Um guia para CEO Compensação É difícil ler a notícia de negócios sem se deparar com relatórios sobre os salários, bônus e pacotes de opções de ações atribuídas a executivos-chefe de empresas de capital aberto. Fazendo sentido dos números para avaliar como as empresas estão pagando o seu top brass isnt sempre fácil. É a compensação executiva trabalhando a favor dos investidores Aqui estão algumas diretrizes para verificar um programa de compensação da empresa. Risco e recompensa Os conselhos da empresa, pelo menos em princípio, tentam usar contratos de compensação para alinhar as ações dos executivos com o sucesso da empresa. A idéia é que o desempenho do CEO fornece valor para a organização. Pagar pelo desempenho é o mantra que a maioria das empresas usa quando tenta explicar seus planos de compensação. Embora todos possam apoiar a idéia de pagar pelo desempenho, isso implica que os CEOs assumem riscos: as fortunas dos CEOs devem subir e descer com as fortunas das empresas. Quando você está olhando para um programa de compensação da empresa, vale a pena verificar para ver o quanto os executivos da estaca têm na entrega dos bens para os investidores. Vamos dar uma olhada em como diferentes formas de compensação colocar uma recompensa CEOs em risco se o desempenho é ruim. (Para mais sobre isto, verifique Avaliando Remuneração Executiva.) Salários de Caixa / Base Hoje em dia, é comum que os CEOs recebam salários base bem acima de 1 milhão. Em outras palavras, o CEO recebe uma excelente recompensa quando a empresa faz bem, mas ainda recebe a recompensa quando a empresa faz mal. Por conta própria, os salários de base grandes oferecem pouco incentivo para que os executivos trabalhem mais e tomem decisões inteligentes. Bônus Tenha cuidado com os bônus. Em muitos casos, um bônus anual não é mais do que um salário base disfarçado. Um CEO com um salário de 1 milhão também pode receber um bônus de 700.000. Se algum desse bônus, digamos 500.000, não varia com o desempenho, então o salário real CEOs é de 1,5 milhões. Bônus que variam com o desempenho são outra questão. É difícil discutir com a idéia de que CEOs que sabem theyll ser recompensado por desempenho tendem a realizar a um nível superior. CEOs têm um incentivo para trabalhar duro. Desempenho pode ser medido por qualquer número de coisas, como lucros ou crescimento de receita, retorno sobre o patrimônio líquido. Ou valorização do preço das acções. Mas usar medidas simples para determinar o pagamento adequado para o desempenho pode ser complicado. Métricas financeiras e ganhos anuais de preço das ações nem sempre são uma medida justa de quão bem um executivo está fazendo seu trabalho. Executivos podem ser injustamente penalizados por eventos únicos e escolhas difíceis que possam prejudicar o desempenho ou causar reações negativas do mercado. Cabe ao conselho de administração criar um conjunto equilibrado de medidas para julgar a eficácia dos CEOs. (Saiba mais sobre como avaliar o desempenho dos CEOs na avaliação de um gerenciamento da empresa.) Opções de ações As empresas proclamam opções de ações como forma de vincular os executivos com os interesses dos acionistas. Mas as opções estão longe de ser perfeito. Na verdade, com opções, o risco pode ficar muito distorcido. Quando as ações sobem em valor, os executivos podem fazer fortuna com opções - mas quando caem, os investidores perdem enquanto os executivos não estão em pior situação do que antes. De fato, algumas empresas permitem que os executivos troquem antigas ações de opção por novas ações de menor preço quando as ações da empresa caem em valor. Pior ainda, o incentivo para manter o preço das ações em alta para que as opções permaneçam in-the-money incentiva os executivos a se concentrar exclusivamente no próximo trimestre e ignorar os interesses dos acionistas de longo prazo. As opções podem até solicitar que os gerentes superiores manipulem os números para garantir que os objetivos de curto prazo sejam atingidos. Isso dificilmente reforça a ligação entre CEOs e acionistas. Propriedade de ações Estudos acadêmicos dizem que a propriedade de ações ordinárias é o motorista de desempenho mais importante. Assim, uma maneira de os CEOs realmente terem seus interesses ligados aos acionistas é que eles possuam ações, não opções. Idealmente, isso envolve dar bônus executivos com a condição de que eles usam o dinheiro para comprar ações. Enfrentá-lo: os altos executivos agem mais como proprietários quando eles têm uma participação no negócio. (Se você está se perguntando sobre a diferença de ações, confira nosso Tutorial Basics Stocks.) Encontrando os números Você pode encontrar toda uma série de informações sobre um programa de compensação da empresa em seu registro regulatório. Form DEF 14A, apresentado à Securities and Exchange Commission. Fornece tabelas de resumo de compensação para um CEO da empresa e outros executivos mais bem pagos. Ao avaliar o salário base e bônus anual, os investidores gostam de ver as empresas adjudicação de um pedaço maior de compensação como bônus em vez de salário base. A DEF 14A deve oferecer uma explicação de como o bônus é determinado e que forma a recompensa toma, seja dinheiro, opções ou ações. As informações sobre as opções de opções de ações do CEO também podem ser encontradas nas tabelas de resumo. O formulário divulga a freqüência de concessão de opções de ações eo montante de prêmios recebidos por executivos no ano. Ele também divulga re-pricing de opções de ações. A declaração de proxy é onde você pode localizar números em executivos propriedade beneficiária na empresa. Mas não ignore as tabelas que acompanham as notas de rodapé. Lá você vai descobrir quantas dessas ações o executivo realmente possui e quantas são opções não exercidas. Novamente, é reconfortante encontrar executivos com abundância de ações. Conclusão Avaliar compensação CEO é um pouco de uma arte negra. Interpretar os números não é terrivelmente direto. No entanto, é valioso para os investidores para ter uma noção de como programas de compensação pode criar incentivos - ou desincentivos - para os altos gerentes de trabalhar no interesse dos acionistas. Evaluating Compensação Executiva Remuneração executiva é uma coisa muito importante a considerar ao avaliar um investimento oportunidade. Os executivos indevidamente remunerados podem não ter o incentivo para atuar no melhor interesse dos acionistas. Que pode ser oneroso para esses acionistas. Embora novas leis e regulamentos tenham tornado a compensação executiva muito mais clara nos registros de empresas, muitos investidores permanecem sem noção de como encontrar e ler esses relatórios críticos. Este artigo vai dar uma olhada nos diferentes tipos de remuneração dos executivos e como os investidores podem encontrar e avaliar informações de remuneração. Tipos de Compensação Executiva Existem muitas formas diferentes de remuneração de executivos que oferecem uma variedade de benefícios fiscais e incentivos de desempenho. Abaixo estão as formas mais comuns: Compensação em dinheiro Esta é a soma de todas as compensações padrão de salário em dinheiro que o executivo recebe para o ano. Subsídios de Opção Esta é uma lista de todas as opções concedidas ao executivo a informação inclui preços de exercício e datas de expiração. (Para a leitura relacionada, veja a controvérsia sobre a compensação da opção e uma aproximação nova à compensação da equidade.) Compensação diferida Esta é a compensação que é diferida até uma data mais atrasada, tipicamente para finalidades do imposto. No entanto, as mudanças nos regulamentos têm diminuído a popularidade deste tipo de compensação. Planos de Incentivo de Longo Prazo (LTIPs) Os planos de incentivos de longo prazo englobam toda a remuneração vinculada ao desempenho para fins tributários. As leis fiscais atuais favorecem a compensação por desempenho. Pacotes de aposentadoria Estes são pacotes dados aos executivos após se aposentar da empresa. Estes são importantes para assistir porque eles podem conter chamados pára-quedas dourados para executivos corruptos. Perks Executivo Estas são várias outras regalias dadas aos executivos, incluindo o uso de um jato particular, reembolsos de viagens e outras recompensas. Estes são encontrados nas notas de rodapé. (Para saber mais, verifique as notas de rodapé: Comece a ler o Fine Print.) Encontrar compensação executiva Todas as informações sobre remuneração dos executivos podem ser encontradas em registros públicos junto à Securities and Exchange Commission (SEC). A SEC exige que todas as empresas públicas divulguem o quanto estão pagando seus executivos, como esse montante é derivado e quem está envolvido na determinação do pagamento. A informação em si é divulgada em vários locais, incluindo: Formulário 8-K. O arquivamento do evento atual pode ser usado para divulgar informações de compensação se o evento estiver relacionado a mudanças nas políticas e / ou procedimentos de remuneração. Form 10-K. O arquivamento do relatório anual é sempre usado para divulgar informações anuais de remuneração. Form 10-Q. O relatório trimestral também contém informações trimestrais sobre a remuneração. S-1 / S-3. As novas emissões contêm informações de remuneração de executivos relevantes para futuros investidores. Avaliando a remuneração dos executivos A avaliação da remuneração dos executivos pode ser uma tarefa difícil para o investidor individual. Felizmente, existem muitas ferramentas que estão agora disponíveis para tornar o processo muito mais fácil. Essas ferramentas analisam automaticamente os arquivos da SEC para puxar os números e fazer comparações projetadas para dar significado a informações brutas. Pague contra. Desempenho Uma das maneiras mais populares de avaliar a remuneração dos executivos é comparando salário versus desempenho. Infelizmente, muitos executivos recebem aumentos e bônus mesmo quando suas empresas estão vacilando. Comparando o salário ao desempenho do estoque pode ajudá-lo a determinar se os executivos são pagos em excesso. A métrica específica usada com mais freqüência é comparar a variação ano a ano em aumentos de salários de executivos com a mudança ano-a-ano no preço das ações. Obviamente, se a mudança no preço das ações ultrapassar a mudança na remuneração, o executivo não será pago em excesso. Aqui está um exemplo de comparação para Bill Gates. Que foi CEO da Microsofts entre 1975 e 2000 eo arquiteto de software principal da empresa e presidente entre 2000 e 2006: Entre 1998 e 2006, a compensação de Bill Gates é amarrada consideravelmente pròxima ao desempenho total dos companys. Quando a empresa ganha mais dinheiro, Gates recebe mais compensação e vice-versa. Isto é saudável porque fornece executivos com o incentivo para executar bem e aumentar sua riqueza pessoal. As tendências que mostram que os executivos recebem uma taxa mais alta do que o desempenho podem significar uma compensação excessiva pelo desempenho inferior, o que pode prejudicar os investidores em dólares pagos e incentivos para realizar. Comparação entre pares Outra maneira popular de avaliar a remuneração dos executivos é comparar um executivo com os seus colegas do setor. Enquanto os líderes de mercado normalmente têm CEOs que são pagos um pouco mais do que suas indústrias, a maioria dos executivos deve ser pago a par com seus pares. Aqui está o mesmo exemplo acima, exceto que desta vez é uma comparação de pares em vez de pagar vs. desempenho: Aqui podemos ver claramente que Bill Gates fez mais do que o executivo médio em sua indústria durante o período traçado. Às vezes, se o executivo é o fundador da empresa, ou um CEO de classe alta, ele ou ela pode merecer maior remuneração. Porque Bill Gates é tanto um magnata da indústria e fundador da empresa, isso pode explicar sua compensação comparativamente maior. Desvios significativos entre estes dois em CEOs não-fundador padrão podem indicar que eles são pagos em excesso. (Para saber mais sobre como determinar se um executivo é pago em excesso ou bem pago, ver