012. Top scholars contribute essays on executive compensation, assessing research in the field.

Articles

Cahill, Joe, “Caterpillar shareholders speak. Directors should listen,” Crain's Chicago Business, June 13, 2015, http://tinyurl.com/qyj7h9z. One-third of Caterpillar shareholders vote against the executive compensation program.

Gelles, David, “For the Highest-Paid C.E.O.s, the Party Goes On,” The New York Times, May 16, 2015, http://tinyurl.com/k7xbl3g. The highest-paid CEOs still make out well—as much as $156 million in total compensation.

Goldman, David, “Marissa Mayer docked $13 million and still made $42 million,” CNNMoney, April 30, 2015, http://tinyurl.com/nakejbx. Yahoo's female CEO breaks into the top 15 highest-paid CEOs even though her company did not meet its goals in 2014.

Hiltzik, Michael, “JPMorgan's Jamie Dimon is fed up with you ‘lazy’ investors voting against him,” Los Angeles Times, May 29, 2015, http://tinyurl.com/o98dqf2. A bank CEO accuses investors of lazily relying on advisory firms to tell them how to cast their votes on executive pay.

Morgenson, Gretchen, “Shareholders' Votes Have Done Little to Curb Lavish Executive Pay,” The New York Times, May 16, 2015, http://tinyurl.com/lhtv9pa. Say-on-pay voting has not curbed rising CEO pay despite the Dodd-Frank Act, which required companies to put their compensation plans to nonbinding shareholder votes.

Rothwell, Steve, “The top 10 highest-paid female CEOs,” The Associated Press, May 29, 2015, http://tinyurl.com/qym3mov. Among large companies, the median female CEO makes more than the median male CEO.

Reports and Studies

“Report of the NACD Blue Ribbon Commission on the Compensation Committee — Executive Summary,” National Association of Corporate Directors, June 9, 2015, http://tinyurl.com/nkynq22. A membership association of corporate directors makes recommendations for setting CEO pay. For example, boards should take peer group compensation into account only at the end of the executive compensation-setting process.

“200 Highest-Paid CEO Rankings,” Equilar, May 16, 2015, http://tinyurl.com/ozphcn7. A research firm tabulates the 200 highest-paid CEOs in 2014, with David Zaslav of Discovery Communications coming in first at $156.1 million.

Frydman, Carola, and Raven E. Saks, “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005,” The Review of Financial Studies, Feb. 2, 2010, http://tinyurl.com/pdg8wnc. Academic researchers analyze the long-run trends in CEO pay.

Mishel, Lawrence, and Alyssa Davis, “Top CEOs Make 300 Times More than Typical Workers,” Economic Policy Institute, June 21, 2015, http://tinyurl.com/n9egga9. A liberal policy group calculates the ratio of CEO pay to the typical worker and says that chief executives at the largest firms earn at least 10 times more than they did 30 years ago.

Murphy, Kevin J., “Executive Compensation: Where We Are, and How We Got There,” Social Science Research Network, Aug. 12, 2012, http://tinyurl.com/pzl5dvg. A professor of finance and business economics at the University of Southern California traces the evolution of CEO pay.

The Next Step

Compensation

Gavett, Gretchen, “Is Your CEO's High Salary Scaring Away Customers?” Harvard Business Review, June 4, 2015, http://tinyurl.com/psxgnp9. Consumers favor companies with fair and transparent CEO-to-worker pay ratios, according to researchers at the Harvard Business School.

Hamilton, Jesse, “Fannie, Freddie CEOs Get Pay Raises as White House Objects,” Bloomberg Business, July 1, 2015, http://tinyurl.com/ojxoq5v. The CEOs of Fannie Mae and Freddie Mac may receive pay raises, but the Obama administration advises directors to continue limited compensation plans.

Melin, Anders, “How Companies Justify Big Pay Raises for CEOs,” Bloomberg Business, June 4, 2015, http://tinyurl.com/pjn3wz9. When deciding pay for senior executives, directors attempt to match the compensation programs of “peer” companies.

Pay and Performance

Canipe, Chris, and Sarah Slobin, “CEO Pay vs. Performance,” The Wall Street Journal, June 24, 2015, http://tinyurl.com/pbndr6o. Executives of companies with weak shareholder returns in 2014 were still highly compensated, with some even receiving raises.

