It's hard to find people who approve of CEO compensation levels these days. Many will surely rejoice upon hearing that for the second year in a row, the median total compensation of North American CEOs shrank. Despite that, there's a troubling trend in CEO pay, one that can hurt shareholders.
First, though, let's review the good news, with figures from The Corporate Library:
- Median total compensation fell by 2.8% from 2008 to 2009.
- More than half (56%) of CEOs experienced a decline in their annual pay.
- Bigger companies cut their leaders' pay more, with S&P 500 CEOs experiencing a median compensation drop of more than 11%.
Bear in mind, though, that those are only median figures. Some bigwigs experienced much more severe drops. Caterpillar
Some numbers may seem not to have fallen enough. Jeffrey Peek, former CEO of CIT Group
Still, massive increases persist at many companies, confounding many investors. WellPoint
That's the kind of argument for hefty compensation that does hold water. If a CEO is helping a company grow significantly, perhaps earning billions, then it doesn't seem so crazy to pay her millions. Paying a sizable chunk of change can be reasonable to keep a talented manager at the helm of a strong performer.
Less understandable are examples such as Kraft
The troubling trend
While it's encouraging that CEO salaries have been dropping, don't get too excited. As the economy starts cooking again, I won't be surprised to see compensation levels soaring again. And here's something else to fret about: According to the folks at The Corporate Library, between 2006 and 2008, there has been a shift from rewarding CEOs with stock options to rewarding them with fully valued stock. The problem is that this reduces the alignment of CEO interests and shareholder interests, because even if the stock price falls, the full-value shares will maintain some value, whereas stock options might not offer much value unless the share price is increased, presumably by the CEO's efforts.
CEO compensation is likely to remain a vexing issue for investors. Do you see any promising solutions to keep compensation levels from soaring? Leave a comment below and let us know!
Here's a modest proposal to reduce CEO pay. Is it outlandish or sensible?
Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway. Berkshire Hathaway and WellPoint are Motley Fool Inside Value selections. The Fool owns shares of Berkshire Hathaway, which is also a Motley Fool Stock Advisor recommendation. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.