Compensação Executiva: Quanto é demais) Leis de Compensação Executiva Houve muitas novas leis aprovadas para ajudar a satisfazer as preocupações dos investidores sobre a remuneração dos executivos. Mudanças nas exigências de relatórios da SEC forçaram as empresas a incluir uma seção Análise de Amostra de Compensação de Executivos para acompanhar toda a documentação de pagamento futuro em todos os formulários de SEC. Esta seção exige uma explicação legível de como a compensação foi determinada e o que ela abrange. Outras leis têm sido mais diretas em restringir práticas que as próprias empresas usam. Um bom exemplo disto foi a remoção do abrigo imposto de compensação diferida que ajudou muitos executivos a evitar milhões em impostos. Além disso, as melhorias em outras lacunas fiscais tornaram muito mais difícil para os conselhos justificar grandes pagamentos e ocultar esses pagamentos dos investidores. Conclusão A remuneração dos executivos é uma questão muito importante para os investidores a considerar quando tomam decisões. Um executivo indevidamente compensado pode custar dinheiro aos acionistas e pode produzir um executivo que não tem o incentivo para aumentar os lucros e aumentar o preço das ações. Enquanto isso, o governo está trabalhando para conter o problema com novas leis que fecham lacunas e tornam o processo mais transparente. Combinado com novas ferramentas de análise, os investidores estão agora muito mais informados. Compensação executiva CEOs (CEOs) recebem muito dinheiro por ser os principais funcionários da empresa. Por que eles são pagos tanto Como os atletas e atores, os CEOs fornecem um nível de talento que é necessário para produzir o produto desejado - neste caso, uma empresa com forte desempenho. As habilidades e responsabilidades que vêm com o cargo de CEO são extremas eo número de pessoas que podem preencher esses papéis é limitado. É por isso que o mercado determinou que as pessoas com essas habilidades valem muito dinheiro para suas empresas. Apenas cerca de 20 por cento de um CEOs pagar salário base, o resto é composto de incentivos com base no desempenho da empresa. O raciocínio é que se a empresa está se saindo bem e os acionistas estão ganhando dinheiro, então o CEO deve participar desse sucesso. Diretor Executivo Planeja e dirige todos os aspectos das políticas, objetivos e iniciativas de uma organização. Pode exigir um grau de bacharel com pelo menos 15 anos de experiência no campo. Baseia-se na experiência e no julgamento para planejar e realizar metas. Pode presidir o Conselho de Administração. O pagamento do CEO estabelece um teto para a empresa Um pacote de remuneração CEOs afeta todos dentro de uma empresa. Muitas vezes, pode ser considerado o critério pelo qual todos os outros benefícios dos empregados e bônus são medidos e negociados. Além disso, a remuneração dos CEOs pode ser um indicador de quão bem a empresa está se saindo. Esse desempenho, por sua vez, poderia se traduzir em um pacote de remuneração mais generoso para os funcionários individuais que são negociadores experientes. Quando as empresas estabelecem estruturas de remuneração, definem a compensação para os empregos de maior e menor salário antes de preencher a remuneração dos empregos que se encontram entre eles. No método de equidade interna tradicional de estabelecer uma estrutura de pagamento, a compensação de CEOs estabelece um teto para a empresa, e cada nível abaixo é compensado em um nível comparativamente mais baixo. Se você sabe o quão bem o CEO é compensado, você pode ter uma noção de quão generosa a empresa é susceptível de ser para outros funcionários também. CEOs fazem a maior parte de seu dinheiro através de incentivos Como regra geral, o salário base representa apenas 20% do salário de um CEO. Os outros 80% são provenientes do pagamento baseado no desempenho. Base de pagamento para o papel central e as responsabilidades do dia-a-dia da organização. Este montante é muitas vezes inferior a 1 milhão porque o IRS impôs restrições fiscais sobre compensação excessiva. Bônus anuais para cumprimento dos objetivos anuais de desempenho. Pagamentos de incentivo de longo prazo para alcançar os objetivos de desempenho a serem alcançados por um período de dois a cinco anos. Esses prêmios são, às vezes, descritos como ações de desempenho, unidades de desempenho ou incentivos em dinheiro de longo prazo. Prêmios de ações restritas como um incentivo para garantir que os executivos estão fortemente alinhados com os interesses dos acionistas. Como os prêmios de ações restritas têm um valor real quando são concedidos, a tabela de proxy mostra esses valores em dólares, e não em ações. Opções de ações e direitos de valorização de ações (SARs) para aumentar o preço das ações e aumentar os retornos dos acionistas. Opções têm muito favorável tratamento contábil para a empresa, que é por isso que eles são tão comuns. As concessões de opções são sempre apresentadas como um número de ações subjacentes à opção. Em uma tabela subseqüente no proxy é uma estimativa do valor presente de cada concessão de opção assumindo um aumento de 5 por cento e 10 por cento no preço da ação, ou usando um modelo matemático (por exemplo Black-Scholes) para prever o valor de a opção. A remuneração total dos CEOs vai além do caixa e do estoque Embora tipicamente excluídos dos cálculos de remuneração, os benefícios executivos e os benefícios indiretos são divulgados na tabela de compensação de resumo e na seção do plano de aposentadoria do proxy. Eles incluem o seguinte. Os planos complementares de aposentadoria executiva (SERPs), que podem manter o conjunto executivo (isto é, compensar a diferença) ou melhor de uma regulamentação fiscal que impede que o executivo receba um benefício de pensão que exceda os limites de ERISA (135.000 por ano ou menos baseado em O plano de pensão). Para um CEO fazendo 2 milhões por ano, um benefício de 135.000 pode ser inadequado para manter um estilo de vida comparável. Planos de seguro executivo que fornecem uma fonte de renda de aposentadoria e um benefício de morte mais rico para a família de executivos. Esses planos são usados para garantir benefícios de aposentadoria de falência. Ao contrário dos planos de aposentadoria padrão que recebem proteção da falência pelo governo federal, os benefícios do SERP podem ser perdidos em caso de falência. Diversos benefícios executivos e outras compensações para vários programas ou negócios negociados que não se encaixam corretamente nas categorias acima, incluindo regalias, como taxas de clube e planejamento financeiro. Estes são muitas vezes pequenos números que revelam montantes de renda imputada para os benefícios especiais adicionais, mas também pode incluir alguns montantes muito grandes para itens como o perdão do empréstimo, programas de seguro especial, despesas de deslocalização, etc Na maioria das empresas, a maioria dos CEOs pagar vem De ações ou ganhos de opções de ações. Nos bancos de investimento, a maior parte provém de bônus anuais. As empresas que pagam a parte dos leões de compensação na forma de opções de ações podem pagar pouca ou nenhuma aposentadoria. Você pode dizer, procurando uma tabela de aposentadoria na declaração de proxy. Se as palavras SERP, ERISA excesso plano ou Top Hat plano aparecem no proxy, então aposentadoria é uma parte importante da remuneração dos executivos. Se não, então os executivos são esperados para se aposentar em sua capacidade de fazer e economizar dinheiro em seus ganhos em dinheiro e capital. Filosofias de pagamento muitas vezes vinculam o pagamento ao desempenho da empresa O Comitê de Compensação da empresa Relatório sobre Compensação Executiva contém detalhes sobre a filosofia de remuneração de sua empresa, que afeta todos os funcionários. Abrange o seguinte. Como sua empresa paga relativamente aos seus pares. Quem a empresa vê como seus pares. Como o estoque da companhia executou relativo a seus pares e ao mercado conservado em estoque no conjunto. Como a empresa prefere recompensar seus executivos por meio de suas práticas de remuneração total, ou seja, que proporção de um total de executivos paga vem de salário, bônus, opções de ações e planos de caixa de longo prazo. Como a empresa mede seu desempenho - lucro líquido (NI), lucro por ação (EPS), retorno sobre o patrimônio líquido (ROE), retorno sobre o patrimônio (ROA), crescimento da receita, etc. Que critérios são usados para determinar o tamanho dos pagamentos de bônus : Resultados corporativos, resultados de divisão, metas individuais ou se os pagamentos são discricionários. O grau em que sua empresa é um sucesso pode ser respondido nas colunas de pagamento de incentivo anual e de longo prazo na tabela de compensação de resumo. Se você vê grandes pagamentos de bônus, então é provável que sua empresa seja bem-sucedida. Bolsas de opção de ações e ganhos também são importantes para olhar. Essas informações podem ser obtidas a partir de três tabelas na declaração de proxy: a opção de ações concede tabela os exercícios de opção agregada no último ano fiscal e tabela de valor de opção de fim de ano fiscal ea tabela de retorno total para acionistas. Se há grandes ganhos de exercícios de opções de ações e montantes substanciais nas opções de ações adquiridas ou não, pode ser um indicador de que a empresa é bem administrada na opinião dos acionistas. Os bons retornos dos acionistas de cinco anos na tabela de retorno total aos acionistas certamente validariam essa opinião. Compensação em dinheiro é a norma em organizações sem fins lucrativos Organizações sem fins lucrativos geralmente oferecem uma compensação pesada em relação ao salário base. Em resposta a preocupações competitivas, bônus estão se tornando mais prevalente como são programas especiais de diferimento de impostos que ajudam os executivos a poupar para a aposentadoria. Ao contrário de programas comparáveis em fins lucrativos, muito poucos desses programas são de base ampla. A participação é limitada a alguns poucos. Algumas organizações de vigilância têm criticado os montantes pagos aos executivos-chefe de organizações sem fins lucrativos. Mas esses empregadores contestam que eles estão competindo por talentos seniores com organizações com fins lucrativos que podem oferecer incentivos, como opções de ações que não estão disponíveis para eles. Artigos relacionadoscompensaçãoexecutiva Foto por: Helder Almeida Os funcionários executivos, tais como CEOs, diretores financeiros, presidentes de empresas e outros gerentes de nível superior são muitas vezes compensados de forma diferente dos níveis inferiores de uma organização. A remuneração dos executivos consiste em salário base, bônus, incentivos de longo prazo, benefícios e prêmios. Além de compreender os componentes da remuneração dos executivos, há questões de equidade de remuneração e ética associada ao pagamento desses tipos de empregados. BASE SALÁRIO DOS EXECUTIVOS O salário base é o salário anual regular do executivo. Embora a avaliação de postos de trabalho seja normalmente utilizada para fixar o salário dos trabalhadores nas organizações, os níveis salariais da base executiva são frequentemente mais influenciados pela opinião da comissão de compensação (que consiste em alguns ou todos os membros da diretoria da empresa), que é muitas vezes dependente Sobre as informações provenientes de inquéritos salariais de empresas similares. Normalmente, pagamento de CEOs e outros executivos é definido para ser competitivo com outros salários executivos no mercado e, portanto, pode ser muito elevado em comparação com o pagamento dos empregados em sua própria empresa. Dados recentes indicam que os salários para os executivos estão em ascensão. Um levantamento de 100 grandes empresas norte-americanas conduzido pela Mercer Human Resource Consulting indica que a remuneração direta total média para os principais executivos dessas empresas foi de 4.419.300 em 2004. Bônus de Execução No salário base dos executivos, a maioria recebe remuneração variável, uma remuneração