In the United States, the compensation of company executives is distinguished by the forms it takes and its dramatic rise over the past three decades."The dramatic rise in CEO compensation over the past three decades has resulted in tremendous popular and shareholder discord." from Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution By Charles M. Elson, Craig K. Ferrere, irrcinstitute.org (undated, circa 2010) Within the last 30 years, executive compensation or pay has risen dramatically beyond what can be explained by changes in firm size, performance, and industry classification. This has received a wide range of criticism.Criticism has come from Paul Krugman (Nobel Prize-winning economist): "Today the idea that huge paychecks are part of a beneficial system in which executives are given an incentive to perform well has become something of a sick joke." (Krugman's book), Peter Drucker (noted management consultant). "Peter Drucker had an intense loathing of exorbitant executive salaries." businessweek, John C. Bogle (founder of one of the largest mutual fund families in the U.S.) and author of the paper "The Executive Compensation System is Broken", Ben Bernanke (Federal Reserve chairman) Fed Plans to Vet Banker Pay to Discourage Risky Practices, By Stephen Labaton, nytimes.com, 22 October 2009 George W. Bush (ex-president) "President George W. Bush has been a critic of greedy executives." (Letter From Washington: As U.S. rich-poor gap grows, so does public outcry, International Herald Tribune, Albert R. Hunt, 18 February 2007) Warren Buffett (successful billionaire investor) who said in one investor letter: "Getting fired can produce a particularly bountiful payday for a CEO, Indeed, he can 'earn' more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure." (Berkshire Hathaway Inc. 2005 Annual Report p.16)
The top CEO's compensation increased by 940.3% from 1978 to 2018 in the US. In 2018, the average CEO's compensation from the top 350 US firms was $17.2 million. The typical worker's annual compensation grew just 11.9% within the same period.: CEO compensation has grown 940% since 1978. https://www.epi.org/publication/ceo-compensation-2018/#:~:text=CEO%20compensation%20in%202018%20(stock%2Doptions%2Dgranted%20measure),the%20recovery%20began%20in%202009. It is the highest in the world in both absolute terms and relative to the median salary in the US.see, for one example, The Guardian, August 4, 2005, "US executive pay goes off the scale"Hacker, Jacob S., Paul Pierson, Winner-Take-All Politics, (Simon & Schuster, 2010) p.62
It has been criticized not only as excessive but also for "rewarding failure"Berkshire Hathaway Inc. 2005 Annual Report p.16—including massive drops in stock price,In 2007, while shareholders suffered an 80 per cent decline in share value, CEO of Countrywide Financial Angelo Mozilo made more than $520 million. Executive Decisions By Nell Minow, tnr.com, 8 February 2012 and much of the national growth in income inequality. Observers differ as to how much of the rise and nature of this compensation is a natural result of competition for scarce business talent benefiting stockholder value, and how much is the work of manipulation and self-dealing by management unrelated to supply, demand, or reward for performance.Lucian Bebchuk and Jesse Fried, Pay Without Performance (2004)Krugman, Paul, The Conscience of a Liberal, W. W. Norton & Company, 2007, 143–148 Federal laws and Securities and Exchange Commission (SEC) regulations have been developed on compensation for top senior executives in the last few decades,Executive Compensation. US Securities and Exchange Commission including a $1 million limit on the tax deductibility of compensation"The principal executive officer of the corporation (or an individual acting in that capacity)" IRS instructions. Disallowance of Deduction for Employee Compensation in Excess of $1 MillionTaxes and executive compensation, By Steven Balsam, 14 August 2012 Economic Policy Institute not "performance-based", and a requirement to include the dollar value of compensation in a standardized form in annual public filings of the corporation.*"In their annual public filings, firms must publish compensation tables indicating the dollar value of different forms of compensation received by the current CEO and the four other most highly paid executives of the firm. The numbers in these tables are the most visible indicators of executive compensation in public firms. They are easily accessible to the media and others reading the public filings. (Bebchuk and Fried, Pay Without Performance (2004), p.99)SEC Delays Guidance on Key Executive Compensation Requirements under Dodd-Frank , Benefits Brief, Groom Law Group (September 13, 2011)."In the annual proxy statement, a company must disclose information concerning the amount and type of compensation paid to its chief executive officer, chief financial officer and the three other most highly compensated executive officers." https://www.sec.gov/answers/execomp.htm
While an executive may be any corporate "officer"—including the president, vice president, or other upper-level managers—in any company, the source of most comment and controversy is the pay of chief executive officers (CEOs) (and to a lesser extent the other top-five highest-paid executivesquote: "Although the CEO is likely to have the most power and influence, in many cases other top executives also have some influence onboard decision making. When executives other than the CEO serve on the board for example ...." (from: Bebchuck and Fried, Pay without Performance, 2004, p.64)Bebchuck and Fried, Pay without Performance, 2004, p.9,) of large publicly traded firms.
