Thursday, July 7, 2011

Executive Compensation : Business As Usual!

Further confirmation of the fact that executive compensation has little to do with performance comes from a preliminary examination of CEO comempensation figures for 2010 in the US.

A study commissioned by the New York Times show that the median pay for top executives at 200 big companies last year was $10.8 million, which works out to a 23% gain from 2009. The record levels of corporate profits, at the expense of wages and jobs, meant that some of these gains were shared as higher executive compensation.

The median pay raise of 23% for chief executives, while roughly in line with the increase in net corporate profits, far exceeded the median gain in shareholders’ total return, which was 16%, as well as the median gain in revenue, which was 7%. The median American worker's wages were up a mere 0.5% in 2010, and when adjusted for inflation workers were actually making less.

The third graphic is the most instructive. It clearly shows why executive compensation has little to do with performance outcomes. Taking stock returns as a barometer of the companies performance, it shows that executives from similar sized companies with same stock returns showed wide variations in compensation. Similarly, the top executives from health care, oil and gas, and financial sectors showed wide variations in their compensation despite more or less same stock returns. Though stock returns are not the perfect measure of the companies actual performance, the variations in compensation are too large to be rationalized.

Update 1 (8/4/2012)

Times has a nice article on ballooning executive compensation in the US. In particular, it draws attention to Apple CEO Tim Cook's eye-popping $376.2 million stock-options award (to be redeemed over 10 years) in addition to salary of roughly $900,000 in 2011. The options are now valued at roughly $634 million.

The median chief executive in this group took home $14.4 million — compared with the average annual American salary of $45,230. In all, the combined compensation of these 100 C.E.O.s totaled $2.1 billion, the rough equivalent of the estimated annual economic output of Sierra Leone

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