que flutua De acordo com algum nível de desempenho. O uso de compensação além do salário-base tem por objetivo motivar os executivos a atingir determinados objetivos de desempenho organizacional, por exemplo, níveis de lucro específicos, e recompensá-los por alcançar esses objetivos. Um tipo muito popular de pagamento variável é o bônus executivo, que é um pagamento único vinculado a uma meta de desempenho de curto prazo. O bônus pode ser baseado em qualquer número de resultados de desempenho, que vão desde julgamentos de desempenho executivo pelo conselho de administração, até níveis de lucros da empresa ou participação de mercado. Quase todos os executivos agora recebem algum tipo de bônus como parte de seu pacote de compensação. O estudo Mercer, descrito acima, indica que os CEOs de 100 grandes corporações americanas tiveram um bônus mediano de 1,14 milhões em 2004, o que equivaleu a 141% de seus salários anuais. Em outras palavras, os bônus representaram mais dinheiro do que o salário anual do CEOx0027s nesta amostra. INCENTIVOS DE LONGO PRAZO Nos últimos anos, os incentivos tornaram-se importantes para recompensar o desempenho dos executivos e agora representam cerca de metade da remuneração total dos executivos. Incentivos são recompensas que estão ligadas a objetivos específicos de longo prazo da organização. O incentivo mais comum a longo prazo é a opção de compra de ações, que dá ao executivo ações livres da empresa, ou permite que ele ou ela para comprar ações da empresa a um preço reduzido por um período de tempo. Estas ações tornam-se mais valioso como a empresa melhora financeiramente e, portanto, a propriedade de ações destina-se a incentivar o executivo para tornar a organização mais rentável. Executivos podem então vender essas ações em um momento posterior, quando eles têm apreciado em valor, proporcionando, portanto, compensação além do mandato do empregado com a organização. Histórias de notícias recentes detalhando falhas da empresa em que as práticas contábeis antiéticas e a inflação artificial dos preços das ações fizeram com que os funcionários de nível inferior perdessem investimentos em ações da empresa aumentaram as preocupações sobre a ética de conceder um grande número de opções de ações aos executivos. BENEFÍCIOS EXECUTIVOS E PERQUISITOS Os benefícios para os funcionários de nível executivo também são provavelmente diferentes dos oferecidos aos funcionários de nível inferior. Executivos muitas vezes recebem altos níveis de benefícios sociais típicos da empresa, como seguro de saúde, seguro de vida e planos de pensão. Além disso, alguns executivos também podem ter um contrato para grandes pacotes de demissão, pagando em dinheiro e opções de ações para um CEO despedido de uma empresa. Muitos executivos negociar pacotes de indemnização generoso no momento da contratação, de modo que, mesmo que eles são incapazes de cumprir promessas para a empresa, eles podem coletar compensação na saída. Executivos perquisites, ou x0022perks, x0022 são benefícios especiais e serviços para executivos e outros altos funcionários das empresas. Benefícios podem ser coisas como um serviço de carro, uma sala de jantar executiva, estacionamento especial, associação em clubes, e outras tais amenidades. É habitual que muitos executivos norte-americanos recebam vantagens como parte de sua remuneração total. Algumas dessas vantagens, como o serviço de carro ou um avião da empresa, podem servir para melhorar a capacidade de um executivo de fazer seu trabalho. Além disso, algumas regalias trazem consigo um certo nível de status, por exemplo, a adesão paga pela empresa a um clube exclusivo que é atraente para os funcionários executivos. EQUIDADE PAGA A equidade salarial, ou a equidade do pagamento, pode ser avaliada tanto interna como externamente. Essas idéias são baseadas na teoria da equidade, uma teoria da motivação. A teoria da equidade, brevemente, indica que uma pessoa examina o que ele traz para um trabalho (insumos) e o que recebe de um trabalho (resultados) e compara isso com uma pessoa de referência, avaliando as outras entradas e resultados da pessoa. Um empregado pode determinar que ela traz um certo nível de educação, experiência e esforço para seu trabalho e que esses insumos resultam em um certo nível de salário e benefícios. Ela então compararia essa relação com a educação, experiência e esforço, e os salários e benefícios subseqüentes de outra pessoa. Se essas razões não são iguais, então o empregado se sentirá injustamente tratado. Se este empregado determina que seus insumos são muito maiores do que seus insumos de contrapartida, mas seu salário é o mesmo, este funcionário se sentirá injustamente compensado. Equidade externa é a avaliação da equidade do salário em empregos semelhantes em diferentes organizações. Executivos que comparam seu salário a executivos de outras firmas similares estão fazendo uma avaliação do patrimônio externo. A equidade externa pode ser determinada através de pesquisas de remuneração de mercado, nas quais as empresas compartilham informações sobre o salário e os benefícios em seus empregos. Além disso, os níveis de remuneração dos executivos podem ser de conhecimento público, seja em publicações da empresa para os acionistas ou em organizações comerciais. Se um executivo é altamente compensado em comparação com outros em empresas similares, ele ou ela é susceptível de se sentir positivamente sobre esta situação no entanto, os executivos que são remunerados a uma taxa menor do que os executivos comparáveis em outras empresas podem tentar ter o seu salário levantado ou pode Procure outra posição. Equidade interna é uma avaliação da equidade do pagamento em diferentes empregos dentro da mesma organização. Os executivos e os empregados comparam seus insumos e seu salário uns com os outros para determinar se são tratados de forma justa. A equidade interna é muitas vezes referida como estrutura de remuneração, e existem dois tipos de estruturas de remuneração: igualitária e hierárquica. Em estruturas de remuneração igualitária, o intervalo de remuneração do empregado mais baixo pago para o empregado mais bem pago não é muito grande, não há grandes diferenças no salário. As estruturas igualitárias tendem a ser preferidas pelos empregados com baixos salários, porque sentem que a remuneração dos executivos não é muito alta. No entanto, os executivos podem ficar insatisfeitos em organizações com estruturas de remuneração igualitárias, porque sentem que seu salário pode não ser proporcional às suas habilidades ou deveres de trabalho. As estruturas de remuneração hierárquicas, por outro lado, têm uma ampla gama de salários entre os empregados mais baixos e mais bem pagos. Em estruturas de remuneração hierárquicas, os empregados de nível superior tendem a ser pagos salários muito altos, o que eles são susceptíveis de encontrar satisfatória. No entanto, em estruturas hierárquicas, os empregados em empregos de baixo nível podem se sentir tratados injustamente por causa de sua taxa de remuneração relativamente mais baixa. O nível de remuneração dos executivos norte-americanos é muito alto em comparação com o pagamento de executivos em outros países, em comparação com o pagamento de executivos dos EUA no passado, e em comparação com os funcionários dos EUA em níveis mais baixos da organização. Atualmente, executivos norte-americanos ganham cerca de 400 vezes o salário dos trabalhadores mais baixos pagos em suas próprias empresas. Na Europa e na Ásia, a remuneração dos executivos é cerca de 10 vezes a do trabalhador mais baixo. Além disso, muitos executivos dos EUA têm pacotes de opção de ações ou de separação generosos que aumentam o valor de sua compensação. As altas taxas de remuneração dos executivos norte-americanos têm atraído muita atenção da mídia, especialmente quando as organizações com altas taxas de remuneração para CEOs e outros altos funcionários têm demissões ou fechamentos de fábricas. Muitos críticos argumentam que a remuneração dos executivos é muito alta, e que essas taxas de remuneração convidam problemas éticos. Para examinar a equidade da remuneração dos executivos, vários fatores devem ser avaliados. Em primeiro lugar, o pacote de remuneração dos executivos deve ser responsável perante os acionistas, o que significa que não é tão alto que diminui os lucros da empresa ou que seus incentivos desencorajam a influência antiética dos preços das ações. Em segundo lugar, os pacotes de remuneração devem ser competitivos com os de outras organizações similares para que os executivos possam ser recrutados, recompensados e retidos com sucesso. Se um pacote salarial não é competitivo, pode haver problemas de motivação ou volume de negócios. Em terceiro lugar, o pagamento de executivos deve caber com a estratégia de companyx0027s de modo que incentive o sucesso total da companhia. Isso é particularmente relevante no que diz respeito a bônus de curto prazo e incentivos de longo prazo que podem ser usados para orientar o desempenho do executivo e da organização. Por fim, a remuneração dos executivos deve estar em conformidade com os regulamentos. Há uma série de leis sobre planos de aposentadoria, opções de ações e outros componentes de remuneração que devem ser seguidos ao projetar planos de remuneração de executivos. PREOCUPAÇÕES ÉTICAS COM A REMUNERAÇÃO EXECUTIVA O salário base, bônus, incentivos e benefícios para os executivos levantaram sérias questões sobre as implicações éticas de tal remuneração. Uma preocupação sobre o alto nível de remuneração para os executivos americanos é que eles podem incentivar os executivos a tomar decisões de negócios que se beneficiam mais do que a organização, a fim de cumprir metas de desempenho necessárias para receber pagamento de incentivo. This is particularly likely if incentives are short-term in nature. For example, an executive may drive up short-term profits that cannot be sustained, only to collect a large bonus and leave the company before long-term financial problems are revealed. A second concern with the ethics of high executive pay is the use of stock options as an incentive. Recent evidence of illegal practices in some high-profile American companies has prompted the enactment of the Sarbanes-Oxley Act of 2002. This act prevents executives of companies from keeping profits or bonuses acquired from selling company stock if they have misled the public about the financial health of the company to increase stock price. Finally, some question the ethics of the high level of executive pay when lower-level employee pay has not risen at the same rate. There is a continually widening gap in compensation in different levels of organizations for instance, the Mercer study described previously determined that CEOs enjoyed bonuses of 141 percent of salary in 2004, while other studies indicate that typical clerical and technical staff earn approximately 5 percent of salary as an annual bonus. Although some argue that executive level positions deserve high rates of pay due to the nature of the job and the high level of responsibility involved, others argue that the gap in executive versus typically employee pay has widened so dramatically that employees are under-compensated and may even be tempted to engage in unethical behavior, such as stealing from the company. Executive compensation consists of base salary, bonuses, long-term incentives, benefits, and x0022perks. x0022 Total executive compensation has increased dramatically in recent years, which has led to concerns about pay equity and ethics. Because of the strong focus on external equity when determining executive compensation, internal equity is likely to be a concern. Additionally, as the gap between pay at lower and higher levels of the organization increasingly widens, many CEOs are perceived to be overcompensated. There are other ethical issues to be considered, such as the motivation of executives based on their bonuses, incentives, and stock option grants. FURTHER READING: Chingos, Peter T. ed. Responsible Executive Compensation for a New Era of Accountability. Hoboken, N. J. John Wiley x0026 Sons, Inc. 2004. x0022Executive Pay Trends: Looking Forward and Back. x0022 Journal of Deferred Compensation 10, no. 1 (2004): 24x201335. Lublin, Joann S. x0022CEO Bonuses Rose 46.4 at 100 Big Firms in 2004 Median Was 1.14 Million Some Chiefs Under Fire Also Drew Sizable Extras. x0022 Wall Street Journal, 25 February 2005, A1. Martocchio, Joseph J. Strategic Compensation: A Human Resource Management Approach 3rd ed. Upper Saddle River, NJ: Pearson Prentice Hall, 2004. Milkovich, George T. and Jerry M. Newman. Compensation. 