In the United States, the compensation of company executives is distinguished by the forms it takes and its dramatic rise over the past three decades.[2] Within the last 30 years, executive compensation or pay has risen dramatically beyond what can be explained by changes in firm size, performance, and industry classification.[3] This has received a wide range of criticism leveled against it.[4]
The top CEO's compensation increased by 940.3% from 1978 to 2018 in the US. In 2018, the average CEO's compensation from the top 350 US firms was $17.2 million. The typical worker's annual compensation grew just 11.9% within the same period.[5] It is the highest in the world in both absolute terms and relative to the median salary in the US.[6][7]
It has been criticized not only as excessive but also for "rewarding failure"[8]—including massive drops in stock price,[9] and much of the national growth in income inequality.[10] Observers differ as to how much of the rise and nature of this compensation is a natural result of competition for scarce business talent benefiting stockholder value, and how much is the work of manipulation and self-dealing by management unrelated to supply, demand, or reward for performance.[11][12] Federal laws and Securities and Exchange Commission (SEC) regulations have been developed on compensation for top senior executives in the last few decades,[13] including a $1 million limit on the tax deductibility of compensation[14][15] not "performance-based", and a requirement to include the dollar value of compensation in a standardized form in annual public filings of the corporation.[16][17][18]
While an executive may be any corporate "officer"—including the president, vice president, or other upper-level managers—in any company, the source of most comment and controversy is the pay of chief executive officers (CEOs) (and to a lesser extent the other top-five highest-paid executives[19][20][21]) of large publicly traded firms.
Most of the private sector economy in the United States is made up of such firms where management and ownership are separate, and there are no controllingshareholders. This separation of those who run a company from those who directly benefit from its earnings, create what economists call a "principal–agent problem", where upper-management (the "agent") has different interests, and considerably more information to pursue those interests, than shareholders (the "principals").[22] This "problem" may interfere with the ideal of management pay set by "arm's length" negotiation between the executive attempting to get the best possible deal for him/her self, and the board of directors seeking a deal that best serves the shareholders,[23] rewarding executive performance without costing too much. The compensation is typically a mixture of salary, bonuses, equity compensation (stock options, etc.), benefits, and perquisites. It has often had surprising amounts of deferred compensation and pension payments, and unique features such as executive loans (now banned), and post-retirement benefits, and guaranteed consulting fees.[24]
The compensation awarded to executives of publicly-traded companies differs from that awarded to executives of privately held companies. "The most basic differences between the two types of businesses include the lack of publicly traded stock as a compensation vehicle and the absence of public shareholders as stakeholders in private firms."[25] The compensation of senior executives at publicly traded companies is also subject to certain regulatory requirements, such as public disclosures to the U.S. Securities and Exchange Commission.[26]
^Bebchuk, Lucian; Grinstein, Yaniv (April 2005). "The Growth of Executive Pay"(PDF). Harvard University: John M. Olin Center for Law, Economics and Business.
Paul Krugman (Nobel Prize-winning economist): "Today the idea that huge paychecks are part of a beneficial system in which executives are given an incentive to perform well has become something of a sick joke." (Krugman's book),
Peter Drucker (noted management consultant). "Peter Drucker had an intense loathing of exorbitant executive salaries." businessweek,
Warren Buffett (successful billionaire investor) who said in one investor letter: "Getting fired can produce a particularly bountiful payday for a CEO, Indeed, he can 'earn' more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure." (Berkshire Hathaway Inc. 2005 Annual Report p.16)
^In 2007, while shareholders suffered an 80 per cent decline in share value, CEO of Countrywide Financial Angelo Mozilo made more than $520 million. Executive Decisions By Nell Minow, tnr.com, 8 February 2012
^Cassidy, John (March 31, 2014). "Forces of Divergence Is surging inequality endemic to capitalism? (review of Capital in the Twenty-first Century by Thomas Piketty)". New Yorker. Retrieved March 31, 2014. The main factor, he insists, is that major companies are giving their top executives outlandish pay packages. His research shows that "supermanagers", rather than "superstars", account for up to seventy per cent of the top 0.1 per cent of the income distribution. (In 2010, you needed to earn at least $1.5 million to qualify for this élite group.) Rising income inequality is largely a corporate phenomenon.
^Lucian Bebchuk and Jesse Fried, Pay Without Performance (2004)
^Krugman, Paul, The Conscience of a Liberal, W. W. Norton & Company, 2007, 143–148
^*"In their annual public filings, firms must publish compensation tables indicating the dollar value of different forms of compensation received by the current CEO and the four other most highly paid executives of the firm. The numbers in these tables are the most visible indicators of executive compensation in public firms. They are easily accessible to the media and others reading the public filings. (Bebchuk and Fried, Pay Without Performance (2004), p.99)
^"In the annual proxy statement, a company must disclose information concerning the amount and type of compensation paid to its chief executive officer, chief financial officer and the three other most highly compensated executive officers." https://www.sec.gov/answers/execomp.htm
^quote: "Although the CEO is likely to have the most power and influence, in many cases other top executives also have some influence onboard decision making. When executives other than the CEO serve on the board for example ...." (from: Bebchuck and Fried, Pay without Performance, 2004, p.64)
^Bebchuck and Fried, Pay without Performance, 2004, p.9,
^Cite error: The named reference growth was invoked but never defined (see the help page).