Thursday, March 08, 2018

Compensating CEOs of Public Companies

One of the changes in the tax code made by President Clinton was to limit how much executive compensation was deductible against corporate earnings. However, the cap applied to cash pay only, not stock grants. So, stock compensation has become an ever-larger proportion of executive pay at public companies. 

Thus, the CEOs pay is based more on the company's stock price than its performance in its industry. Yet, the stock market can do very well or very poorly no matter what the company does. It is more dependent on the state of the economy, Federal Reserve policy, industry trends, bull-and-bear stock-market cycles and inflation. The CEO can do very well in a rising market.

Are our CEOs over-paid? They get more than CEOs in Europe or Japan. Today, top German executives make about half of what their U.S. counterparts are paid; Japanese CEOs get paid about 10 percent of comparable American CEOs. In 1965, an American CEO was paid about 20 times -- a ratio of 20-to-1 -- more than the median pay of other workers. Then executive compensation took off, peaking at 383-to-1 in 2000. The ratio checked in at 296-to-1 in 2013, according to Economic Policy Institute, a liberal think tank.

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