8a ed. New York: McGraw-Hill Irwin, 2005. User Contributions: Aug 2, 2006 3:15 pm Your numbers are interesting, but lack a significant meaningful relation. A more meaningful amount is the total comp (including the annual change in granted stock options) of all (except full time sales only -- not sales managers) employees over 150k/year for each corporation separately Please tell us what this amount is. Apr 18, 2007 11:11 am This is interesting article and fairly represents the greed of current American executives. The company I work - the CEO 2 years ago made in salary 1.5mil, 200 bonus, laid off 10 (6000) workers, and this year reported a more than 300 raise in salary (up to 10.6mil). Oh, by the way. the worker with a good performance rating got a 3 raise the last three years, a medium worker got 1.2. I love what American Airlines flight attendants union is doing - creating media attention. I am certain that if I were to highlight the executives numbers (which I indicate above) that are available in the Annual Reports for the last three years, and mention it to people in my company. I would be fired. I hope I live to see the day that external equity and hierarchical pay structers are made illegal. or better yet - internal equity and egalitarian structures are mandated and based on sustainability factors - with only their stock options and other perks directly related to shareholder value. Power and greed - aint capitalism fantastic. Comment about this article, ask questions, or add new information about this topic:CEO IncentivesIts Not How Much You Pay, But How The arrival of spring means yet another round in the national debate over executive compensation. Soon the business press will trumpet answers to the questions it asks every year: Who were the highest paid CEOs How many executives made more than a million dollars Who received the biggest raises Political figures, union leaders, and consumer activists will issue now-familiar denunciations of executive salaries and urge that directors curb top-level pay in the interests of social equity and statesmanship. The critics have it wrong. There are serious problems with CEO compensation, but excessive pay is not the biggest issue. The relentless focus on how much CEOs are paid diverts public attention from the real problem how CEOs are paid. In most publicly held companies, the compensation of top executives is virtually independent of performance. On average, corporate America pays its most important leaders like bureaucrats. Is it any wonder then that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets We recently completed an in-depth statistical analysis of executive compensation. Our study incorporates data on thousands of CEOs spanning five decades. The base sample consists of information on salaries and bonuses for 2,505 CEOs in 1,400 publicly held companies from 1974 through 1988. We also collected data on stock options and stock ownership for CEOs of the 430 largest publicly held companies in 1988. In addition, we drew on compensation data for executives at more than 700 public companies for the period 1934 through 1938. Our analysis leads us to conclusions that are at odds with the prevailing wisdom on CEO compensation. Despite the headlines, top executives are not receiving record salaries and bonuses. Salaries and bonuses have increased over the last 15 years, but CEO pay levels are just now catching up to where they were 50 years ago. During the period 1934 through 1938, for example, the average salary and bonus for CEOs of leading companies on the New York Stock Exchange was 882,000 (in 1988 dollars). For the period 1982 through 1988, the average salary and bonus for CEOs of comparable companies was 843,000. Annual changes in executive compensation do not reflect changes in corporate performance. Our statistical analysis posed a simple but important question: For every 1,000 change in the market value of a company, how much does the wealth of that companys CEO change The answer varied widely across our 1,400-company sample. But for the median CEO in the 250 largest companies, a 1,000 change in corporate value corresponds to a change of just 6.7 cents in salary and bonus over two years. Accounting for all monetary sources of CEO incentivessalary and bonus, stock options, shares owned, and the changing likelihood of dismissala 1,000 change in corporate value corresponds to a change in CEO compensation of just 2.59. Compensation for CEOs is no more variable than compensation for hourly and salaried employees. On average, CEOs receive about 50 of their base pay in the form of bonuses. Yet these bonuses dont generate big fluctuations in CEO compensation. A comparison of annual inflation-adjusted pay changes for CEOs from 1975 through 1988 and pay changes for 20,000 randomly selected hourly and salaried workers shows remarkably similar distributions. Moreover, a much lower percentage of CEOs took real pay cuts over this period than did production workers. With respect to pay for performance, CEO compensation is getting worse rather than better. The most powerful link between shareholder wealth and executive wealth is direct stock ownership by the CEO. Yet CEO stock ownership for large public companies (measured as a percentage of total shares outstanding) was ten times greater in the 1930s than in the 1980s. Even over the last 15 years, CEO holdings as a percentage of corporate value have declined. Compensation policy is one of the most important factors in an organizations success. Not only does it shape how top executives behave but it also helps determine what kinds of executives an organization attracts. This is what makes the vocal protests over CEO pay so damaging. By aiming their protests at compensation levels, uninvited but influential guests at the managerial bargaining table (the business press, labor unions, political figures) intimidate board members and constrain the types of contracts that are written between managers and shareholders. As a result of public pressure, directors become reluctant to reward CEOs with substantial (and therefore highly visible) financial gains for superior performance. Naturally, they also become reluctant to impose meaningful financial penalties for poor performance. The long-term effect of this risk-averse orientation is to erode the relation between pay and performance and entrench bureaucratic compensation systems. Are we arguing that CEOs are underpaid If by this we mean Would average levels of CEO pay be higher if the relation between pay and performance were stronger the answer is yes. More aggressive pay-for-performance systems (and a higher probability of dismissal for poor performance) would produce sharply lower compensation for less talented managers. Over time, these managers would be replaced by more able and more highly motivated executives who would, on average, perform better and earn higher levels of pay. Existing managers would have greater incentives to find creative ways to enhance corporate performance, and their pay would rise as well. These increases in compensationdriven by improved business performancewould not represent a transfer of wealth from shareholders to executives. Rather, they would reward managers for the increased success fostered by greater risk taking, effort, and ability. Paying CEOs better would eventually mean paying the average CEO more. Because the stakes are so high, the potential increase in corporate performance and the potential gains to shareholders are great. How Compensation Measures Up Shareholders rely on CEOs to adopt policies that maximize the value of their shares. Like other human beings, however, CEOs tend to engage in activities that increase their own well-being. One of the most critical roles of the board of directors is to create incentives that make it in the CEOs best interest to do whats in the shareholders best interests. Conceptually this is not a difficult challenge. Some combination of three basic policies will create the right monetary incentives for CEOs to maximize the value of their companies: 1. Boards can require that CEOs become substantial owners of company stock. 2. Salaries, bonuses, and stock options can be structured so as to provide big rewards for superior performance and big penalties for poor performance. 3. The threat of dismissal for poor performance can be made real. Unfortunately, as our study documents, the realities of executive compensation are at odds with these principles. Our statistical analysis departs from most studies of executive compensation. Unlike the annual surveys in the business press, for example, we do not focus on this years levels of cash compensation or cash compensation plus stock options exercised. Instead, we apply regression analysis to 15 years worth of data and estimate how changes in corporate performance affect CEO compensation and wealth over all relevant dimensions. We ask the following questions: How does a change in performance affect current cash compensation, defined as changes in salary and bonus over two years What is the wealth effect (the present value) of those changes in salary and bonus How does a change in corporate performance affect the likelihood of the CEO being dismissed, and what is the financial impact of this new dismissal probability Finally, how does a change in corporate performance affect the value of CEO stock options and shares, whether or not the CEO exercised the options or sold the shares (For a discussion of our methodology, see the insert, How We Estimate Pay for Performance.) How We Estimate Pay for Performance Our analysis draws primarily on two sources of data: annual executive compensation surveys published in Forbes magazine from 1975 through 1988 and Standard amp Poors Compustat file. The base sample includes information on 2,505 CEOs from 1,400 companies. We estimated pay-for-performance sensitivities for each CEO using a variety of statistical techniques. The findings reported in the table The Weak State of Pay for Performance represent the median and middle 50 CEOs in a sample of the 250 largest companies. Perhaps the best way to illustrate our methodology is to review pay-for-performance calculations for a single CEOfor example, David H. Murdock of Castle amp Cooke, Inc. who tops our list of large-company CEOs with the best incentives. For each element of Mr. Murdocks compensation, we estimated answers to the same question: How does that compensation element change in response to a 1,000 change in corporate value, as measured by annual share price appreciation and dividends Two-Year Change in Salary and Bonus. We used least squares regression to calculate the relation between the dollar change in salary and bonus and the dollar change in shareholder wealth for all companies with at least seven years of pay-change data from 1975 through 1988. We estimate a single pay-for-performance sensitivity for each company, therefore our estimates for Castle amp Cooke use data on both Murdock and his predecessor Donald Kirchhoff. We did not use data on three other former CEOsRobert Cook, Ian Wilson, and Henry Clark, Jr. because they each served as CEO for less than two years and we could therefore not calculate pay changes. The regression equation uses last years performance in addition to this years performance as