CEO Compensation: Most Overpaid?

By Brandon Clay

“How much do you make?” It’s one of those taboo questions that usually goes unasked during polite dinner conversation. But after a few beers, the vocal chords are often limbered enough to divulge family secrets. Tax return numbers may slip off the tongue. Even so, such private matters are usually not shouted to the whole room. That’s in the real world.

However, in the upper strata of American society, CEOs don’t always enjoy such luxuries. The top executives of publicly-traded companies have their compensation disclosed in SEC filings. And many CEOs make millions upon millions every year. The more money they get paid, the more outcry there is for disclosure.

Through the years executive compensation has taken a few different forms: base salary, bonuses, long-term incentives, perks, and compensation protection (golden parachutes). To make it more complex, the amount of compensation is not always dependent on either the industry or even the size of the company. CEOs in a niche industry can take home multiple millions. Or they could run a successful business and make $558,000 a year – like Costco (COST) CEO James Sinegal. It depends on the company, the board, and sometimes the personality of the CEO.

Another conundrum is the compensation disparity between executives and workers, i.e. the difference between executive pay and worker pay. In 2005, the average CEO earned 262 times the pay of the average worker. In fact, chief executives made more in one workday than the average worker made the entire year. In 1965 the differential was only 24 to 1.

Does it matter for investors? Defenders of high pay point to the supply and demand nature of the executive market. There is simply not enough talent and experience to manage multinational corporations – thus executive pay keeps rising. However, it seems boards who continue to vote for this sort of compensation to CEOs may not be managing company resources as wisely as they could. Investors should take that into account.

Last week CNNMoney.com released a report on the Top 10 Executive Earners in corporate America. Perhaps I’m a tad jealous of their fat wallets, but I was awestruck at these numbers. In addition, we posted the stock price performance in 2008. I’ll let you decide if these guys were overcompensated for their company’s performance.

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Comments

[Weston 448:]

I wonder if it isn't fair to distinguish between "salary" and "dividends". In the case of Schwartzman, e.g., he has quite a modest salary. Maybe $350,000? The vast, vast majority of his "compensation" comes from his ownership of Blackstone units. As it happens, I share in that revenue stream on a pari passu basis on the number of units that I earn.

Aug 19 08:57 AM

[CaroleHutch:]

Brandon,

The report on the Top 10 executive earners you refer to was actually compiled by The Corporate Library, an independent corporate governance research firm that helps investment managers screen equities for governance risk. CNNMoney was reporting on The Corporate Library's "The Top Ten Highest Paid CEOs of 2008" report, which your readers can download here: thecorporatelibrary.we...

Thanks,
Carole Hutchinson
Marketing Manager, The Corporate Library

Aug 19 10:31 AM

[FloridaBoy2:]

Thanks for the article. I have no problem with well paid CEO's but most of them are not worth what they bring home...what they earn should depend on creating shareholder value using honest accounting.

Aug 26 06:16 PM