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Exec's Big $lice Of American Pie

This commentary was written by's Dick Meyer.

Stories about obscenely excessive executive pay offer high titillation value, interesting insights into social anthropology and important arguments about economic fairness. I always read them.

But I have never really considered the whole issue of executive compensation to be of enormous economic consequence because I assumed that in the grand scheme of corporate cash flow, CEO pay was but a ripple in the river.

I was very wrong.

From 2001 to 2003, the total compensation paid to the top five executives at public corporations totaled 9.8 percent of the total earnings of those companies.

One-tenth of all corporate earnings in America's publicly traded corporations went to paying the top five chiefs on the totem pole. That has economic consequences.

These figures come from a fascinating recent paper

In the 2000 to 2002 period, the top five bosses at public companies took in a stunning 12.8 per cent of corporate earnings. That's a huge slice of the American economy going to a tiny population.

In the 11 year period, that cohort received total compensation of about $351 billion; about $192 billion of that just in 1999-2003. Remember, this is only the top five executives. They might not even be the highest paid people in a company; an investment bank may pay a star trader more than one of the top five executives in the food chain whose compensation must be revealed to the SEC by law.

The authors discovered that pay increases grew in public companies of all sizes and in all sectors. Compensation grew by much more than can be explained by the performance or growth of the companies; pay did not increase because performance increased.

Pay at the top of public corporations grew much more than at the top of other highly paid fields such as law, engineering and accounting.

Compensation in the form of stock and stock options, of course, grew in the 1990s, but there was no corresponding reduction in conventional salaries. This was true of "old-economy companies" and "new-economy companies." Everything grew for the corporate brass (except public approval as measured by public opinion research).

So if compensation grew proportionately way more than corporate performance and the market, what's the explanation?

Bebchuk and Grinstein take this question on from two different perspectives. The first assumes that the corporate directors, who technically determine executive compensation, are focused on the shareholders' interests; the other asserts that directors have reasons to favor executives "within constraints imposed on them by market forces and outsider' reactions."

Among the sensible and plausible hypotheses (put in my simplistic terms) that the authors consider:

  • The bull market did not create such a demand for top execs that directors needed to raise to compensation to retain and attract talent.
  • The increase cannot be explained by companies' increased tendency to hire executives from outside their firms.
  • Executives did not need to be paid proportionately more because they had better options in other businesses or markets.
  • In the 1990s, stock options became more popular, supposedly as a way to give executives better incentives to perform — if they performed well, so did the stock price and they would get more money. Did the growing use of incentive-based compensation release "political constraints" on pay levels that were too low to motivate CEOs to improve shareholder wealth? Did shareholders become more willing to accept big pay if it was attached to the idea that their interests coincided with top executives? No, if that were true directors would not have increased regular salaries for execs just as much as they did equity compensation. Further, the way stock-options were used generally did not provide an efficient means to gives management incentives from the shareholders perspective.
  • Did directors simply not understand the full cost of stock option-compensation to companies? Maybe. Since companies could and did use options without accounting for them as cash outlays, even though they did cost the companies cash, directors were "overly willing to grant them." Did directors actually not understand those costs? The authors seem to think that is unlikely.
  • Did the bull market of the 1990s simply overpower the "outrage constraint"? Did the overall performance of the market give managers and boards new freedom to boost manager pay without irritating outside constituencies? Yes and no: yes this was a factor, but executive pay went up more in this bull market, far more than in other bull markets. So it's a partial explanation at the very best.
  • Did managers use the new popularity of incentive-based pay to hoodwink directors into increasing equity payments, usually flawed as efficient incentive engines, while also still increasing performance-insensitive salaries? Well, it sort of looks that way.

    Somehow, some combination of factors allowed directors, managers and large institutional investors to preside over compensation arrangement that gave top managers an amazing 13 percent of corporate earnings at the peak.

    I would love to see how sociologists would study this phenomenon. What variables would they look at? Did the percentage of top-five executives and directors who had been in World War II decline abruptly in the 1990s? Did the percentage of MBAs rise? Is there a culture of greed that could be empirically measured?

    Many people have a direct financial interest in how executives are compensated and how well corporations perform — directors, institutional investors, large private investors, small investors, employees, trade unions and competitors. It should be and is a highly scrutinized part of the economy. Yet it got totally out of whack — on the macroeconomic level, not just on the Tyco and Enron level.

    It is interesting to keep that lesson in mind as the debate continues about how to regulate the behavior of government leadership in giving itself reward — by the gifts from lobbyists, pay or incumbency advantages. For all the press scrutiny that Congress gets, there are no deep-pocketed, self-interested constituencies equivalent to, say, institutional investors or competitors. There is no enforcement and disclosure agency equivalent to the Securities and Exchange Commission. There is nothing like a board of directors.

    In this light, congressional behavior and compensation does seem difficult to regulate. Perhaps the reformers need to hire some economists. Or not.

    Dick Meyer, formerly a political and investigative producer for CBS News, is now the editorial director of, based in Washington.

    E-mail questions, comments, complaints, arguments and ideas to
    Against the Grain. We will publish some of the interesting (and civil) ones, sometimes in edited form.

    By Dick Meyer

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