Exposing executive pay options

May 05, 1993

With all the corporate tough talk about leaner and meaner productivity, mass layoffs and wage freezes, there's one group of employees whose compensation has mushroomed in spite of the recession: the executives who decide to make those cuts.

The annual executive compensation survey by Business Week magazine showed the corporate captains of the 365 largest U.S. firms got an average $3.8 million in 1992, up 57 percent from 1991.

Even more shocking, these chief executive officers' compensation averaged 157 times that of the average worker. Only a dozen years ago, the CEO received 42 times more than the paychecks earned by hourly workers.

With a few exceptions, this executive largess fails to reflect comparative corporate performance. Stumbling companies and those that lost money (or market share) were still magnanimous in rewarding the corporation helmsmen. Total corporate profits rose by only 22 percent.

Much of the CEO compensation comes from lavish awards of stock options, the right to buy company stock at a fixed price (and to sell it at a profit.) This executive perk can be an incentive for higher performance, so the stock price will rise and the boss' options will become more valuable.

Too often, however, millions of stock options are offered executives at a low set price by friendly boards of directors, providing rewards without deeds. The overall stock market may go up, enriching even mediocre CEOs.

Unlike salary and other benefits, stock options are not charged against a company's earnings. Options only have value when exercised, so they cost the firm nothing, the reasoning goes.

But most executive stock options do have real value, and represent a claim against the company's income. Otherwise, why give them?

The Federal Accounting Standards Board, which makes the rules that govern corporate bookkeeping, recently decided to require companies to charge executive options as a corporate expense. That's a sound move toward full disclosure to shareholders and other employees.

As a result, executive option packages will likely shrink, and pay should be more closely linked to performance.

Will this harm global competitiveness? Hardly, since Japanese executives get one-quarter the compensation of American CEOs.

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