This essay examines the growing controversy over excessive CEO compensation in early 2000s corporate America. Drawing on USA Today and Investor Responsibility Research Center data, it documents how top executives continued receiving multimillion-dollar pay packages — including salaries, bonuses, and stock options — even as company share prices fell dramatically, workers were laid off, and corporate profits declined. The paper explores three structural factors that sustain inflated executive pay: the separation of ownership from corporate control, American culture's celebration of wealth, and intense global competition for top executive talent. The author concludes that despite rising shareholder activism and regulatory scrutiny, meaningful reform remains unlikely in the near term.
When Gordon Gekko, in the film Wall Street, told the shareholders of Teldar Paper, "The point is, ladies and gentlemen, that greed — is good. Greed is right. Greed works. Greed clarifies...captures the essence of the evolutionary spirit...and greed will not only save Teldar Paper but that other malfunctioning corporation called the U.S.A.," many corporate executives must have been listening and took it to heart (Wall Street). During the last few years, corporate scandals have remained front-page news and have rocked the foundation of corporate business. Although the glory days are gone for most stockholders, for many CEOs the good times still roll on (Strauss, Hansen).
The high-profile scandals of fraud and executive chicanery have tarnished corporate America. "The sputtering economy and sagging corporate profits pounded stock for a third consecutive year...But when it came to pain and suffering...most CEOs barely felt the downdraft last year" (Strauss, Hansen). Based on an exclusive database analysis by USA Today and the Investor Responsibility Research Center, a corporate-governance watchdog, CEOs running 100 of the biggest companies in the United States pulled in median 2002 compensation of $33.4 million, essentially unchanged from 2001 (Strauss, Hansen). This analysis included "salaries, bonuses, incentive pay, stock awards, gains from exercising stock options and the potential value of stock-option grants" (Strauss, Hansen).
The USA Today and Investor Responsibility Research Center tally revealed several striking findings. CEO salaries and bonuses surged 15% in a year when salaries for rank-and-file workers averaged only 3.2% gains. Instead of stock options, many companies gave CEOs large blocks of restricted shares — less risky equity stakes. Among the 36% of CEOs receiving them, the median value was $2.9 million. More than 90% received fresh stock-option grants, with a median potential value of $23.2 million. Nearly one-third pulled in compensation valued at $50 million or more. Even at companies where pay fell, packages remained large: PepsiCo CEO Steve Reinemund's pay package fell 62%, yet was a still-impressive $76.5 million (Strauss, Hansen).
Critics believe that these enormous pay packages reflect a boardroom culture largely rooted in the now-faded boom of the 1990s, when surging stock prices spawned pay bonanzas (Strauss, Hansen). John Nofsinger, co-author of Infectious Greed: Restoring Confidence in America's Companies, says, "The environment has changed dramatically, so now's the time you'd expect CEOs to lie low. Yet they still have the audacity to ask for more pay and large stock-option grants" (Strauss, Hansen).
Pearl Meyer of Pearl Meyer & Partners, a compensation consulting firm who had been forecasting a sharp drop in executive pay, says, "Now, I'm not so sure. Boards are issuing large equity grants because so many CEOs are holding worthless options" — and big option grants are likely to remain in vogue until regulators require companies to expense them, which would trim corporate profits (Strauss, Hansen). Richard Trumka, treasurer of the AFL-CIO, which sponsors 380 shareholder resolutions, says, "Most CEOs will continue to be way overpaid. It's unfair and discouraging at companies freezing workers' salaries, cutting pensions, and reducing benefits" (Strauss, Hansen).
A few companies have struggled to justify big bonuses and option grants for CEOs, but many have paid regardless. Tenet Healthcare's Jeff Barbakow pulled in $190 million, including $111 million from exercising stock options (Strauss, Hansen). Dwight Schar of home builder NVR received a pay package of $219 million, with $87.3 million from exercising options (Strauss, Hansen).
While Sun Microsystems' stock fell 68%, CEO Scott McNealy realized a $25 million gain from exercising options (Strauss, Hansen). Qualcomm's stock sank nearly 40%, yet Irwin Jacobs gained $61.4 million exercising options; directors also boosted his bonus 33% to $800,000 and issued options worth up to $36 million "in consideration of his leadership" (Strauss, Hansen).
Many corporate boards ignored pay-for-performance guidelines and pre-established growth targets, rewarding CEOs in 2002 simply for managing during a tough economic climate (Strauss, Hansen). Although Compuware's Peter Karmanos was not eligible for a bonus based on the company's financial targets, directors gave him a "special" $700,000 bonus and stock options potentially worth $50 million (Strauss, Hansen). Industrial products maker SPX saw its shares lose 45%, yet the board gave CEO John Blystone stock worth $48.9 million, a $4.1 million bonus, and options worth up to $22.1 million (Strauss, Hansen). Walt Disney shares were off 60% since 2000, yet Michael Eisner received a $5 million bonus. Texas Instruments shares had slumped 80% since 2000, yet Tom Engibous was granted stock options worth $142 million, including a single grant valued at $44 million (Strauss, Hansen).
Even at companies where longtime directors had little personal allegiance to new CEOs, huge compensation packages were awarded. In his first year at the helm, Sam Palmisano oversaw 15,000 layoffs as IBM shares lost 36%, yet directors gave him a $4.5 million bonus and $47 million in stock options (Strauss, Hansen). Less than two years into his tenure as GE's CEO, Jeffrey Immelt received $6.9 million in salary and $43 million in stock options even though GE shares had fallen 39% (Strauss, Hansen).
Tracking data from the AFL-CIO's PayWatch site — which monitors CEO salaries from proxy statement information of companies listed on the Standard & Poor's Super 1,500 Index — revealed that although 1.4 million workers were laid off in 2001 and corporate profits declined 35%, CEOs received a median pay increase of 7%, with average pay reaching $15.5 million (AFL-CIO).
"Three systemic causes of inflated executive compensation"
"Proxy battles and AFL-CIO tracking efforts"
Although directors are coming under more regulatory scrutiny and more heat from shareholders, it is doubtful anything is going to change anytime soon. As they say, old habits die hard.
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