Key Takeaways
- CEO compensation dramatically surged in the mid-1990s following decades of slower growth.
- A 1993 tax law change incentivized performance-based pay, particularly stock options.
- Initial accounting rules treated stock options as a 'free' benefit, inflating their use and CEO pay.
- Public and investor scrutiny, alongside accounting rule changes, later tempered executive compensation growth.
- Since 2014, CEO earnings have continued to outpace average employee raises, widening the pay gap.
Deep Dive
- A chart indicates CEO pay at large U.S. corporations dramatically surged in the mid-1990s.
- Economist Kevin Murphy advocated linking CEO compensation to company performance, rather than fixed salaries.
- This idea gained traction during an early 1990s recession as executives were perceived to profit while employees faced layoffs.
- In 1993, President Clinton capped deductible CEO pay at $1 million, but exempted performance-based compensation.
- This tax law change prompted compensation committees to shift towards stock options as a primary compensation tool.
- Stock options give a CEO the right to buy company stock at a set price, allowing profit if the stock price increases.
- Between 1992 and 1996, CEO pay at largest U.S. corporations doubled from $4 million to $8 million.
- A significant driver was the widespread belief that stock options were 'free' due to prevailing accounting rules.
- For decades, accounting rules did not require companies to treat stock options as an expense, unlike salaries.
- This led to over-issuance of options, diluting existing shares and impacting shareholder value.
- In 1994, Silicon Valley workers successfully protested proposed changes by FASB to treat stock options as a cost, not a free benefit.
- Compensation consultant Don Delves later expressed discomfort with his role in facilitating the massive wealth transfer to CEOs.
- Economist Kevin Murphy, who initially advocated for stock options, also worried about the wealth transfer, noting average CEO pay quintupled to $19 million by 2000.
- Following the dot-com bubble and increased shareholder scrutiny, FASB changed accounting rules to expense stock options.
- Average CEO pay decreased from $19 million in 2000 to $12 million in 2014, before beginning to rise again.
- Since 2014, CEO earnings have increased approximately 10% annually, outpacing the average employee's 3% raise.
- The Dodd-Frank Act, mandating CEO-to-median-employee pay ratio reporting since 2018, showed a rise from 160:1 to 190:1.