Delevingne, Lawrence, “Wall Street CEO pay vs. shareholder gains: Who won?” CNBC, May 28, 2015, http://tinyurl.com/o64og7g. A new ranking by recruitment firm Charles Skorina & Co. aligns CEO pay with stock performance, as will be required under the Dodd-Frank Act.

Gordon, Sarah, “Top managers' pay reveals weak link to value,” Financial Times, Dec. 28, 2014, http://tinyurl.com/pxtv97s. Studies at the Chartered Financial Analyst Society of the United Kingdom and Lancaster Business School show a weak correlation between CEO compensation and company performance.

Pay Ratios

Kerber, Ross, “U.S. pay gap also problematic in C-Suite,” Reuters, June 19, 2015, http://tinyurl.com/o95kr8y. After the financial crisis, a larger percentage of CEO compensation was delivered in the form of stock awards, leading to greater pay disparities between CEOs and executives.

Morgenson, Gretchen, “Despite Federal Regulation, C.E.O.-Worker Pay Gap Data Remains Hidden,” The New York Times, April 10, 2015, http://tinyurl.com/m9sfomm. In 2013, the Securities and Exchange Commission proposed a regulation requiring companies to disclose CEO pay ratios, but the rule met opposition and is in limbo.

Rudegeair, Peter, “Pay Gap Between Wall Street CEOs and Employees Narrows,” The Wall Street Journal, April 5, 2015, http://tinyurl.com/ps38q7x. At the five biggest Wall Street firms, workers' paychecks reached new highs in 2014 while the firms' CEOs are earning less in the wake of the 2008 financial crisis.

Say-on-Pay

Shecter, Barbara, “Canadian shareholders increasingly aggressive on ‘say-on-pay,’” Financial Post, May 1, 2015, http://tinyurl.com/ntdjw85. Canadian shareholders have begun to challenge the pay practices of major companies, following U.S. strategies for the “say-on-pay” movement.

Syre, Steven, “Nuance Communications one of nine US companies to flunk 'say on pay,'” The Boston Globe, May 19, 2015, http://tinyurl.com/nonu64j. One of nine companies to fail the “say-on-pay” vote has lost the support of stockholders, after the CEO received a pay raise while the company's stock was losing value.

Waters, Richard, “Salesforce shareholders protest vote against Benioff pay deal,” Financial Times, June 10, 2015, http://tinyurl.com/nf99hqu. A growing number of investors criticize the compensation awarded to the CEO of cloud software company Salesforce.

Organizations

AFL-CIO
815 16th St., N.W., Washington, D.C. 20006
202-637-5000
www.aflcio.org
Umbrella federation for 56 U.S. unions that monitors corporate governance.

Center on Executive Compensation
1100 13th St., N.W., Suite 850, Washington, DC 20005
202-408-8181
www.execcomp.org
Represents human resources executives at large U.S. companies on executive compensation issues.

Corporate Governance Research Initiative
Stanford University, 655 Knight Way, Stanford, CA 94305
650-723-2146
www.gsb.stanford.edu/faculty-research/centers-initiatives/cgri
University institute that conducts research on corporate governance.

Economic Policy Institute
1333 H St., N.W., Suite 300, East Tower, Washington, DC 20005
202-775-8810
www.epi.org
Think tank that researches the economic status of low- and middle-income workers.

Equilar
1100 Marshall St., Redwood City, CA 94063
877-441-6090
www.equilar.com
Private firm that compiles executive compensation data for clients, including companies and institutional investors.

Institutional Shareholder Services
702 King Farm Blvd., Suite 400, Rockville, MD 20850-4045
301-556-0570
www.issgovernance.com
Private firm that provides research to institutional investors and corporations; advises investors on proxy voting.

John L. Weinberg Center for Corporate Governance
University of Delaware, 303 Alfred Lerner Hall, Newark, DE 19716
302-831-6157
www.lerner.udel.edu/centers/weinberg
Academic center that conducts research and holds forums on corporate governance.

National Association of Corporate Directors
2001 Pennsylvania Ave., N.W., Suite 500, Washington, DC 20006
202-775-0509
www.nacdonline.org
Membership organization of more than 15,000 corporate directors; conducts research and runs education programs.

Securities and Exchange Commission
100 F St., N.E., Washington, DC 20549
202-942-8088
www.sec.gov
Federal agency that requires public companies to disclose meaningful financial and other information; also regulates securities exchanges, securities brokers and dealers, investment advisers and mutual funds.

DOI: 10.1177/2374556815598978