Home   About Us   Contact Us
Ethics & Employees
Corporate Governance
Corporate Social Responsibility
Public Sector Governance
Links and Meetings

Corporate Governance


Executive Compensation

How much should top executives be paid? Is this an ethics issue? Average compensation of top US executives is now about 475 times greater than the average US worker's average salary. EthicsWorld will be tracking this issue in the months ahead.

On this page


* * *

CEO-Worker Pay Imbalance Grows

New data from the Economic Policy Institute:

In 2005, the average CEO in the United States earned 262 times the pay of the average worker, the second-highest level of this ratio in the 40 years for which there are data, reported the Economic Policy Institute on June 21, 2006. In 2005, a CEO earned more in one workday (there are 260 in a year) than an average worker earned in 52 weeks.

The 1980s, 1990s, and 2000s have been prosperous times for top U.S. executives, especially relative to other wage earners. This can be seen by examining the increased divergence between CEO pay and an average worker’s pay over time, as shown in Figure A. In 1965, U.S. CEOs in major companies earned 24 times more than an average worker; this ratio grew to 35 in 1978 and to 71 in 1989. The ratio surged in the 1990s and hit 300 at the end of the recovery in 2000. The fall in the stock market reduced CEO stock-related pay (e.g., options) causing CEO pay to moderate to 143 times that of an average worker in 2002. Since then, however, CEO pay has exploded and by 2005 the average CEO was paid $10,982,000 a year, or 262 times that of an average worker ($41,861).

Figure A: Ratio of CEO to average worker pay, 1965-2005

*Data note:
CEO pay is realized direct compensation defined as the sum of salary, bonus, value of restricted stock at grant, and other long-term incentive award payments from a Mercer Survey conducted for the Wall Street Journal and prior Wall Street Journal-sponsored surveys. Worker pay is the hourly wage of production and nonsupervisory workers, assuming the economy-wide ratio of compensation to wages and a full-time, year-round job.

Back to Top

* * *


“Gilded Paychecks”: Rising Executive Compensation and the Role of Consultants

In 2004, one-half of executives in leading U.S. corporations enjoyed total compensation (including salaries, bonuses, and stock options)  - that was more than 104 times the average pay of U.S. workers pay, while 10% of executives earned more than 350 times the average workers’ pay. The best compensated U.S. corporate executives took home over 700 times the compensation of the average America in 2004, according to data compiled by Pearl Meyer & Partners, an affiliate of Clark Consulting, and published on April 9, 2006 in The New York Times in a special report on executive pay by Eric Dash. The report is the first in a series of articles, entitled "Gilded Paychecks," on the subject of compensation.

The data shows a drastic widening of the gap between executive pay and average worker compensation in the U.S. from the early 1980s. In 1940, for example, half of executives earned more than 56 times the average workers pay. The latest numbers provide a broad context for an extensive discussion about the appropriateness of major compensation packages to America’s business leaders. It is an issue that is under review at the U.S. Securities and Exchange Commission and is being raised at many annual meetings of U.S. companies that are currently taking place.

No issue in this framework has created more concern for shareholders than the awarding by boards of directors of substantial compensation rises to chief executive officers of companies whose stock price has declined. The issue is illustrated by a story in The New York Times on April 10, 2006, “Advice on Boss’s Pay May Not Be So Independent” by Gretchen Morgenson.

Morgensen reports that, in 2005, Ivan G. Seidenberg, Chairman and Chief Executive Officer of Verizon Communications Inc. received $19.4 million in salary, stock and other bonuses, constituting a 48% rise in his overall compensation. In 2005, however, the stock price fell 26 percent, bondholders’ value dropped, and the pensions of 50,000 managers were frozen. Verizon’s earnings declined by 5.5 percent in 2005.

In defending its decision to increase Mr. Seidenberg’s pay, Verizon’s Board of Directors pointed to “challenging” performance targets and standard executive reward packages in the industry. The board also underscored the fact that Mr. Seidenberg’s pay was determined with the help of an “outside consultant” who answers to the board.

Conflicts of Interest

According to the article, however, this consultant is Hewitt Associates, an employee benefits management and consulting firm, which has a substantial array of consulting contracts with Verizon which, according to the report, have amounted to over half a billion dollars since 1997. The reporter suggests that the consultants, which secure their contracts from management, had a conflict of interest on advising the board on the CEO’s remuneration.

