Human Resources: Executive Summary: Executive Compensation

Executive compensation is one of the most controversial topics in business today. Though critics continue to call for reforms, executive compensation continues to rise in most sectors. In 1970 the average salary for a U.S. CEO at a S&P 500 company was about 30 times that of the average worker; by 2003, that salary figure skyrocketed to almost 500 times the earnings of the average worker. Historically, executives have always earned much more than the average worker; as the first U.S. president, George Washington received $25,000 a year, about 1,000 times the average worker's salary in 1789.

But are the CEOs and CFOs who make these gargantuan salaries really worth it? That's the concern of specialists who study why certain executives earn so much, whether or not they deserve such pay, and what can be done to prevent an intensifying of the ever-present backlash that surfaces among critics of the current payment formulas for executives.

Shareholder activists and regulators have pushed to limit executive pay by establishing maximum ratios between what executives earn and the average pay of workers. For example, Whole Foods Market, Inc., keeps executives from earning a salary greater than 14 times as much as the average worker for both base pay and bonuses, while some CEOs like Mark Hurd, who took the reins at Hewlett-Packard (HP) when the controversial Carly Fiorina was ousted in early 2005, limit their pay voluntarily. But at shareholder meetings, some corporations have rejected such proposals of limiting salaries as unworkable.

Since the corporate scandals of recent years, government regulators have stepped in to oversee corporate finances and protect shareholders from executive excesses. In January 2006 the SEC proposed requiring full disclosure of all compensation awarded to executives in clear, understandable language rather than letting it remain buried in the fine print and footnotes of proxy statements. It has also called for the expensing of stock options in response to shareholders' wishes.

Pay for performance is gaining popularity among shareholders, who harbor concerns that company CEOs are not performing to expectations. The "pay-for-results" program at HP, which tied CEO pay to a three-year performance measure, earned rare praise from financial consultant Graef Crystal, known for his vocal criticism of excessive compensation. According to Crystal, pay should be tightly tied to performance. But critics maintain that pay for performance has its pitfalls - performance standards are usually not revealed because of concerns about making such information available to the competition, so these measures can be manipulated. And despite the HP pay program, CEO Fiorina left with over $21 million in severance pay, prompting two shareholders to sue HP, alleging that the company gave her more than she was entitled to.

Of course Sarbanes-Oxley (SOX) has had a major influence on how top executives are paid. SOX regulations took effect in 2002, establishing an accounting oversight board to keep an eye on the auditing of public companies subject to securities laws. Companies now need accountants with expertise in the complicated SOX regulations, so auditors with these skills are in high demand. This extra expense of outsourcing or hiring SOX specialists is prompting some corporations to consider going private, said the Wall Street Journal's Alan Murray.

Overall, reforms should be good for the ROI as well as executives and shareholders. Ideally the use of restricted stock, pay-for-performance schemes and greater disclosure should ameliorate disgruntled investors and satisfy directors as well, but it's a safe bet that executive pay will still remain high as corporations seek and compete to attract and retain the most talented CEOs.

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The Institute for Corporate Productivity (i4cp, inc.) improves corporate productivity through a combination of research, community, tools and technology focused on the management of human capital. With more than 100 leading organizations as members, including many of the best-known companies in the world, i4cp draws upon one of the industry’s largest and most-experienced research teams and Executives-in-Residence to produce more than 10,000 pages annually of rapid, reliable and respected research and analysis surrounding all facets of the management of people in organizations. Additionally, i4cp identifies and analyzes the upcoming major issues and future trends that are expected to influence workforce productivity and provides member clients with tools and technology to execute leading-edge strategies and "next" practices on these issues and trends. i4cp is a for-profit company with offices in St. Petersburg, Florida.