Types of Executive Compensation

¶ … Executive Compensation

Sometimes it seems that the salaries executives make at big corporations are entirely out of proportion with the value added to the firm by their being on the payroll. It makes sense that if someone, anyone, makes a certain wage, then they should be making at least that much money for the company. If someone is pumping gas for $7/hr, then he should be pumping at least $7 worth of gas every hour. If someone else is making $30 million/year at a big corporation, then he should be bringing in at least that much revenue, even if only indirectly. If a $30 million/year executive starts programs at the company that make $100million, then the $30million the company pays him is well-worth it. The trouble is that it is sometimes hard to decide the degree to which company performance is the result of an exec's contribution.

If we cannot establish with any degree of certainty the relationship between company success and executives' efforts, one thing we can establish with absolute certainty: if the company tanks, it is upper management that takes the blame. Partly for this reason, executive compensation packages can be ridiculously lucrative; execs get lavishly rewarded for good performance so that, if they are wise with what they have earned, they can survive once their reputations have been ruined by a messy dismissal, such as one-time stock market darling Mel Karmazin, sent packing by Viacom just this year (Kadlec, et al., 2004). I would like to spend the balance of this paper discussing some of the ways that execs are compensated.

High-level executives can receive any or all of the following as part of their overall compensation packages: high salaries, large bonuses, generous perquisites, and so-called golden handshakes and parachutes.

If it is lonely at the top, then corporations dry away executive's tears of solitude with heaps of cash and stock options. In 2003, Dow Jones' chairman and CEO William Stavropoulos earned almost $17 million (Plishner, 2004). Rueben Mark, of Colgate Palmolive, made almost $148 million dollars in 2003 (Keep in mind that the President of the United States earns $400,000 annually.

For all practical purposes, a bonus is a one-time increase in annual pay. Michael S. Dell, CEO of Dell, Inc. received a $2.5 million bonus in 2003, and Deere & Co. CEO Robert Lane's compensation package included a bonus of $1.4 million; but the winner last year was Michael Eisner, of Disney, whose 2003 bonus tipped the scales at $6.3 million. In these executive's cases, their directing boards voted to give them these lavish gifts as rewards for such things as increased revenues and rising stock prices. But it works the other way too; Silicon Graphics lost almost $130 million in 2003, and its board of directors voted CEO Robert Bishop's $370,000 bonus into thin air (Lavelle, et all, 2004).

Another form of compensation, perquisites, or "perks" for short, typically includes such benefits as relocation expenses, overseas living differentials, tax "gross-ups," insurance policies, club memberships, and personal use of cars and planes (Plishner, 2004). Calgon Carbon's CEO James Cederma received $1,839,460 in perquisites alone in 2003.

A golden handshake is a form of compensation that can exist at any level within a company. It typically takes the form of special incentives to accept early retirement. More specifically it applies to executives retiring at any age before their contract expires. The largest golden handshake on record (according to Guinness) was served to retiring RJR Nabisco chairman F. Ross Johnson. The amount was $53.8 million.

A golden parachute is a compensation package the company agrees to serve the executive in the event he or she is asked to leave (fired). The details are usually spelled out in the exec's contract with the company. In 1996, when Disney fired then-CEO Michael Ovits he got $90 million in cash and stock options. Jill Barad was paid $50 million in cash and stock options when Mattel fired her (Gray, 2000). Evidently, taking the blame can be a highly lucrative game.

While all of these facts may seem familiar features of American business culture, the tendency to, dare I say it, over-pay top execs is far from limited merely to the United States. In 2003, the rate at which exec's compensation rose in the UK was 8%, which did not compare favorably with pay rate increases for all other levels of employment, which averaged only 4% (Professional Engineering, 2004). Also in the UK, salaries for PCT (primary care trust) executives rose 28% in 2003 alone, even though government agencies suggested a more reasonabl pay increase of 3.6% (Pulse, 2004).