Executive pay consultants are increasingly being used by the compensation committees of boards of directors. The reporter writes that the procedures behind, and justifications for, the conclusions reached by the consultants and the full reasoning behind board compensation decisions rarely come to light and have received little to no public analysis.

While compensation committees of board of directors should consist solely of independent directors without ties to management, according to the latest U.S. corporate governance standards, the New York Times report provides details on Verizon’s board that raise questions about just how independent the compensation committee members are. Morgensen reports that boards of directors are frequently composed of executives from other companies that have a strong incentive to keep average executive pay high. While SEC regulations require compensation committees members to be unconnected to the executives whose pay they control, the links between the two are often said to be subtle and hard to control, frequently stemming from years of running in the same social circles or sitting on the same boards.  A number of key members of the Verizon compensation committee sit on the same boards as does Verizon’s CEO, for example.

Possible Solutions

The Securities and Exchange Commission is currently considering suggestions for a new set of executive compensation disclosure rules, which it aims to introduce before the 2007 proxy season (see Landmark US SEC Regulations and SEC Chairman Speech lower on this same page). It has suggested regulations that would require companies to publicly name pay consultants, as well as provide far more detail on all aspects of executive remuneration, including perks and retirement packages. It would also oblige companies to divulge more about how compensation committees operate and establish pay. The rules, however, would not compel businesses to reveal information on any other contracts consulting firms have with the company. Moreover, critics have argued that they would not increase the role that shareholders have in setting pay.

Many NGO’s and experts have joined the SEC in proposing solutions to the compensation issue. The Committee for Economic Development, for instance, in its recent report, “The State of Corporate America After Sarbanes-Oxley” (See Corporate Governance, Views and Analysis) stressed that the issue of excessive compensation must be considered in terms of both “process and disclosure.” It underlined its belief in the validity of market forces and individual performance in setting executive salaries as well as its opposition to “specific rules, laws, or regulations that place artificial limits on compensation.”  The report suggested, among other things, that compensation committees should fully disclose not only compensation decisions but also the reasonings behind them. It further suggested that determinations of pay relative to performance should be based on long-term increases in corporate value. Finally, it recommended that companies maintain the right to recall executive bonuses should targets not be met.

Back to Top

* * *


U.S. Banker Receives $135 million

Wachovia Corporation, a major U.S. banking group with headquarters in Charlotte, North Carolina, reported on January 30, 2006 that Wallace Malone, a vice chairman and director, will retire with a severance package valued at $135 million.

Mr. Malone had headed South Trust Corporation which was acquired by Wachovia in November, 2004. In a filing with the Securities and Exchange Commission the retirement payment, according to The New York Times.

This sum comes on top of the $473 million worth of Wachovia shares that Mr. Malone owns as a result of the sale of South Trust and including a $10 million a stock grant that he received last year. 

Last year the former head of Gillette, Mr. James M. Kilts, who had held the position for four years, became eligible for a severance package worth $175 million when his company was acquired by Procter & Gamble.


The Securities and Exchange Commission is reviewing current corporate compensation practices. Numerous shareholder and investor groups, as well as public interest groups, are also reviewing the degree to which top executive compensation is fully disclosed by companies and the scale of key awards.

Back to Top

* * *

Two Reports: SEC Action Pl,an on Executive Compensation and SEC Chairman's first major statement explaining his goals on compensation transparency.

The U.S. Securities and Exchange Commission Makes Landmark Decision to Increase Transparency in Corporate Compensation

(January 17, 2006)
The Following is the Press Release issued by the SEC:

The Securities and Exchange Commission today voted to publish for comment proposed rules that would amend disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters, and security ownership of officers and directors. The proposed rules would affect disclosure in proxy statements, annual reports and registration statements. The proposals would require most of this disclosure to be provided in plain English. The proposals also would modify the current reporting requirements of Form 8-K regarding compensation arrangements.

1. Executive and Director Compensation

The proposals would refine the currently required tabular disclosure and combine it with improved narrative disclosure to elicit clearer and more complete disclosure of compensation of the principal executive officer, principal financial officer, the three other highest paid executive officers and the directors.

New company disclosure in the form of a Compensation Discussion and Analysis would address the objectives and implementation of executive compensation programs - focusing on the most important factors underlying each company's compensation policies and decisions.