Most of the private sector economy in the United States is made up of such firms where management and ownership are separate, and there are no controlling shareholders. This separation of those who run a company from those who directly benefit from its earnings, create what economists call a "principal–agent problem", where upper-management (the "agent") has different interests, and considerably more information to pursue those interests, than shareholders (the "principals").Bebchuk, Lucian, Pay Without Performance by Lucian Bebchuk and Jesse Fried, Harvard University Press 2004, pp.15–17 This "problem" may interfere with the ideal of management pay set by "arm's length" negotiation between the executive attempting to get the best possible deal for him/her self, and the board of directors seeking a deal that best serves the shareholders,Bebchuk and Fried, Pay Without Performance, (2004), p.2 (preface and introduction) rewarding executive performance without costing too much. The compensation is typically a mixture of salary, bonuses, equity compensation (stock options, etc.), benefits, and perquisites (perks). It has often had surprising amounts of deferred compensation and pension payments, and unique features such as executive loans (now banned), and post-retirement benefits, and guaranteed consulting fees.Bebchuk and Fried, Pay Without Performance (2004), p.6
The compensation awarded to executives of publicly-traded companies differs from that awarded to executives of privately held companies. "The most basic differences between the two types of businesses include the lack of publicly traded stock as a compensation vehicle and the absence of public shareholders as stakeholders in private firms."Don Delves, Executive compensation in privately held companies, Willis Towers Watson (May 3, 2016). The compensation of senior executives at publicly traded companies is also subject to certain regulatory requirements, such as public disclosures to the U.S. Securities and Exchange Commission.Fast Facts: Executive Compensation, U.S. Securities and Exchange Commission (last accessed May 9, 2017).
Levels of compensation Since the 1990s, CEO compensation in the U.S. has outpaced corporate profits, economic growth and the average compensation of all workers. Between 1980 and 2004, Mutual Fund founder John Bogle estimates total CEO compensation grew 8.5 per cent/year compared to corporate profit growth of 2.9 per cent/year and per capita income growth of 3.1 per cent.Pay Madness At Enron Dan Ackman, 03.22.2002 By 2006 CEOs made 400 times more than average workers—a gap 20 times bigger than it was in 1965. As a general rule, the larger the corporation the larger the CEO compensation package.
The share of corporate income devoted to compensating the five highest-paid executives of (each) public firms more than doubled from 4.8 per cent in 1993–1995 to 10.3 per cent in 2001–2003.Based on the ExecuComp database of 1500 companies. The pay for the five top-earning executives at each of the largest 1500 American companies for the ten years from 1994 to 2004 is estimated at $500 billion in 2005 dollars.Based on the ExecuComp database, from Bebchuk and Fried, Pay Without Performance (2004), (pp.9–10)
A study by the executive compensation analysis firm Equilar Inc. for The New York Times found that the median pay package for the top 200 chief executives at public companies with at least $1 billion in revenue in 2012 was $15.1 million—an increase of 16 per cent from 2011.
Lower-level executives also have fared well. About 40 per cent of the top 0.1 per cent income earners in the United States are executives, managers, or supervisors (and this doesn't include the finance industry)—far out of proportion to less than 5 per cent of the working population that management occupations make up.Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data Jon Bakija, Adam Cole, Bradley T. Heim, March 2012
Highest-paid CEOs
In 2012, the highest-paid CEO in the US was Larry Ellison of Oracle, with $96.2 million. That year the top 200 executives earned a total of $3 billion in compensation. The median cash compensation was $5.3 million, the median stock and option grants were $9 million.
In 2018, the highest-paid CEO in the US was Elon Musk of Tesla, Inc. Musk earned a total of $2.3 billion in compensation.
In 2020, The Wall Street Journal reported that the median pay for executives at 300 of the biggest U.S. companies reached $13.7 million, up from $12.8 million in 2019. The highest paid CEO out of companies on the S&P 500 in 2020 was Paycom CEO Chad Richison. For companies not on the S&P 500 list, Palantir Technologies CEO Alexander Carp and DoorDash CEO Tony Xu earned the most in 2020, with pay packages of $1.1 billion and $1 billion respectively.
Types of compensation
The occupation of "executive" (a person having administrative or managerial authority in an organizationDefinition of EXECUTIVE merriam-webster.com) includes company presidents, chief executive officers (CEOs), chief financial officers (CFOs), vice presidents, occasionally directors, and other upper-level managers. Like other employees in modern US corporations, executives receive a variety of types of cash and non-cash payments or benefits provided in exchange for services—salary, bonuses, fringe benefits, severance payments, deferred payments, retirement benefits. But components of executive pay are more numerous and more complex than lower-level employees. Executives generally negotiate a customized employment contract with documentation spelling out the compensation,Executive Compensation By Susan M. Heathfield, About.com Guide and taking into account government regulations and tax law.The complete guide to executive compensation By Bruce R. Ellig, 2002