Probing C-level Pay

By Michelle Leder
April 14, 2008

Suddenly, everyone, including the major candidates for President, can’t seem to talk enough about the paychecks that corporate executives receive. That’s especially true when it comes to executives who ran companies involved in the sub-prime mess that’s roiling the American economy.

Last weekend, John McCain criticized both Angelo Mozillo, the founder of sub-prime lender Countrywide Financial and James Cayne, the chairman of the soon-to-be-sold Bear Stearns, calling their pay packages outrageous and unconscionable. On the Democratic side, both Hillary Clinton and Barack Obama have also been highly critical of super-sized paychecks. Indeed, on Friday, Mr. Obama said that, “Some CEOs make more in one day than their workers make in one year.”

And with few exceptions, the current crop of proxy statements that are pouring into the Securities and Exchange Commission are evidence of the major disconnect between the economy and the compensation that C-level executives receive. Yet, a recent study by compensation consulting firm Equilar shows that CEO pay rose a meager 1.3 percent between 2006 and 2007.

So which is it? Are the candidates right and CEO pay is really out of control? Or, is the truth closer to the fact that it’s barely keeping pace with inflation? It’s actually a little of both and it’s up to business journalists, primarily, to avoid falling into the populist trap. That means learning how to navigate a proxy statement and dissecting the various parts of the pay puzzle.

When you do, you’ll see that base salaries – the first column in most summary compensation tables – have remained relatively stable. The next column – typically for the annual bonus – is blank at a growing number of companies, though my personal take is that’s largely due to a matter of semantics in that the old bonus payments are simply being called something else. It’s the other columns in the chart where things really start to get tricky.

Total CEO pay has been rising steadily for years, especially when you include stock options and various other forms of compensation. But one of the reasons it’s such a big story right now – enough to warrant three candidates for the highest office to weigh in on the subject – is because the economy is in such disarray. As a result, it’s very easy to look at someone like former Merrill Lynch CEO Stan O’Neal, who left with $131 million when he “retired” last fall over the investment bank’s growing sub-prime woes, and wag a disapproving finger. But simply wagging a finger won’t help your readers or viewers get a better understanding of the problem. That kind of surface messaging is best left to the politicians.

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism