Executive Compensation Outpaces Earnings

Sometimes the argument about excessive executive compensation founders on the concept of excessive.  For some, the enormous dollar amounts speak for themselves (Stan O'Neil receiving $160 from Merrill Lynch when he stepped down in 2007).   For others, this is not enough. 

Another way of assessing CEO compensation is to look at the increase in the multiple over time, with CEOs today earning something around 400 times the lowest paid worker, up from 50 times in 1980.   Another interesting way to look at the issue is the relationship between pay and earnings increases.  A study by ERI Economic Research Institute shows that executive compensation has increased substantially faster than earnings.  We borrow the following paragraph from the PomTalk:

• According to a new study of 45 randomly selected publicly traded companies by ERI Economic Research Institute and the Wall Street Journal, executive compensation increased 20.5% from a year ago while revenues just grew 2.8%. Specifically, the study found the average top executive received an increase of overall total compensation of more than $3.1 million from the previous year. This is a stark contrast when the study compared to the past 11 years where revenues of U.S. publicly traded companies grew 93% while the highest paid executive’s compensation only increased by 24.7%. The study also found that companies are continuing to shift away from stock options to restricted stock awards. “More corporate boards are tying compensation packages to performance through Incentive Plans, Stock Options, Restricted Stock Awards, and Long Term Incentive Plans,” observed Dr. David Thomsen, Director, ERI Economic Research Institute. For instance, one year ago, the study noted that a company paid its top executive on average $4.16 million in restricted stock, but increased to $5.08 million this month, a surge of 22%. In contrast, the amount designated through stock options has fallen 15.7% from a year ago.

In other words, the amount of compensation is largely disconnected from earnings. 

We have discussed this often on this Blog, the most significant problem with executive compensation is the lack of standards under state law.  Delaware courts will generally uphold any compensation scheme at any amount as long as it was approved by "independent" directors, eliminating fairness from the analysis.  Because Delaware courts do not ensure that these directors are in fact independent, the result is predictable:  Compensation without limits.