Top executives argue that looking only at their base salary gives a misleading picture.
Few workplace issues are more divisive in America than how much top executives should earn for leading their companies. During the 2000s, chief executive officers made 263 times more than their workers, causing union critics like the AFL-CIO to blast such disparities as unhealthy for society. Defenders of the system respond that a more nuanced picture only emerges after an executive's salary is compared to the returns that they earn for their company.
Compensation Trends
Concerns about executive pay are not new, as Delta College student Russell S. Whelton outlined in his paper,"Effects of CEO Pay on American Society." In 1970, chief executive officers made 11 times more than an average hourly worker, Whelton says. During the 1980s and 1990s, these gaps grew to 42 and 85 times, respectively. By the 2000s, however, CEO pay outpaced workers by 531 times, according to Whelton -- a trend that originated in the United States, independently of any global concerns.
Corporate Rationales
Most CEO compensation comes from stock options, which corporate boards defend as a reward for boosting a company's value, according to Whelton. Boeing used this rationale when it chose James McNerney as its leader in 2005. Although McNerney's six-year contract called for a $62 million salary, the resulting increase in stock -- which created a one-day paper profit of $3 billion -- offset McNerney's earnings, says Whelton. Large salaries can also suggest a vibrant image that attracts new investors' interest.
Public Criticisms
By 2009, CEO pay had declined to 263 times that of an hourly worker. Such margins earned renewed scrutiny following the Wall Street financial bailout -- which led to the federal government setting pay levels for companies getting "exceptional assistance" through its Troubled Assets Relief program. By the end of 2009, companies repaid their obligations by using new shares to raise funds. Banks then paid a record $145 billion in total compensation, according to the AFL-CIO's "Executive PayWatch" analysis.
The Big Picture
From another standpoint, CEOs did not fare as well in 2009 -- which marked the third consecutive year of declining salaries, "Forbes" reported in April 2010. The magazine's ranked Priceline.com CEO Jeffrey H. Boyd as its top performer. Boyd made $2.9 million per year, yet delivered a 49 percent return to shareholders. By contrast, Omnicare CEO Joel F. Gemunder earned $14 million per year, while his company generated a negative six percent return -- making him the bottom-ranked performer.
Wall Street Pushes Back
Companies are pushing back against public criticism, particularly over the "say on pay" component of the Dodd-Frank financial overhaul package. This measure took effect in January 2011, and was meant to allow shareholders a vote on executive pay, according to "The Wall Street Journal." Companies have argued the measure gives too much weight to proxy-advisory firms, who earn subscriber fees from small institutional investors that do little of their own corporate governance research, the newspaper stated.
