An Introduction to Executive Compensation
This text analyzes package elements and, drawing upon practitioner and academic literature, leads readers through the development of optimal plans under varying circumstances.
TABLE OF CONTENTS An Introduction to Executive Compensation
Part IV: Considerations in Designing the Executive Compensation Package
- Chapter 10: Is Executive Compensation Really That High?
- Chapter 11: The Effect of Corporate and Executive Characteristics on Designing an Optimal Compensation Contract
- Chapter 12: Designing a Compensation Contract
I. INTRODUCTION
After a decade of seemingly limitless pay increases, the average compensation for chief executives shot up an additional 23 percent, to $11.9 million, last year. Valuing stock options in the most widely used way, a chief executive now makes more in a single day than the typical American worker does in a year. [1]
Implicit in the above statistic is the argument that American CEOs are overpaid. In reality, whether CEOs are overpaid depends on how the issue is framed. When framed as above, that is as a multiple of blue-collar worker pay, it does appear CEOs are overpaid. The amounts involved are high by most people's standards. However, more interesting is how the amounts compare to corporate profits, dividends, or increases in shareholder wealth, which may be considered surrogates for the value of the CEO to the corporation.
A. CEO Compensation Relative to Corporate Profits
In 2000, James Maguire, Chairman and Chief Executive Officer of Philadelphia Consolidated, realized $64,406,900 in profits from the exercise of stock options, [2] in a year where the company earned $30,770,000, [3] less than half that amount.
Although these options had been awarded in previous years, and hence would not be considered compensation for the current year, this gain does seem disproportionately large. However, this is only one company.
Tables 10.1,...
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