An Overview of Corporate Executive Salaries
The total compensation of corporate CEOs is rising much faster than the compensation of hourly workers at the other end of the pay scale. Since 1960, the difference has escalated dramatically. In 1960, the average CEO was paid 40 times as much as the average worker; by 1990, the figure had risen to 107 times as much. In 2003, CEOs earned, on average, 301 times as much as average workers. By 2006, this number had escalated to 364 times the average worker's pay.
In addition to annual pay, CEO compensation also includes the value of stock options, and questions have been raised about the details of this compensation. Specifically, it has been suggested that option prices have been set retroactively at a low point in the stock's value, in order to maximize the value of the option. A common example given is that of Steve Jobs of Apple Inc., who in 2006 took a salary of $1 but earned $647 million in stock profits.
The dramatic rise in executive compensation is in line with a jump in the wealth of the top-fifth of Americans compared to the broad middle class, and has raised questions about whether such dramatic differences in compensation and wealth are compatible with a democracy. In addition, the high-profile failure of companies whose top executives leave with pre-negotiated lucrative compensation packages seems unscrupulous while most workers lose their jobs, benefits, and retirement savings often with no severance package.
Basic Terms and Definitions Related to Corporate Executives
Board of Directors: A committee elected by shareholders in a corporation to oversee the company's operation.
Chief Executive Officer (CEO): The top executive in a company. CEOs often, but not necessarily, also have the title president. The CEO is ultimately responsible for directing a corporation and reports to the board of directors.
Compensation: The total value of the pay given to a worker.
Deferred Compensation: The promise of payment (compensation) in the future. A company-funded pension is one example; stock options are another.
Productivity: The value added as a result of worker or company activity. For example, if a company buys a raw material (steel) for $1 million and fashions it into machinery sold for $2.5 million, the productivity is $1.5 million. The term productivity usually measures the value of a company's workers. Thus, if a worker is paid $20 an hour, and adds $25 in value as a result of the work, his/her productivity is $5. Over time, companies like to see the productivity increase. Whether or not this added productivity benefits only the company, or is shared with workers, is often an issue when workers negotiate their compensation.
Stock Options: The right to purchase a company's stock at a fixed price (the option price). If the price is set on January 1, 2007, for example, and the company's stock rises by $5 a share over the next two years, an executive with an option to buy 100,000 shares can buy shares at the option price and immediately sell them, pocketing a $500,000 profit.
Wealth: The value of one's property. People can inherit wealth, or they can create it by earning large amounts of money. Wealth is also generated by the rising value of owned property (like real estate or company shares) without regard to the actions of the owner.