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 (NASDAQ: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.