Performance Counts In Executives' Pay
February 1, 1998
In the 1980s and 1990s, professional athletes were about the only group in America whose compensation grew faster than that of chief executives (CEOs) of large corporations, say Harvard University researchers Brian Hall and Jeffrey Liebman. But in a working paper for the National Bureau of Economic Research they report that CEOs' pay has become much more sensitive to the performance of corporations than it once was.
Corporate performance -- as measured by stock prices -- is increasingly linked to CEO pay through the use of stock options, which allow executives and other employees to buy a company's stock at below market prices.
Looking at data from large public companies from 1980 through 1994, the researchers report:
- From 1982 to 1994, there was a median real increase in CEO pay of 120 percent -- outpacing that of average workers, who had a real increase of about 7 percent, and that of other highly paid groups excepting professional athletes.
- With an increasingly large percentage of a CEO's compensation coming from stock options, his or her pay is much more sensitive to changes in company value.
- In 1994, for example, a mediocre year for the stock market, almost a quarter of the CEOs surveyed actually lost money as the value of their company stock holding declined.
- Researchers also found the most recent correlation between pay and performance was about three times what it was in the 1980s.
Since the salaries and bonuses CEOs received changed much less in relation to company performance than options to buy stock, the implication is that CEOs should be paid with even more options.
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