explanatory variables. The result was: (change in salary and bonus) 32,300 .000986 (change in this years shareholder wealth) .000219 (change in last years shareholder wealth) The pay-for-performance sensitivity is defined as the estimated slope coefficient in the regression equation. For this regression, the sum of the estimated coefficients implies that each 1,000 increase in the wealth of Castle amp Cooke shareholders corresponds to an increase of 98.6 cents in this years salary and bonus for Murdock, and a decrease of 21.9 cents in next years salary and bonus. Thus the total expected increase in salary and bonus over two years is 77 cents per 1,000 change in value. We estimated 430 separate regressions like the one for Murdock, having eliminated 740 companies due to incomplete information and 230 companies that were no longer in the sample in 1988. The pattern of t-statistics for the individual regressions implies that the average pay-performance coefficients are positive and statistically different from zero at confidence levels exceeding 99 . Pay-Related Wealth. The estimate of 77 cents is an accurate measure of how David Murdocks and Donald Kirchhoffs salary and bonus change due to a 1,000 change in shareholder value. But it underestimates the change in their wealth. Since part of the change is permanent, they will earn it for the rest of their careers. In addition, Murdock and Kirchhoff received other income as fringe benefits and payoffs from long-term performance plans. We measure the change in their total wealth as the discounted present value of the permanent component of the change in compensation plus other income for the year. To estimate the wealth change, we make three assumptions: (1) all changes in salary and bonus are permanent, while other forms of pay are transitory (2) the CEO receives the change in salary and bonus until age 66 and (3) the wage increase to age 66 is discounted at the real interest rate of 3 . The resulting regression equation for Castle amp Cooke, based on these assumptions, is: (other income present value of change in salary and bonus) 150,000 .00310 (change in this years shareholder wealth) .00060 (change in last years shareholder wealth) The sum of the estimated coefficients in this regression implies that Murdocks and Kirchhoffs wealth (as a result of changes in salary and bonus) changes an average of 3.70 for every 1,000 change in the market value of Castle amp Cooke. Stock Options. Stock options are an increasingly important component of executive compensation packages, and their value relates directly to changes in share price. However, holding a stock option does not provide the same incentives as owning a share of stocka distinction sometimes overlooked by compensation practitioners. For example, stock ownership rewards both price appreciation and dividends, while options reward only appreciation. Moreover, the value of an option changes by less than 1 when the stock price changes by 1. How much less depends on factors such as interest rates, dividend yields, and whether the option is in or out of the money. Our simulation results show that 60 cents is a good approximation for the value change of at-the-money options for a company with a (sample average) dividend yield of 5 . This holds for a reasonable range of maturities, variance of stock returns, and interest rates. We collected data on total stock options held by each of the sample CEOs from the proxy statements issued in advance of the companys 1989 annual meeting. Unfortunately, outstanding options are not always reported on proxy statements. So we estimated Murdocks outstanding options as options granted in 1988 (50,000 shares) plus options exercisable within 60 days (300,000 shares). Castle amp Cooke had 59.3 million shares outstanding. A 1,000 change in shareholder wealth corresponds to the following change in the value of Murdocks options: Thus Murdocks option-related wealth changes by 3.54 for every 1,000 change in shareholder wealth. This estimate understates the change in the value of his options to the extent that he holds options granted prior to 1988 that are not exercisable within 60 days. We also underestimate the option-value change if his outstanding options are in the money, while we overstate the value change of out-of-the-money options. Dismissal Incentives. The threat of being fired for poor performance provides monetary as well as non-monetary incentives for CEOs to maximize value. We estimate the financial incentives associated with dismissal through a four-stage process. First, using nonlinear logistic regression techniques on our 1974 through 1988 sample of 2,505 CEOs, we estimate the probability that a CEO will leave the job as a function of industry, company size, CEO age, market-relative performance, and lagged market-relative performance. Second, we compute point estimates of the departure probabilities when the company earns the market rate of return for two years versus when the company realizes share-price returns 50 below the market in two consecutive years. Third, we multiply the difference in these two dismissal probabilities by the discounted value of the CEOs potential lost wages, assuming that the CEO would have received the current salary until age 66, and, if dismissed, never works again. Fourth, we calculate the dismissal performance sensitivity by dividing the CEOs potential wealth loss by the shareholder loss associated with earning 50 below-market returns for two years. In Murdocks case, the probability that a 65-year-old CEO in a smaller-than-median-size company leaves his job is 20.7 in years when the company earns the market return and 23.9 when his company earns 50 below the market return for two straight years. The probability that Murdock will be fired (or encouraged to leave) for poor performance is 3.2 . Murdocks dismissal-related loss is his 1.5 million 1988 pay multiplied by the turnover-probability difference, or about 48,000. (If Murdock had been younger than 65, we would have calculated the present value of his 1988 pay until he reached 66.) Castle amp Cooke shareholders, on the other hand, would lose about 1.25 billion of their 1.67 billion equity from two straight years of 50 below-market performance. Thus Murdocks potential wealth loss is about 3.8 cents per 1,000 lost by shareholders. It is important to note that while our estimates of other CEO incentive sources use data for the individual CEOs company, our estimates of CEO-dismissal performance sensitivities are based on the entire sample. It is generally impossible to make company-specific estimates of the wealth effects of dismissal threats. Stock Ownership. The most important component of CEO incentives is also the easiest to measure. As of March 1989, Murdock held directly 13,203,932 shares of Castle amp Cooke. In addition, his children hold 80,870 shares in trusts. All told, his family holds 13,284,802 shares, or 22.42 of Castle amp Cookes outstanding stock. His total stock-related incentives are roughly 224.24 per 1,000 change in market value. Putting It All Together. David Murdocks total pay-for-performance sensitivity is simply the sum of the sensitivities of each compensation element, or 231.53 per 1,000 change in shareholder value. This makes Murdock the CEO with the best incentives in the 250 largest companies. The table The Weak State of Pay for Performance provides a detailed review of our main findings for a subsample of CEOs in the 250 largest publicly held companies. Together, these CEOs run enterprises that generate revenues in excess of 2.2 trillion and employ more than 14 million people. The results are both striking and troubling. A 1,000 change in corporate market value (defined as share price appreciation plus dividends) corresponds to a two-year change in CEO salary and bonus of less than a dime the long-term effects of that change add less than 45 cents to the CEOs wealth. A 1,000 change in corporate value translates into an estimated median change of a nickel in CEO wealth by affecting dismissal prospects. At the median, stock options add another 58 cents worth of incentives. Finally, the value of shares owned by the median CEO changes by 66 cents for every 1,000 increase in corporate value. All told, for the median executive in this sub-sample, a 1,000 change in corporate performance translates into a 2.59 change in CEO wealth. The table also reports estimates for CEOs at the lower and upper bounds of the middle two quartiles of the sample. The Weak State of Pay for Performance Note: The median individual components do not add to the median total change in CEO wealth since sums of medians do not in general equal the median of sums. This degree of pay-for-performance sensitivity for cash compensation does not create adequate incentives for executives to maximize corporate value. Consider a corporate leader whose creative strategic plan increases a companys market value by 100 million. Based on our study, the median CEO can expect a two-year increase in salary and bonus of 6,700hardly a meaningful reward for such outstanding performance. His lifetime wealth would increase by 260,000less than 4 of the present value of the median CEOs shareholdings and remaining lifetime salary and bonus payments. 1 Or consider instead a CEO who makes a wasteful investmentnew aircraft for the executive fleet, say, or a spanking addition to the headquarters buildingthat benefits him but diminishes the market value of the company by 10 million. The total wealth of this CEO, if he is representative of our sample, will decline by only 25,900 as a result of this misguided investmentnot much of a disincentive for someone who earns on average 20,000 per week. One way to explore the realities of CEO compensation is to compare current practices with the three principles that we outlined earlier. Lets address them one at a time. CEOs should own substantial amounts of company stock. The most powerful link between shareholder wealth and executive wealth is direct ownership of shares by the CEO. Most commentators look at CEO stock ownership from one of two perspectivesthe dollar value of the CEOs holdings or the value of his shares as a percentage of his annual cash compensation. But when trying to understand the incentive consequences of stock ownership, neither of these measures counts for much. What really matters is the percentage of the companys outstanding shares the CEO owns . By controlling a meaningful percentage of total corporate equity, senior managers experience a direct and powerful feedback effect from changes in market value. Think again about the CEO adding jets to the corporate fleet. The stock-related feedback effect of this value-destroying investmentabout 6,600is small because this executive is typical of our sample, in which the median CEO controls only .066 of the companys outstanding shares. Moreover, this wealth loss (about two days pay for the average CEO in a top-250 company) is the same whether the stock-holdings represent a big or small fraction of the CEOs total wealth. But what if this CEO held shares in the company comparable to, say, Warren Buffetts stake in the Berkshire Hathaway conglomerate Buffett controls, directly and indirectly, about 45 of Berkshire Hathaways equity. Under these circumstances, the stock-related feedback effect of a 10 million decline in market value is nearly 4.5 milliona much more powerful incentive to resist wasteful spending. Moreover, these differences in CEO compensation are associated with substantial differences in corporate performance. From 1970 through 1988, the average annual compound stock return on the 25 companies with the best CEO incentives (out of the largest 250 companies examined in our survey) was 14.5 . more than one-third higher than the average return on the 25 companies with the worst CEO incentives. A 100 investment in the top 25 companies in 1970 would have grown to 1,310 by 1988, as compared with 702 for a similar investment