» Examples of Large Executive Compensation in the US
» Nothing Succeeds Like Failure
» Corporate Governance Issues
» Average US CEO Compensation 1
» World-Wide CEO Compensation
» Average US CEO Compensation 2
» Ratio: CEO and Worker Pay 1
» Ratio: CEO and Worker Pay 2
» Ratio: CEO Pay and Minimum Wage
Updated February 8, 2007
Good CEO's deserve adequate compensation. However, Warren Buffett, chairman of Berkshire Hathaway, says that the ability of corporations to rein in skyrocketing CEO pay is the "acid test" of corporate governance reform.
Examples of Large Executive Compensation in the US
On January 3, 2007, chairman and CEO of Home Depot Inc. Bob Nardelli's severance package was $210 million.
InterActive Corporation (IAC) chairman and CEO Barry Diller's 2006 compensation was $295 million. (Also see our article CEO calls Corporate Governance Researchers Birdbrains!)
David H. Brooks, chairman and CEO of DHB Industries made over $250 million as DHB profited from supplying bullet-proof vests to US Marines in Iraq despite 5,000 vests being returned as ineffective in May 2005. His base salary of $70 million in 2004 was 13,000% more than his 2001 compensation of $525,000. In 2004, Brooks sold company stock worth about $186 million, initiating a drop in DHB’s share price from more than $22 to $6.50, after which he was put on "administrative leave".
Exxon Mobil's chairman and CEO, Lee Raymond's 2006 retirement package was about $400 million.
The CEOs in the examples above also held the position of chairman of the board of directors, a board which must according to fundamental corporate governance principles - and often by law - fulfill their fiduciary duties, monitor the performance of the CEO, hold the CEO accountable, represent the interests of the shareholders in the boardroom, and act in the best interests of the corporation's shareholders.
Lucian Bebchuk and Yaniv Grinstein of the Harvard Law School write in their paper The Growth of Executive Pay that during the period 1993-2003, executive pay "has grown much beyond the increase that could be explained by changes in firm size, performance and industry classification."
According to United for a Fair Economy and Institute for Policy Studies: "If the minimum wage had risen as fast as CEO pay since 1990, the lowest paid workers in the US would be earning $23.03 an hour today (2006), not $5.15 an hour."
Nothing Succeeds Like Failure
Warren Buffett, chairman of Berkshire Hathaway, has said that the ability of corporations to rein in skyrocketing CEO pay is the "acid test" of corporate governance reform. In a shareholder report dated February 28, 2006, he states, "Too often, executive compensation in the U.S. is ridiculously out of line with performance." "Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure."
Much to the dismay of some shareholders, Hank McKinnell, former Pfizer CEO, retired with an $83 million retirement package in July 2006. During his tenure, which started in 2001, Pfizer's stock fell more than 40 percent. Pfizer's new CEO, Jeffrey Kindler, who also became its chairman in December 2006, said that Pfizer need to transform its business methods. On January 22, 2007, Pfizer announced that will cut 10,000 jobs in order to save $2 billion in costs.
Corporate Governance Issues
In a May 2004 letter to shareholders, Warren Buffett wrote about the inadequacy of corporate governance structures among U.S. companies. "(If) Corporate America is serious about reforming itself, CEO pay remains the acid test," Buffett added "The results aren't encouraging." Buffett criticized lavish pay packages and the "lapdog behavior" of directors, calling the situation an "epidemic of greed."
At the 2004 AGM of Berkshire Hathaway, Warren Buffett, Chair, and Charles Munger, Vice Chair, strongly criticized the board process used to determine executive compensation. "The typical large company has a compensation committee," said Buffett. "They don't look for Dobermans on that committee, they look for Chihuahuas..., Chihuahuas that have been sedated."
The issue of skyrocketing CEO compensation has raised various corporate governance questions:
• Are large CEO compensation packages in the best interests of the shareholders?
• Are all sources of CEO and executive income, benefits and perks clearly reported and segregated rather than buried in other items in financial statements?
• Do boards of directors appoint the auditors and hold the auditors accountable or are the auditors beholden to the CEO and management?
• Is the lack of monitoring, accountability and control on the part of boards of directors as exemplified by the Enron and WorldCom scandals an exception or the norm in boardrooms today?
• Is the norm that CEOs appoint directors or is it the norm that shareholders nominate, appoint and hold boards accountable?
• Is there a fundamental conflict of interest for the CEO of a public organization to also be its chairman?
• Is it a conflict of interest for any executive to be a director on the board of a public corporation? Is it preferable for the CEO and other executives to attend board meetings in an ex-officio capacity with no voting powers (and where the ability to vote arises from the franchise exercised by shareholders who elect their representatives to sit on the board)?
Average Compensation of CEOs of 367 US Firms
Average Compensation of CEOs of 367 US Firms
2004 - $11.8 million*
2003 - $8.1 million
1990 - $2.0 million
The 590% increase in CEO compensation from 1990 to 2004 far outstripped the increase in performance in the stock market, inflation, employee wages or the minimum wage.
*This average rises considerably when then number of top corporations is reduced to say the top 100 corporations.
Average World-Wide CEO Compensation as a Multiple of Average Employee Compensation in 2000
|Country ||Year 2000 CEO compensation as a multiple of average employee compensation* |
Source: Towers Perrin & Finfacts
(*Employee compensation used to calculate these averages were those working in industrial companies with about $500 million in annual sales.)
Average US CEO Compensation as a Multiple of Average Employee Compensation 1980-2000
In 2000, CEOs at 365 of the largest publicly traded U.S. companies earned $13.1 million on average, or 531 times what the typical hourly employee took home. (Source Finfacts)
2000 - 531 times the average employee's wages
1990 - 85
1980 - 42
The Ratio of Average CEO and Worker Pay in the US
2004: 431-to-1 (Av CEO-$11.8 million/Worker-$27,460)
Source: United for a Fair Economy and Institute for Policy Studies
The Ratio of Average CEO compensation and Worker Pay in the US 1965-2005
2005 - 262:1 (Av. CEO-$10,982,000/Av. Worker- $41,861)
2004 - 238:1
2003 - 181:1
2002 - 143:1
2000 - 300:1
1989 - 71:1
1978 - 35:1
1965 - 24:1
Source: Mercer Survey of 350 large industrial and service firms conducted for the Wall Street Journal as reported by Mishel, Bernstein, Allegretto
The Ratio of Average CEO compensation and Minimum Wage Worker in the US 1965-2005
2005 - 821:1 (Worker- Minimum wage $5.15/hr plus benefits)
2004 - 725:1
2003 - 540:1
2002 - 416:1
2001 - 668:1
2000 - 815:1
1992 - 319:1
1989 - 207:1
1978 - 78:1
1965 - 51:1
Source: Mercer Survey of 350 large industrial and service firms conducted for the Wall Street Journal