CEO pay goes up and up
At 79, Graef “Bud” Crystal is the grand old man of executive compensation critics. Once a top compensation consultant, he switched sides in the 1980s, becoming a fierce critic of many of the practices he helped institutionalize, and analyzing executive pay for other media like Fortune and, most recently, Bloomberg News. He’s been known to call his second career “atoning for my sins.”
The other day, Crystal was recalling what it used to be like trying to cobble together pay information about a chief executive based on reading the disclosure documents required by the Securities and Exchange Commission. There was no rhyme or reason to the way the numbers were put together, and shareholders were often left scratching their heads.
“I remember writing an article for Fortune in the late 1980s, using Goizueta’s pay at Coca-Cola,” Crystal told me. (Roberto Goizueta was the chief executive of Coke from 1981 until his death in 1997.) The proxy statement showed that he made $800,000 that year in salary. But about 15 pages later, it showed that he had received an additional $56 million in stock options. Except that, instead of being written numerically, the option grant was spelled out, thus easy to overlook. “It was deliberate obfuscation,” Crystal said.
For the most part, it isn’t like that anymore. In the mid-2000s, the SEC passed rules forcing companies to place all the compensation information for top executives in one place. There were people who thought that this effort at pay “transparency” would help get CEO compensation under control — in effect shaming compensation committees and chief executives from letting executive pay get any more out of hand than it already was.
Not exactly how it turned out, is it?
Sunday, The New York Times published its annual list of the compensation of the top executives at the 100 largest publicly traded American companies. (The survey is conducted by Equilar for The Times.) Topping the list, as he often has, was Larry Ellison, chief executive of Oracle, who, despite being the world’s fifth-wealthiest person, raked in an additional $78.4 million in 2013, a combination of cash, stock and stock options. That was more than twice as much as the second and third place finishers, Robert Iger of Disney and Rupert Murdoch of 21st Century Fox. Not that they had anything to complain about, at $34.3 million and $26.1 million respectively.
The Times reported that the median compensation for CEOs in 2013 was $13.9 million, a 9 percent increase from 2012. The Wall Street Journal, which did its own, smaller survey a few weeks earlier, described the 2013 pay increases as representing “moderate growth.”
Nell Minow, another longtime critic of corporate governance and executive compensation practices, told me that the last time she harbored hope that executive pay might be brought under control was 1993. That was the year that Congress passed a bill capping cash compensation at $1 million. But the law also exempted pay that was based on “performance.”
Two things resulted. “Immediately, everybody got a raise to $1 million,” said Minow. And, second, company boards began setting performance measures that were easy to clear — and larding pay packages with huge stock option grants. “I hadn’t realized how easy it would be to manipulate performance measures,” Minow said.
Since then, nothing has stopped executive compensation from rising. When the market fell after the financial crisis, many companies gave their chief executives big option grants to “make up for” what they’d lost. When performance measures were toughened, chief executives responded by demanding larger grants because they were taking more “risk.”
It’s a rigged game. When the company’s stock goes up, says Crystal, the chief executive views himself as a hero. And when it goes down, “it’s Janet Yellen’s or Barack Obama’s fault.”
Plus, there’s simple greed. When I asked Crystal about Ellison’s pay package, he laughed. “There are billionaires like Warren Buffett and Larry Page who don’t pig out,” he said. (As the chief executive of Google, co-founder Page takes a $1 annual salary.) “But there are others who can’t keep their hands off the dough. Ellison is in that category.”
Soon enough, the SEC is going to require yet another disclosure. As a result of the Dodd-Frank financial reform law, companies will have to publish a ratio comparing the chief executive’s pay to the median pay of the company’s employees. At most large American corporations, the ratio is likely to be very high, hinting at how corrosive these huge executive pay packages have become, and the degree to which they play a role in furthering income inequality, a point made in “Capital in the Twenty-First Century,” the new book by Thomas Piketty, the economist. The ratio is going to make people mad.
But will it reduce executive pay? We already know the answer to that.
Joe Nocera is a columnist for The New York Times.