The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISFigure 2.2 Average and Median Expected Compensation for CEOs in USA S&P 500 Firms, 1970-2008Note: Compensation data are based on all CEOs included in the USA S&P 500, using data from Forbes and ExecuComp.CEO total pay includes cash pay, restricted stock, payouts from long-term pay programs and the value of stockoptions granted (using company fair-market valuations, when available, and otherwise using ExecuComp’s modifiedBlack-Scholes approach). Average (median) equity compensation prior to 1978 estimated as 11.2% (and 0%) of totalpay (based on Murphy (1985), equity compensation from 1979 through 1991 estimated as amounts realized fromexercising stock options during the year, rather than grant-date values. Non-equity incentive pay is based on actualpayouts rather than targets, since target payouts were not available prior to 2006. Monetary amounts are converted to2008-constant US dollars using the Consumer Price Index, and then converted to Euros using the 2008 year-endexchange rate.The 2008 average and median in Figure 2.2 (€7.3 mil and €5.4 mil) are considerablysmaller than the average and median in Figure 2.1 (€8.1 mil and €6.1 mil). This differencelargely reflects that Figure 2.1 includes the change in the actuarial value of pension benefits,a component of compensation that was not disclosed or reported before 2006. Anotherdifference – but relatively immaterial – is that Figure 2.1 includes the “target” rather thanrealized payouts from bonuses and other non-equity incentive plans; these data also becameavailable after the 2006 revisions in disclosure rules. To maintain comparability in both ourtime-series results and (in the next Section) our USA vs European comparisons, Figure 2.2and the results hereafter exclude pensions and uses payouts rather than targets for non-equityincentive plans.-15-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISFigure 2.3 Median Expected Compensation for CEOs in USA S&P 500 Firms, 1992-2008Note: Median pay levels based on ExecuComp data for S&P 500 CEOs. Total compensation (indicated by bar height)defined as the sum of salaries, non-equity incentives (including bonuses), benefits, stock options (valued on the dateof grant using company fair-market valuations, when available, and otherwise using ExecuComp’s modified Black-Scholes approach), stock grants, and other compensation. “Other compensation” excludes pension-related expenses.Pay composition percentages defined as the average composition across executives. Monetary amounts areconverted to 2008-constant US dollars using the Consumer Price Index, and then converted to Euros using the 2008year-end exchange rate.Figure 2.3 shows the composition and level of pay for the median CEO in S&P 500firms from 1992 to 2008. The Euro-denominated data are again constructed by first adjustingfor inflation (using the US Consumer Price Index), and then converting to Euros using the2008 year-end exchange rate. The pay composition percentages in the figure are constructedby first calculating the composition percentages for each CEO, and then averaging acrossCEOs. In 1992, base salaries accounted for 39% of the €2.0 million median CEO paypackage, while stock options (valued at grant date) accounted for 25 percent. By 2001, basesalaries accounted for only 18% of the median €6.4 million pay, while options accounted formore than half of pay. By 2008, options fell to only 26% of pay, as many firms switchedfrom granting options to granting restricted stock (which swelled to 31% of pay).-16-
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