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[Music]
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We're speaking today with Martin Kan, a
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research fellow at Wharton, about the
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news this week that CEOs at the largest
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US companies saw their pay jump on
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average about 11% to about 9.3 million.
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And that's according to a survey
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sponsored by the Wall Street Journal.
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Um, in n in 2009, CEOs got no raise at
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all. And these figures apply to 2010. So
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tell me uh is the error of big CEO pay
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back because in addition to that we had
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Philipe Demon of Viacom uh earning $86
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million or double his pay from last year
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which is tends to be what what folks
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focus on right so there I mean there are
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a couple of uh important issues that we
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can raise there. I mean first it does
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seem that uh CEO compensation according
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to this survey has increased by
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approximately 10% in the fiscal year
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2010. I think one of the important
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points and one of the comforting
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elements that comes out of this survey
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is that although we've seen pay increase
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we've also seen the performance of these
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firms increase too. The same survey
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shows that sort of corporate profits
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have increased um by about 18% 19% and
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similarly stockholder returns have
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increased by about that about the same
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amount. So um in terms of uh whether
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CEOs have earned this um extra
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compensation this growth in pay of about
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10%. We do seem to be seeing uh a link
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here between the compensation received
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by CEOs and the performance of their
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firms which in that sense is comforting
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and is part of the good news of this
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survey. On the other hand, overall wages
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and salaries in the US actually drop by
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1% over the calendar year. Um, and so
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maybe that raises the question, did did
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the improved corporate performances did
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that come through shrinkage and and
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layoffs and becoming more efficient and
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or how much was attributed to topline
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growth? Right. Uh, well, for sure the
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determination of executive compensation
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is a reasonably complex issue. Um, the
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uh evidence seems to suggest that
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compensation of CEOs is correlated to
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the growth in their corporate size,
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corporate value and and this is a good
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thing. Um like all factors of production
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within the firm, there's going to be a
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myriad of factors which are going to
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determine the level of pay uh received
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by CEOs or other u individuals within
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firms. Um I think one of the um
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encouraging factors uh that's um arrived
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on the corporate governance landscape in
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the last couple of years um is the
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DoddFrank Act. And as part of the
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DoddFrank Act, uh, one of the things
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that we're going to see is, uh, even
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more transparency and and disclosure of
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executive compensation and other
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compensation matters. Uh, specifically,
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companies are going to start revealing
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how much they're paying their typical
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employees. They're going to be uh, um,
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explaining um, how much their CEOs are
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receiving. And in consequence, um,
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investors, the media, the public are
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going to be able to see much more, um,
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the relation between CEO pay and typical
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workers within the firm over time. We've
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gotten used to hearing that statistic
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that 20 years ago or 30 years ago,
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typical CEO pay was about 50 times or so
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more than the their average employee,
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and now it's 4 or 500. So, that's the
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ratio that they'll be looking at, right?
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Um, they um I'm not sure whether there
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is an ideal or an optimal ratio here. uh
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like many factors of production um it's
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not clear why you would necessarily want
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to benchmark um one uh particular
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individual against another individual
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but it's a useful thing to know about in
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the wider uh scheme of scheme of things
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um shareholders when they're trying to
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design compensation policies must try
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and find an optimal compensation uh
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package that recruits retains and
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motivates a CEO um in that context if we
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think about um uh the CEO labor market
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in recent years becoming more global. Um
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uh that CEOs are having to run
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increasingly complex uh enterprises.
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That may might be part of the
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explanation why CEO compensation is
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increasing at a faster rate than other
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employees within the firm. Um there is
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no easy answer to this but the goal of a
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compensation policy must be to sort of
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try and find the right um uh the right
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set of instruments that aligns uh the
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CEO's interests with those of
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shareholders. Um and I think this is I
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mean as I looked at the um uh results of
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this survey in the Wall Street Journal I
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mean there were some other encouraging
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factors there. It is true that the level
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of compensation has uh increased uh over
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time. Um but one of the interesting uh
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features about this study is the amount
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of pay that is at risk um for the CEO.
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So if one was to look at um the salary
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element only. So this is the cash
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compensation that's guaranteed to the
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CEO. Um and then what's on their W2? Um
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well uh it's other things as well but
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it's but in addition to just a salary
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these the CEOs are receiving um annual
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incentive plans which tend to be related
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to the um uh budgeted performance of the
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uh company stock options restricted
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stock and other equity awards. So if we
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were take the whole package together,
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this is the number that we're seeing
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which was about $910 million. But the
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salary element of that is only about uh
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probably about 15 to 20% on average. So
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four-fifths of the CEO's compensation is
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at risk in the sense that it's
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contingent upon the performance of the
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firm. If the firms don't perform well in
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the future, those elements won't pay off
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and the CEO won't be receiving those
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kinds of those kinds of compensation
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benefits. Have there been any major
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changes that would uh shift or encourage
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CEOs to do more long-term planning
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rather than short-term quarter by
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quarter planning where their
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compensation might be more on the line.
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Yeah. So um the governance of executive
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compensation is uh often shifting and um
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um there can always be improvements in
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the way that we can structure
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compensation. So for example um uh
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compensation arrangements can actually
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be explicitly made performance
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contingent. So one can say these payouts
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of these equity awards are contingent
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upon achieving particular hurdles. And
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in that sense actually um uh European
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firms uh uh publicly traded firms in the
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United Kingdom do make the award of um
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uh compensation components contingent
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upon the achievement of various EPS
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targets or um uh total shareholder
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return targets that beat the market. So
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these are relative performance measures.
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Um in the United States again with the
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passage of DoddFrank we are seeing uh
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much more accountability um and much
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more transparency um even compared to a
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very high level of uh transparency and
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accountability that existed in the
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United States already. Uh but the
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additional I think some of the
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additional elements and I think this
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goes back to your um original question
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about is the era of big CEO payback?
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Well, uh maybe um but with the passage
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of DoddFrank, what we're seeing is now
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shareholders um are going to be able to
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vote on on the compensation packages uh
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received by CEOs and presumably boards
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of directors, compensation committees,
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CEOs themselves will have an eye to what
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shareholders are going to think about
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this when they come to vote on these
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matters in the future. And perhaps that
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um if one thought that uh compensation
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packages were a little on the high side
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uh this would uh tend to have a
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dampening effect on uh compensation
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going forward. So my my thoughts my
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guess is that uh when 2011 rolls around
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uh and the and the uh the same survey is
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done again next year, I suspect we won't
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see quite the same uh increase um that
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we saw this year. That's an interesting
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lever for shareholders. What about
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employees? How does it change the
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culture of a company when the CEO in the
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company earns $86 million? On the one
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hand, we can sort of we can see sort of
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high levels of uh compensation as a goal
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to which employees might aspire. Um and
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in that sense, we might think of it as a
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as a potentially motivating device. Um
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however on the other hand we know that
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uh uh in terms of if the differences
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become too big uh this can actually uh
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demotivate sort of employees. And so
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it's there isn't a really clearcut
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answer to sort of what uh uh to what the
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overall effect is going to be on um uh
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uh on the morale if you like the
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performance consequences of employees.
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We know that there is some evidence to
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suggest that um uh employees when they
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receive um stock-based compensation and
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equity payments uh tend to uh see that
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as a good thing in the sense that it
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creates um an extra kick in their sort
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of motivation and and in consequence we
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see those kinds of companies which are
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um spreading the rewards sort of doing
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better uh than those companies who are
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less likely to do it. Okay. Well, thank
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you very much for joining us today.
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Okay. Thank you very much. Pleasure.