Following this new section, executive compensation disclosure would be organized into three broad categories: compensation over the last three years; holdings of outstanding equity-related interests received as compensation that are the source of future gains; and Retirement plans and other post-employment payments and benefits.

  • A reorganized Summary Compensation Table would be the principal vehicle for showing three-year compensation and would include additional information.
    • A new column would report total compensation.
    • A dollar value will be shown for all stock-based awards, including stock and stock options, measured at grant date fair value, computed pursuant to Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, to provide a more complete picture of compensation and facilitate reporting total compensation.
    • The "All Other Compensation" column would include the aggregate increase in actuarial value of pension plans accrued during the year and all earnings on deferred compensation that is not tax-qualified.
    • The threshold for disclosing perquisites would be reduced to $10,000 and interpretive guidance is provided for determining what is a perquisite.
    • Two supplemental tables would report Grants of Performance-Based Awards and Grants of All Other Equity Awards.

  • Disclosure regarding outstanding equity interests would include
    • the Outstanding Equity Awards at Fiscal Year-End Table, which would show outstanding awards representing potential amounts that may be received in the future; and
    • the Option Exercises and Stock Vested Table, which would show amounts realized on equity compensation during the last year.

  • Retirement plan and post-employment disclosure would include
    • the Retirement Plan Potential Annual Payments and Benefits Table, which would disclose annual benefits payable to each named executive officer;
    • the Nonqualified Defined Contribution and Other Deferred Compensation Plans Table, which would disclose year-end balance, and executive contributions, company contributions, earnings and withdrawals for the year; and
    • disclosure of payments and benefits (including perquisites) payable on termination or change in control, including quantification of these potential payments and benefits.

A Director Compensation Table, similar to the Summary Compensation Table, and related narrative would disclose director compensation for the last year.

2. Related Person Transactions, Director Independence and Other Corporate Governance Matters

The proposals would update, clarify, and slightly expand the disclosure provisions regarding related person transactions. Principal changes would include a disclosure requirement regarding policies and procedures for approving related party transactions, a slight expansion of the categories of related persons and a change in the threshold for disclosure from $60,000 to $120,000. The requirement to disclose these transactions would also be made more principles-based, and would require disclosure if the company is a participant in a transaction in which a related person has a direct or indirect material interest.

A proposed new item (Item 407 of Regulations S-K and S-B) would require

  • disclosure of whether each director and director nominee is independent;
  • a description of any relationships not otherwise disclosed that were considered when determining whether each director and director nominee is independent; and
  • disclosure of any audit, nominating and compensation committee members who are not independent.

Proposed Item 407 also would consolidate corporate governance related disclosure requirements currently set forth in a number of places in the proxy rules and Regulations S-K or S-B. This would include disclosure regarding board meetings and committees, and specific disclosure about nominating and audit committees. Proposed Item 407 would also require similar disclosure regarding compensation committees and a narrative description of their procedures for determining executive and director compensation.

3. Security Ownership of Officers and Directors

The proposals would require disclosure of the number of shares pledged by management.

4. Form 8-K

The proposals would modify the disclosure requirements in Form 8-K to capture some employment arrangements and material amendments thereto only for named executive officers. The proposals would also consolidate all Form 8-K disclosure regarding employment arrangements under a single item.

5. Plain English Disclosure

The proposals would require companies to prepare most of this information using plain English principles in organization, language and design.

Comments on the proposed rules should be received by the Commission within 60 days of publication in the Federal Register.

Back to Top

* * *

New US SEC Chief Pledges to Increase Corporate Transparency, Starting with Executive Compensation

In January 2006, the SEC Chairman provided the detail of broad approaches towards executive compensation that he highlighted in a major speech on December 12, 2005. That presentation by Chairman Christopher Cox at the New York Economic Club provides thew basic context for the work that is unfolding at the SEC in 2006 that may well lead to major increases in transparency of Board actions at major corporations on corporate compensation.

Mr. Co0x started by stressing that the SEC will strengthen rules to ensure that shareholders have clearer information on executive pay, while also moving to radically simplify reporting requirements by corporations in order to enhance the clarity of public information.

Chairman Cox asserted that, “When it comes to giving investors the protection they need, information is the single most powerful tool we have. It's what separates investing from roulette. If the SEC is truly to succeed in helping investors and in ensuring compliance with the law in the securities industry, we'll need nothing less than an all-out war on complexity.”

