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Politics and Economy:
Executive Pay
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Some observers thought that the spate of corporate scandals in recent years would reverse trends in executive pay, or at least put a cap on pay packages. Indde Yet in spite of all the bad press and shareholder outrage, executive is rebounding. According to THE ECONOMIST, in 2004 America's top 2000 chief executives enjoyed pay raises of around 30% and earned an average of $5.7m. The equation of executive packages may look different these days — with more money in cash payments and less in stock options. However, on March 21, 2004, THE FINANCIAL TIMES reported that yearly bonus payments are heading back to the high levels seen in the boom of the late 1990s. A study by Mercer Human Resource Consulting for THE WALL STREET JOURNAL shows that last year's bonuses for the CEOs at 100 large American companies rose by 46.4%. The median bonus was $1.14m.

Several aspects of these big pay-outs cause consternation among stockholders and employees. Although figures vary somewhat, the ratio of the salary of the company boss to the average American worker is quite dramatic. Different studies have come to different ratios — all of which are significant and have increased over the years.

How Much Does the Big Boss Make?      

Turns out that American executive compensation rates are quite different from those of the rest of the developed world. In Japan a typical executive makes eleven times what a typical worker brings home; in Britain, 22 times. In America...

Shareholders and Pay Packets

Another reason CEO pay packets are coming under scrutiny is the feeling that big pay for executives doesn't always mean good returns for the shareholders. According to a August 2003 report by THE ECONOMIST, median total pay for senior executives among America's top 350 companies rose by 10 percent in 2002, after the economy began to recover from the stockmarket bubble, even as median total shareholder returns in those companies fell by more than 5 percent.

Figures such as this have led some shareholders and institutional investors to campaign for change in the way corporate pay is structured. Some reformers are casting an eye on who determines the pay package — asking that someone outside the corporate board make the deal or shareholders themselves have a say. According to THE ECONOMIST, "Top bosses's pay is decided by compensation committees composed of non-executive directors. These may favour bosses over investors rather than display the detachment that might ensure a direct link between performance and pay. Muddying the waters are compensation consultants, who are often appointed by the very chief executives whom they advise upon."

Shareholder activists and reformers stress a "pay for performance" structure — where corporate pay is directly correlated to the effect a manager's leadership has had on the company's health and wealth. Learn more about Pay for Performance from the links below:

The SEC Steps In

Corporate accountability advocates worry that there is more work to do in really achieving "pay for performance." They have asked for greater transparency in corporate pay packages so that sometimes hidden element — retirement plans, severance agreements, loans to executives and various stock agreements are added into total calculation that should be public — and justified to the shareholders. An additional request is that the value of shares granted to senior management be deducted from bottom line profits when then are granted, not a future date.

In January 2006, the Securities and Exchange Commission published proposed rules addressing some of these issues. The new rules would expand disclosure requirements for top corporate managers. Companies would have to provide greater information for pay packages, retirement plans and other perks. The new rules would also require companies " to place a precise dollar value on grants of stock options and restricted stock." And, in a move to make the information accessible to lay shareholder, the SEC will require "most of this disclosure to be provided in plain English." Read more below.

Income Disparity

According to the Institute for Policy Studies, the pay of the average worker remained almost flat at $27,000 from 1990 to 2004, adjusted for inflation, while average chief executive pay has risen from $2.82 million to $11.8 million. Some economists see this a part of a national, or even global trend — the wealthiest among us — are getting richer and richer. The Organisation for Economic Cooperation and Development (OCED) has found the United States to be the most unequal society of all industrialized nations. The U.S. ranks last among OECD nations in terms of income equality, yet in 1993 the poorest 10% of the U.S. population was still wealthier than two-thirds of the rest of the world.

In its recent report "The State of Working America 2002-03," the Economic Policy Institute estimated that the bottom 80 percent of American households control only about 17 percent of the nation's wealth. Meanwhile, wages, benefits, and working conditions for workers at the bottom continue to decrease. Worldwide, the story is the same. A 2002 study by the World Bank found inequality growing not only between nations, but within nations.

Additional Information

Additional sources: FINANCIAL TIMES; THE ECONOMIST; THE WORLD BANK; "The State of Working America 2002-03, The Economic Policy Institute

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