More on CEO Pay -- Whose Fault Is It?

OK, I'll say it -- US Chief Executive Officers, as a group, get paid a lot of money. There! Are they worth what they get paid? Some are, some are not. Gee, you're not surprised yet by anything I've said?

My question to you or to anyone else is how did this happen. I heard somewhere this week that back in the 80s, US CEOs had pay roughly equal to 30 times the median pay for US workers. The same person said that multiple is now in the 300s or 400s. Assuming that you think that is too much on average (and I do think it is), is it my fault that it got that way? Is it yours?

Times have changed. Compensation packages have changed. Some executive compensation consultancies found for a while that the best way to get hired was to be able to show that they could get the executives the most money. There was no independence of compensation committees back then, at least it wasn't particularly required.

Again, back in the 80s, how were CEOs paid? For most, they got a base pay and they got a bonus. Some received equity awards or grants, but that was nowhere near as common.

Three things happened:

1. Companies started giving mega-grants.
2. The country at large and the politicians decided CEO and other executive compensation was too high.
3. Congress was smart enough or not to put Section 162(m) (the million pay cap for deductibility) into the Code.

My memory isn't perfect on this one, but this is my blog, so I can write as if it is. The first mega-grant that I remember was paid by The Coca-Cola Company. Mr. Goizueta became the CEO of Coca-Cola in 1980 at the age of 48 and he was a superstar. The Board thought so, the Compensation Committee thought so, shareholders thought so, Wall Street thought so, and competitors thought so. Coca-Cola wanted to lock Mr. Goizueta in and to do so, they gave him an award of 1,000,000 restricted shares. What this meant, roughly speaking, was that if he stuck around for 10 years, he would get one million shares of KO stock which traded around $83 per share at the time. 

That was a lot of money. Wall Street thought that Coca-Cola had made a great decision.  

So, other companies followed suit. Executive compensation consultancies and practices within larger consulting firms actively trained their people on the intricacies of mega-grants. 

Two things happened. The economy plummeted as it does from time to time, and as often happens when the economy plummets, people think that executives make too much money (oftentimes they do). So, Congress "solved" the problem. 

The Fools on the Hill (Capitol Hill) added Section 162(m) to the Code saying that pay for the top five executives in excess of $1 million in a year was generally not deductible on the corporate tax return. But, they put in an exception for certain performance based pay. 

Ah, a loophole! Who woulda thunk it?

In the Internal Revenue Code, where there's a loophole, there's a loop to put through it, and virtually everyone could find this loop. So, CEOs of large companies everywhere suddenly had base pay at or below $1 million and complex performance clauses that could pay them lots of money, especially when the stock market was heading up. 

Finally, the SEC entered the picture. As they refined and further refined the proxy rules for registrant companies, the SEC decided how pay should be defined. So, now, where CEO compensation can decrease significantly if interest rates are high and the stock market is low on the last day of the company's fiscal year, or conversely, compensation can increase because interest rates plummet on December 31 while the stock market hits new highs, different groups have the opportunity to cherry-pick their data.

In any event, according to the data I heard this week, CEO pay is now a multiple of 400 or so of the median worker pay. I don't know where the number came from. I'm not sure that I care because I know that the number is a contrived one. On the other hand, that multiple is too high by anyone's standards.

It's not my fault, though. Is it yours?