in the bottom 25 companies. The 25 CEOs of Large Companies with the Best Incentives Note: Sample consists of CEOs in the 250 largest companies, ranked by 1988 sales. The 25 CEOs of Large Companies with the Worst Incentives Note: Sample consists of CEOs in the 250 largest companies, ranked by 1988 sales. As a percentage of total corporate value, CEO share ownership has never been very high. The median CEO of one of the nations 250 largest public companies owns shares worth just over 2.4 millionagain, less than 0.07 of the companys market value. Also, 9 out of 10 CEOs own less than 1 of their companys stock, while fewer than 1 in 20 owns more than 5 of the companys outstanding shares. It is unreasonable to expect all public-company CEOs to own as large a percentage of their companys equity as Warren Buffetts share of Berkshire Hathaway. Still, the basic lesson holds. The larger the share of company stock controlled by the CEO and senior management, the more substantial the linkage between shareholder wealth and executive wealth. A few companies have taken steps to increase the share of corporate equity owned by senior management. Employees of Morgan Stanley now own 55 of the firms outstanding equity. Companies such as FMC and Holiday have used leveraged recapitalizations to reduce the amount of outstanding equity by repurchasing public shares, and thus allow their managers to control a bigger percentage of the company. After FMC adopted its recapitalization plan, for example, employee ownership increased from 12 to 40 of outstanding equity. These recapitalizations allow managers to own a bigger share of their companys equity without necessarily increasing their dollar investment. Truly giant companies like IBM, General Motors, or General Electric will never be able to grant their senior executives a meaningful share of outstanding equity. These and other giant companies should understand that this limitation on executive incentives is a real cost associated with bigness. Cash compensation should be structured to provide big rewards for outstanding performance and meaningful penalties for poor performance. A two-year cash reward of less than 7 cents for each 1,000 increase in corporate value (or, conversely, a two-year penalty of less than 7 cents for each 1,000 decline in corporate value) does not create effective managerial incentives to maximize value. In most large companies, cash compensation for CEOs is treated like an entitlement program. There are some notable exceptions to this entitlement pattern. The cash compensation of Walt Disney CEO Michael Eisner, whose pay has generated such attention in recent years, is more than ten times more sensitive to corporate performance than the median CEO in our sample. Yet the small number of CEOs for whom cash compensation changes in any meaningful way in response to corporate performance shows how far corporate America must travel if pay is to become an effective incentive. Creating better incentives for CEOs almost necessarily means increasing the financial risk CEOs face. In this respect, cash compensation has certain advantages over stock and stock options. Stock-based incentives subject CEOs to vagaries of the stock market that are clearly beyond their control. Compensation contracts based on company performance relative to comparable companies could provide sound incentives while insulating the CEO from factors such as the October 1987 crash. Although there is some evidence that directors make implicit adjustments for market trends when they set CEO pay, we are surprised that compensation plans based explicitly on relative performance are so rare. 2 The generally weak link between cash compensation and corporate performance would be less troubling if CEOs owned a large percentage of corporate equity. In fact, it would make sense for CEOs with big chunks of equity to have their cash compensation less sensitive to performance than CEOs with small stockholdings. (For example, Warren Buffetts two-year cash compensation changes by only a penny for every 1,000 increase in market value.) In some cases, it might even make sense for pay to go up in bad years to serve as a financial shock absorber for losses the CEO is taking in the stock market. Yet our statistical analysis found no correlation between CEO stock ownership and pay-for-performance sensitivity in cash compensation. In other words, boards of directors ignore CEO stock ownership when structuring incentive compensation plans. We find this result surprisingand symptomatic of the ills afflicting compensation policy. Make real the threat of dismissal. The prospect of being fired as a result of poor performance can provide powerful monetary and nonmonetary incentives for CEOs to maximize company value. Because much of an executives human capital (and thus his or her value in the job market) is specific to the company, CEOs who are fired from their jobs are unlikely to find new jobs that pay as well. In addition, the public humiliation associated with a high-visibility dismissal should cause managers to carefully weigh the consequences of taking actions that increase the probability of being dismissed. Here too, however, the evidence is clear: the CEO position is not a very risky job. Sports fans are accustomed to baseball managers being fired after one losing season. Few CEOs experience a similar fate after years of underperformance. There are many reasons why we would expect CEOs to be treated differently from baseball managers. CEOs have greater organization-specific capital it is harder for an outsider to come in and run a giant company than it is for a new manager to take over a ball club. There are differences in the lag between input and output. The measure of a baseball managers success is the teams won-lost record this year the measure of a corporate manager is the companys long-term competitiveness and value. For these and other reasons, it is not surprising that turnover rates are lower for CEOs than for baseball managers. It is surprising that the magnitude of the discrepancy is so large. On average, CEOs in our base sample (2,505 executives) hold their jobs for more than ten years before stepping down, and most give up their title (but not their seat on the board) only after reaching normal retirement age. Two recent studies, spanning 20 years and more than 500 management changes, found only 20 cases where CEOs left their jobs because of poor performance. 3 To be sure, directors have little to gain from publicly announcing that a CEO is leaving because of failuremany underperforming CEOs leave amidst face-saving explanations and even public congratulations. But this culture of politeness does not explain why so few underperforming CEOs leave in the first place. University of Rochesters Michael Weisbach found that CEOs of companies that rank in the bottom 10 of the performance distribution (measured by stock returns) are roughly twice as likely to leave their jobs as CEOs whose companies rank in the top 10 of the performance distribution. Yet the differences that Weisbach quantifiesa 3 chance of getting fired for top performers versus a 6 chance of getting fired for laggardsare unlikely to have meaningful motivational consequences for CEOs. Our own research confirms these and other findings. CEOs of large public companies are only slightly more likely to step down after very poor performance (which we define as company earnings 50 below market averages for two consecutive years) than after average performance. For the entire 1,400-company sample, our analysis estimates that the poor-performing CEOs are roughly 6 more likely to leave their jobs than CEOs of companies with average returns. Even assuming that a dismissed CEO never works again, the personal wealth consequences of this increased likelihood of dismissal amounts to just 5 cents for every 1,000 loss of shareholder value. With respect to pay for performance, theres no denying that the results of our study tell a bleak story. Then again, perhaps corporate directors are providing CEOs with substantial rewards and penalties based on performance, but they are measuring performance with metrics other than long-run stock market value. We tested this possibility and reached the same conclusion as in our original analysis. Whatever the metric, CEO compensation is independent of business performance. For example, we tested whether companies rewarded CEOs on the basis of sales growth or accounting profits rather than on direct changes in shareholder wealth. We found that while more of the variation in CEO pay could be explained by changes in accounting profits than stock market value, the pay-for-performance sensitivity was economically just as insignificant as in our original model. Sales growth had little explanatory power once we controlled for accounting profits. 4 Of course, incentives based on other measures will be captured by our methodology only to the extent that they ultimately correlate with changes in shareholder wealth. But if they dontthat is, if directors are rewarding CEOs based on variables other than those that affect corporate market valuewhy use such measures in the first place Moreover, if directors varied CEO compensation substantially from year to year based on performance measures not observable to us, this policy would show up as high raw variability in CEO compensation. But over the past 15 years, compensation for CEOs has been about as variable as cash compensation for a random sample of hourly and salaried workersdramatic evidence of compensations modest role in generating executive incentives. 5 Common Variability: CEO and Worker Wages compares the distribution of annual raises and pay cuts of our CEO sample with national data on hourly and salaried workers from 1975 through 1986. A larger percentage of workers took real pay cuts at some time over this period than did CEOs. Overall, the standard deviation of annual changes in CEO pay was only slightly greater than for hourly and salaried employees (32.7 versus 29.7 ). Common Variability: CEO and Worker Wages Looking Backward: Pay for Performance in the 1930s CEO compensation policies look especially unsatisfactory when compared with the situation 50 years ago. All told, CEO compensation in the 1980s was lower, less variable, and less sensitive to corporate performance than in the 1930s. To compare the current situation with the past, we constructed a longitudinal sample of executives from the 1930s using data collected by the Works Projects Administration. The WPA data, covering fiscal years 1934 through 1938, include salary and bonus for the highest paid executive (whom we designate as the CEO) in 748 large U. S. corporations in a wide range of industries. Nearly 400 of the WPA sample companies were listed on the New York Stock Exchange, and market values for these companies are available on the CRSP Monthly Stock Returns Tape. In order to compare similar companies over the two time periods, we restricted our analysis to companies in the top 25 of the NYSE, ranked by market value. WPA compensation data are available for 60 of this top quartile group (averaging 112 companies per year), while data for more recent times are available for 90 of the top quartile companies (averaging 345 companies per year). The results are striking. Measured in 1988 constant dollars, CEOs in top quartile public companies earned an average salary and bonus of 882,000 in the 1930smore than the 1982 through 1988 average of 843,000 and significantly more than the 1974 through 1981 average of 642,000. Over this same time period, there has been a tripling (after inflation) of the market value of top quartile companiesfrom 1.7 billion in the 1930s to 5.9 billion in 1982 through 1988. Coupled with the decline in salaries, the ratio of CEO pay to total company value has fallen significantlyfrom 0.11 in the 1930s to 0.03 in the 1980s. Compensation was more variable in the 1930s as well. The average