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CEO Compensation |
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Jade Duan |
5/12/2012 |
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INTRODUCTION
Over the past a few decades, executive pay has risen dramatically in the United States. As of 1960, the average CEO at a large corporation made approximately $190,000 (equivalent to approximately $1.3 million today). The 1990s saw one of the greatest wealth transfers in history, as CEO pay skyrocketed. S&P companies CEO pay went from 1993 average of $3.7 to $17.4 million in 2000 [1]. In 2010 the highest paid CEO was Viacom's Philippe P. Dauman at $84.5 million in 9 months [2]. Motorola CEO, Sanjay Jha, pay package rose to $47 million in 2011, almost four times of his 2010 pay about $13 million [3]. As ...view middle of the document...
Americans are not necessarily opposed CEO’s paycheck, as long as it is pay for performance, as Minow has often said, somebody, someday, might decide to overpay them. But injustice is another matter; the nation’s ongoing financial crisis has provided numerous occasions for public fury. In late 2008, the federal government committed more than a hundred and seventy billion dollars to rescuing the insurance giant American International Group. Yet during the bailout A.I.G. paid a hundred and sixty-five million dollars in bonuses to employees in its financial-services division. “How do they justify this outrage to the taxpayers who are keeping the company afloat?” as President Obama ask publicly. Highly paid executives at other resuscitated corporations have displayed a similar determination to disconnect their personal financial health from that of the companies they guided into disaster [5]. In July 2009, Andrew Cuomo, New York’s attorney general, issued a report called “No Rhyme or Reason,” in which he observed that in 2008, Citigroup and Merrill Lynch lost fifty-five billion dollars between them and received fifty-five billion in general bailouts, yet paid nine billion dollars in bonuses [6].
Now the question is how much is too much and what can we do to correct the overpaying situation?
ANALYSIS
In this section, I am going to start with CEO compensation definition and CEO compensation determination process, followed by the views of Compensation from four perspectives: (1) tax; (2) legal; (3) SEC disclosure rules; and (4) shareholder activism, and discuss the potential issues along with case analyses.
CEO compensation definition [7]
Executive pay (also executive compensation), is financial compensation received by executives of a firm. It is typically a mixture of salary, bonuses, shares of and/or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance. As an important part of corporate governance, CEO pay is often determined by a company's board of directors. In a modern corporation, the CEO and other top executives are often paid in six basic tools of compensation or remuneration:
* salary
* short term incentives (STIs), sometimes known as bonuses
* Long –term incentive plans (LTIP)
* Employee benefits
* paid expenses (perquisites)
* insurance (Golden parachute)
Who decides how much a CEO makes? And what are the issues here?
Cozy Corporate Boards
CEOs of public corporations get paid based on the recommendations of the board of directors. So how do these packages get approved? Corporate boards usually include a subset of the board called the compensation committee. The problem is that many corporate directors (so-called “inside” directors) report to the CEO. So their judgment is not exactly impartial. [8]
The NYSE and NASDAQ now require listed...
