NCPA - National Center for Policy Analysis

Higher Executive Pay Benefits Others

February 23, 1998

Companies have increasingly linked executive compensation to stock price performance; analysts say this has motivated CEOs to improve corporate performance, thus improving U.S. companies' competitive advantage.

  • A 1997 Watson Wyatt survey found companies that give stock options to all employees have a total return to shareholders of 19.2 percent vs. 10.7 percent for companies that don't.
  • Companies that give cash incentives also have a much higher return to shareholders.
  • Another Watson Wyatt survey of 438 companies found those with above-median stock ownership among CEOs had a median total return of 22 percent annually.
  • Companies with below-median ownership had a median annual return of 15 percent -- a difference that can mean billions of dollar of increased shareholder value.

Researchers say higher executive compensation creates value for employees and retirees. As stock prices rise, so does the security of pensions and other mutual funds that employees and companies have established for retirement.

In return, CEOs take comparatively little. From 1994 to 1996, the total value of stock owned by American households rose from $5.7 trillion to $8.5 trillion. The CEOs of the 500 largest companies take home far less than 1 percent of that amount.

Source: Ira T. Kay (Watson Wyatt Worldwide), "High CEO Pay Helps the U.S. Economy Thrive," Wall Street Journal, February 23, 1998.


Browse more articles on Economic Issues