standard deviation of the annual pay changesthe best statistical measure of the year-to-year variability of compensationwas 504,000 in the 1930s compared with 263,500 in the 1980s. The incentives generated by CEO stock ownership have also declined substantially over the past 50 years. To test this trend, we reviewed stock ownership data for CEOs in the 120 largest companies (ranked by market value) in 1938, 1974, and 1988. Whatever Happened to CEO Stock Ownership reports our findings. The percentage of outstanding shares owned by CEOs (including shares held by family members) in the top 120 companies fell by a factor of nearly ten from 1938 to 1988. The trend is unmistakable: as a percentage of total market value, CEO stock ownership has declined substantially over the last 50 years and is continuing to fall. Whatever Happened to CEO Stock Ownership Note: Median stock ownership for CEOs in largest 120 companies, ranked by market value. Data were obtained from proxy statements and include not only shares held directly but also shares held by family members and related trusts. The Costs of Disclosure Why dont boards of directors link pay more closely to performance Commentators offer many explanations, but nearly every analysis weve seen overlooks one powerful ingredientthe costs imposed by making executive salaries public. Government disclosure rules ensure that executive pay remains a visible and controversial topic. The benefits of disclosure are obvious it provides safeguards against looting by managers in collusion with captive directors. The costs of disclosure are less well appreciated but may well exceed the benefits. Managerial labor contracts are not a private matter between employers and employees. Third parties play an important role in the contracting process, and strong political forces operate inside and outside companies to shape executive pay. Moreover, authority over compensation decisions rests not with the shareholders but with compensation committees generally composed of outside directors. These committees are elected by shareholders but are not perfect agents for them. Public disclosure of what the boss makes gives ammunition to outside constituencies with their own special-interest agendas. Compensation committees typically react to the agitation over pay levels by cappingexplicitly or implicitlythe amount of money the CEO earns. How often do shareholder activists or union leaders denounce a corporate board for under paying the CEO Not very oftenand thats precisely the problem. Most critics of executive pay want it both ways. They want companies to link pay to performance, yet they also want to limit compensation to arbitrary amounts or some fuzzy sense of whats fair. That wont work. Imposing a ceiling on salaries for outstanding performers inevitably means creating a floor for poor performers. Over time, by cutting off the upper and lower tails of the distribution, the entire pay-for-performance relation erodes. When mediocre outfielders earn a million dollars a year, and New York law partners earn about the same, influential critics who begrudge comparable salaries to the men and women running billion-dollar enterprises help guarantee that these companies will attract mediocre leaders who turn in mediocre performances. Admittedly, it is difficult to document the effect of public disclosure on executive pay. Yet there have been a few prominent examples. Bear, Stearns, the successful investment bank, went public in 1985 and had to submit to disclosure requirements for the first time. CEO Alan Greenbergs 2.9 million salary and bonus was the nations fourth highest that year, and his ranking drew attention to the firms compensation system. Under private ownership, compensation of the firms managing directors was set at a modest 150,000 base plus a bonus pool tied to earningsa tight link between pay and performance. Because the firm was so profitable in 1986, the bonus pool swelled to 80 million, an average of 842,000 for each of the firms 95 managing directors. A public outcry ensued. Six months after going public, Bear, Stearns announced it was lowering the bonus pool from 40 to 25 of the firms adjusted pretax earnings in excess of 200 million. According to one account, the firms business success had yielded an embarrassment of riches for top executives. 6 More recently, we interviewed the president of a subsidiary of a thriving publicly traded conglomerate. This president is compensated with a straight fraction of his subsidiarys earnings above a minimum threshold, with no upper bound. Today he makes roughly five times what he made before his operation was acquired by the conglomerate, and corporate headquarters recognizes him as one of the companys outstanding executives. Why doesnt he want to be an officer of the conglomerate For one, because his salary would have to be made publica disclosure both he and the CEO consider a needless invitation to internal and external criticism. We are not arguing for the elimination of salary disclosure. (Indeed, without disclosure we could not have conducted this study.) But its time compensation committees stood up to outside criticism and stopped adopting policies that make their companies incentive problem worse. The costs of negative publicity and political criticism are less severe than the costs to shareholder wealth created by misguided compensation systems. Corporate Brain Drain The level of pay has very little to do with whether or not CEOs have incentives to run companies in the shareholders interestsincentives are a function of how pay, whatever the level, changes in response to corporate performance. But the level of pay does affect the quality of managers an organization can attract. Companies that are willing to pay more will, in general, attract more highly talented individuals. So if the critics insist on focusing on levels of executive pay, they should at least ask the right question: Are current levels of CEO compensation high enough to attract the best and brightest individuals to careers in corporate management The answer is, probably not. Who can disagree with these propositions It is good when our most talented men and women are attracted to the organizations that produce the goods and deliver the services at the heart of the economy. People evaluate alternative careers at least in part on the basis of lifetime monetary rewards People prefer to make more money than less, and talented, self-confident people prefer to be rewarded based on performance rather than independent of it. If some organizations pay more on average and offer stronger pay-for-performance systems than other organizations, talent will migrate to the higher paying organizations. These simple propositions are at the heart of a phenomenon that has inspired much handwringing and despair over the last decadethe stream of talented, energetic, articulate young professionals into business law, investment banking, and consulting. Data on the career choices of Harvard Business School graduates document the trend that troubles so many pundits. Ten years ago, nearly 55 of newly graduated HBS students chose careers in the corporate sector, while less than 30 chose investment banking or consulting. By 1987, more than half of all HBS graduates entered investment banking or consulting, while under 30 chose careers in the corporate sector. Last year, just over one-third of all graduating HBS students chose corporate careers, while nearly 40 chose careers in investment banking or consulting. And Harvard Business School is not alone we gathered data on other highly rated MBA programs and found similar trends. We dont understand why commentators find this trend so mysterious. A highly sensitive pay-for-performance system will cause high-quality people to self-select into a company. Creative risk takers who perceive they will be in the upper tail of the performance and pay distribution are more likely to join companies who pay for performance. Low-ability and risk-averse candidates will be attracted to companies with bureaucratic compensation systems that ignore performance. Compensation systems in professions like investment banking and consulting are heavily weighted toward the contributions made by individuals and the performance of their work groups and companies. Compensation systems in the corporate world are often independent of individual, group, or overall corporate performance. Moreover, average levels of top-executive compensation on Wall Street or in corporate law are considerably higher than in corporate America. Financially speaking, if you are a bright, eager 26-year-old with enough confidence to want to be paid based on your contribution, why would you choose a career at General Motors or Procter amp Gamble over Morgan Stanley or McKinsey amp Company Most careers, including corporate management, require lifetime investments. Individuals must choose their occupation long before their ultimate success or failure becomes a reality. For potential CEOs, this means that individuals seeking careers in corporate management must join their companies at an early age in entry-level jobs. The CEOs in our sample spent an average of 16 years in their companies before assuming the top job. Of course, many people who reach the highest ranks of the corporate hierarchy could also expect to be successful in professional partnerships such as law or investment banking, as proprietors of their own businesses, or as CEOs of privately held companies. It is instructive, therefore, to compare levels of CEO compensation with the compensation of similarly skilled individuals who have reached leadership positions in other occupations. The compensation of top-level partners in law firms is one relevant comparison. These numbers are closely guarded secrets, but some idea of the rewards to top partners can be gleaned from data on average partner income reported each year in a widely read industry survey. The table Salaries for Top Lawyers Are High reports 1988 estimated average incomes earned by partners in the highest paying corporate law firms. These five firms paid their 438 partners average incomes ranging from 1.35 million to nearly 1.6 million. Partners at the very top of these firms earned substantially more. When comparing these results with corporate compensation, the appropriate question to ask is How many public companies paid their top 67 or 177 executives average salaries of 1.6 million or 1.2 million in 1989 The answer is, few or none. How surprising is it, then, that law school classes are bulging with some of the countrys brightest students Salaries for Top Lawyers Are High Source: The American Lawyer, JulyAugust 1989, p. 34. Compensation for the most successful corporate managers is also modest in comparison with compensation for the most successful Wall Street players. Here too it is difficult to get definitive numbers for a large sample of top executives. But the most recent annual survey, as reported in the table So Are Salaries on Wall Street, documents the kinds of rewards available to top investment bankers. At Gold-man, Sachs, for example, 18 partners earned more than 3 million in 1988, and the average income for those partners was more than 9 million. Only nine public-company CEOs had incomes in excess of 9 million in 1988 (mostly through exercising stock options), and no public company paid its top 18 executives more than 3 million each. The Wall Street surveys for 1989 are not yet available, but consistent with high pay-for-performance systems, they will likely show sharp declines in bonuses reflecting lower 1989 industry performance. So Are Salaries on Wall Street Source: Financial World, July 11, 1989. Average earnings are based on Financial Worlds lower bound earnings estimate, p. 32. The compensation figures for law and investment banking look high because they reflect only the most highly paid individuals in each occupation. Average levels of compensation for lawyers or