He said that the complexities of SEC rules often impede compliance. “When it comes to disclosure documents intended for investors, nothing is more complicated than the description of executive compensation. We aim to simplify it, and make it more meaningful,” he noted.

In this area the SEC wants to see “information that's clear, complete, and comprehensible.” He said the SEC “will propose disclosure that permits a complete and accurate understanding of the compensation package. Any judgment or action taken on that information is up to boards of directors and investors, not us. It is absurd to think that the owners of an enterprise should be denied full knowledge of how much they're paying their employees. The shareholders own the company, and the executives work for them. Think about it this way: Which of our nation's corporations issues signed, blank payroll checks for its employees to fill in the amount, learning only after the employee has cashed it just how much that check was for?”

Interactive Data

Mr. Cox said: “Making our mandated disclosures actually useful to investors is the idea behind another SEC initiative: interactive data. The beauty of interactive data is that it will not only make today's 10Ks, proxies, and mutual fund prospectuses more useful to investors, but it will also eliminate much of the time and expense that companies currently devote to filing SEC reports.”

He pointed out that today the SEC has over 800 different forms and “the SEC might have need of no more than a dozen. The key to making this happen is looking at the data on the forms independently from the forms themselves. That's what we mean by interactive data. Computer codes can tag each separate piece of information on a report, and tell us what it is: operating income, interest expense, and so forth. That way, every number in a report or financial statement is individually identified, both qualitatively and quantitatively. For individual investors, this means they'll be able to use more sophisticated software tools to analyze the information from SEC filings in real time. For the SEC, it means we could organize our database not around individual reports, but instead around the companies who file them.”

Back to Top

* * *


Corporate Governance: Different Views in Different Countries Germany on Trial

On December 21, 2005, the Germany Federal Supreme Court ruled in favor of public prosecutors who appealed the acquittal earlier in the year of top corporate executives in a case involving Mannesmann. The case brings to the fore stark differences in compensation for successful business executives. Over the last year, for example, several top executives of major U.S. corporations whose firms were acquired went home with vast multi-million dollar payments. A perspective on this major German case was provided on December 22, 2005 in an editorial (fully reproduced below) in The Financial Times.

Markets on trial
dddNearly six years after Vodafone acquired Mannesmann, the repercussions continue to reverberate around Deutschland AG. Yesterday's decision by the federal appeal court to order a retrial of six Mannesmann directors over bonuses paid to its chief executive after the takeover battle has further damaged the country's reputation as a place to do business. It also reinforces the view that Germany is a country where distrust of success and nationalist protectionism outweigh the rights of shareholders.

The facts in the Mannesmann case are simple. Vodafone succeeded in its bid only after a fierce defence by the German telecommunications giant that forced the British mobile telephone group to pay €175bn (£119bn). The share price had risen 176 per cent over the previous year and the largest shareholder proposed paying bonuses worth more than €74m to the chief executive and other managers.

Such a practice would be uncontroversial in other market economies. But it aroused controversy in Germany where the interests of the company and its diverse stakeholders rate more highly than the rights of shareholders. Court proceedings for breach of trust were brought against six directors, including Josef Ackermann, Deutsche Bank chief executive. The case was thrown out but that ruling has now been dramatically overturned.

There was also a storm among Vodafone shareholders over bonuses paid to its chief executive following the Mannesmann purchase. Yet this was entirely justified given the subsequent plunge in the British group's share price - as so often happens after acquisitions. Mannesmann shareholders, by contrast, were enriched by the performance of their managers and were entitled to reward them appropriately.

The six defendants now face more years of legal uncertainty and distraction from their working lives. The ruling also highlights the shallow roots that the concept of shareholder value has put down in Germany. It will inhibit the development of a more dynamic corporate culture in a society that has an aversion to risk-taking and the concomitant rewards for success. And it will reinforce international perceptions that this is a country where the normal rules do not apply when it comes to mergers and acquisitions involving its flagship companies.

Mr Ackermann has said he will not resign - no doubt to the relief of Deutsche Bank shareholders. Yet they too have been penalised by this continuing show trial that has provided a lengthy and unnecessary distraction for Germany's largest bank. It is not surprising that Deutsche Bank - like several others among the country's most successful enterprises - considered moving its corporate base abroad. Nor is an environment where rewards for exceptional performance produce such consequences an attractive place for ambitious managers to work.


Back to Top

* * *



Useful Sites...



Transparency International


More Links...