investment bankers may not be any higher than average pay levels for executives. But thats not the relevant comparison. The very best lawyers or investment bankers can earn substantially more than the very best corporate executives. Highly talented people who would succeed in any field are likely to shun the corporate sector, where pay and performance are weakly related, in favor of organizations where pay is more strongly related to performanceand the prospect of big financial rewards more favorable. Money Isnt Everything Some may object to our focus on monetary incentives as the central motivator of CEO behavior. Are there not important nonmonetary rewards associated with running a large organization Benefits such as power, prestige, and public visibility certainly do affect the level of monetary compensation necessary to attract highly qualified people to the corporate sector. But unless nonmonetary rewards vary positively with company value, they are no more effective than cash compensation in motivating CEOs to act in the shareholders interests. Moreover, because nonmonetary benefits tend to be a function of position or rank, it is difficult to vary them from period to period based on performance. Indeed, nonmonetary rewards typically motivate top managers to take actions that reduce productivity and harm shareholders. Executives are invariably tempted to acquire other companies and expand the diversity of the empire, even though acquisitions often reduce shareholder wealth. As prominent members of their community, CEOs face pressures to keep open uneconomic factories, to keep the peace with labor unions despite the impact on competitiveness, and to satisfy intense special-interest pressures. Monetary compensation and stock ownership remain the most effective tools for aligning executive and shareholder interests. Until directors recognize the importance of incentivesand adopt compensation systems that truly link pay and performancelarge companies and their shareholders will continue to suffer from poor performance. A New Survey of Executive Compensation Routinely misused and abused, surveys contribute to the common ills of corporate compensation policy. Surveys that report average compensation across industries help inflate salaries, as everyone tries to be above average (but not in front of the pack). Surveys that relate pay to company sales encourage systems that tie compensation to size and growth, not performance and value. Surveys that rank the countrys highest paid executives stir public outrage, raise legislative eyebrows, and provide emotional justification for increased demands in labor negotiations. The basic problem with existing compensation surveys is that they focus exclusively on how much CEOs are paid instead of how they are paid. Our focus on incentives rather than levels leads naturally to a new and different kind of survey. Instead of reporting whos paid the most, our survey reports whos paid the bestthat is, whose incentives are most closely aligned with the interests of their shareholders. Our survey considers incentives from a variety of sourcesincluding salary and bonus, stock options, stock ownership, and the threat of getting fired for poor performance. It includes only companies listed in the Forbes executive compensation surveys for at least eight years from 1975 through 1989, since we require at least seven years of pay change to estimate the relation between pay and performance. Our methodology is described in the insert How We Estimate Pay for Performance. Compensation surveys in the business press, such as those published by Fortune and Business Week, are really about levels of pay and not about pay for performance. Yet they often include an analysis or ranking of the appropriateness of a particular CEOs pay by relating it to company performance in some fashion. The methods adopted by Fortune and Business Week share a common flaw. CEOs earning low fixed salaries while delivering mediocre performance look like stars on the flip side, CEOs with genuinely strong pay-for-performance practices rank poorly. For example, Business Weeks 1989 survey calculates the ratio of the change in shareholder wealth to the CEOs total compensation, both measured over three years. Executives with the highest ratios are labeled the CEOs Who Gave the Most for Their Pay. Low-ratio CEOs purportedly gave shareholders the least. Fortunes 1989 compensation issue uses a regression model to estimate how compensation varies with factors such as the CEOs age and tenure, company size, location, industry, and performance. Although the author cautions against taking the results too literally, CEOs earning more than predicted are implicitly designated as overpaid, while those earning less than predicted are underpaid. Consider the case of Disneys Michael Eisner. By all accounts, Mr. Eisners pay is wedded to company performancein addition to loads of stock options, he gets 2 of all profits above an annually increasing threshold. Shareholders have prospered under Eisner, and few have complained that his compensation is unreasonable in light of the 7 billion in shareholder wealth he has helped create since joining the company in 1984. But Business Week ranks Eisner second on the list of CEOs who gave their shareholders the least (right behind option-laden Lee Iacocca, who over the past decade helped create 6 billion in wealth for Chrysler shareholders), while Fortune flags Eisner as the nations third most overpaid CEO. Surveys ranking Eisner and Iacocca low are clearly not measuring incentives. In contrast, our survey ranks Eisner and Iacocca as the nations fourth and ninth respectively best paid CEOs measured on the basis of pay-related wealth alone. We estimated the pay-for-performance relation for each of the 430 companies for which we have sufficient data. The results are summarized in the four nearby tables. Three of the tables include results for the 250 largest companies ranked by 1988 sales. The 25 CEOs with the best and worst overall incentives, as reflected by the relation between their total compensation (composed of all pay-related wealth changes and the change in the value of stock owned), are summarized in the first two tables. Castle amp Cooke, whose current CEO is David Murdock, ranks first with a total change in CEO wealth of 231.53 for every 1,000 change in shareholder wealth. His stockholdings contribute 224.24 of this amount, while the change in all pay-related wealth adds another 7.29. With a few exceptions, it is clear that the best incentives are determined primarily by large CEO stockholdings. Donald Marron of Paine Webber is such an exception, with more than 55 of his total of 67 coming from changes in pay-related wealth. So too are Philip Hawley of Carter Hawley Hale, Henry Schacht of Cummins Engine, and Disneys Eisner. The 25 companies providing their CEOs with the worst total incentives are led by Navistar International whose CEO James Cotting on average receives a 1.41 increase in wealth for every 1,000 decrease in shareholder value. Carolina Power amp Lights Sherwood Smith, Jr. receives a 16-cent increase for every 1,000 decrease in shareholder wealth. Other well-known corporations whose CEOs appear on the worst-incentives list include Chevron, Johnson amp Johnson, Eastman Kodak, and IBM. Although one has to recognize that there is statistical uncertainty surrounding our estimates of pay-related wealth sensitivity, no CEO with substantial equity holdings (measured as a fraction of the total outstanding equity) makes our list of low-incentive CEOs. As we point out in the accompanying article, an important disadvantage of corporate size is that it is extremely difficult for the CEO to hold a substantial fraction of corporate equity. The inverse relation between size and stockholdings (and therefore the negative effect of size on incentives) is readily visible in the much higher sensitivities shown for the top 25 CEOs in smaller companies, those ranking from 251 to 430 in 1988 sales. (See the table The Best of the Rest: CEO Incentives in Smaller Companies.) Warren Buffett of Berkshire Hathaway leads this list with 446 per 1,000, followed by William Swindells, Jr. of Williamette Industries, Joe Allbritton of Riggs National, and Barron Hilton of Hilton Hotels. Again, the importance of large stockholdings is clear. The Best of the Rest: CEO Incentives in Smaller Companies Note: Sample consists of CEOs in companies ranked 251 to 430 by 1988 sales. Indeed, one problem with current compensation practices is that boards often reward CEOs with substantial equity through stock options but then stand by to watch CEOs undo the incentives by unloading their stockholdings. Boards seldom provide contractual constraints or moral suasion that discourage the CEO from selling such shares to invest in a diversified portfolio of assets. One of the ironies of the situation is that the corporation itself often funds executive financial counseling by consultants whose common mantra is sell and diversify, sell and diversify. While this can be personally advantageous to executives, it is not optimal for shareholders or society because it significantly reduces CEOs incentives to run their companies efficiently. Pay-related incentives are under the direct control of the compensation committee and the board. The table Best Paid CEOs of Large Companies lists the 25 companies that reward their CEOs in a way that provides the best incentives from pay-related wealth alonechanges in salary and bonus, long-term incentive plans, dismissal likelihood, and stock options. Each of these estimates is given in the table, along with the sum of the effects in the last column. The table makes clear that the major contributors to pay-related incentives are stock options and the present value of the change in salary and bonus. Best Paid CEOs of Large Companies Note: Sample consists of CEOs in the 250 largest companies, ranked by 1988 sales. 1. The median CEO in our sample holds stock worth 2.4 million. The average 1988 salary and bonus for the CEOs in our sample was roughly 1 million. At a real interest rate of 3 . the present value of the salary and bonus for the next five years to retirement (the average for the sample) is 4.6 million. Thus total lifetime wealth from the company is 7 million. 2. See Robert Gibbons and Kevin J. Murphy, Relative Performance Evaluation for Chief Executive Officers, Industrial and Labor Relations Review, February 1990, p. 30-S. 3. See Jerold B. Warner, Ross L. Watts, and Karen H. Wruck, Stock Prices and Top Management Changes, Journal of Financial Economics, JanuaryMarch 1988, p. 461 and Michael S. Weisbach, Outside Directors and CEO Turnover, Journal of Financial Economics, JanuaryMarch 1988, p. 431. 4. For more detail on these tests, see our article, Performance Pay and Top-Management Incentives, Journal of Political Economy, April 1990. 5. Data on hourly and salaried workers come from the Michigan Panel Study on Income Dynamics. The sample includes 21,895 workers aged 21 to 65 reporting wages in consecutive periods. See Kenneth J. McLaughlin, Rigid Wages University of Rochester Working Paper, 1989. 6. Wall Street Journal, March 21, 1986. A version of this article appeared in the MayJune 1990 issue of Harvard Business Review . Michael C. Jensen. the Jesse Isidor Straus Professor of Business Administration, Emeritus, at Harvard Business School in Boston, is the managing director of the organizational strategy practice of the Monitor Group, a collection of global professional services firms with headquarters in Cambridge, Massachusetts. Kevin J. Murphy is an associate professor at the University of Rochester8217s William E. Simon Graduate School of Business Administration. His earlier HBR article on executive compensation, 8220Top Executives Are Worth Every Nickel They Get,8221 appeared in the March8211April 1986 issue. This article is about BOARDS
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