Page 134 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

120 The Complete Guide to Executive Compensation

Average
Pay Definition CEO Company OTE Lowest Paid

Salary $200.0 $75.0 $40.0 $20.0
Multiple 2.7 5.0 10.0

Salary ST/INC $300.0 $80.0 $42.0 $20.0
Multiple 3.8 7.1 15.0
Salary ST LT/INC $500.0 $100.0 $45.0 $20.0
Multiple 5.0 11.1 25.0
Table 4-4. CEO pay vs. other employees ($ amounts in thousands; ST/INC, short-term
incentives, LT/INC, long-term incentives)

One can see how the impact of a significant long-term incentive plan could raise the
multiple dramatically. It has been said that J.P. Morgan considered a multiple of 20 times
average pay appropriate, but since he was likely referring to incomes with little in the way of
long-term incentives, his statement is somewhat misleading. Even so, there is no evidence to
show that he was including dividends on all of the company stock he owned.
The ratio is also greater for larger than smaller companies. In some cases, the problem has
been exacerbated by adding on new long-term incentive plans without reducing or removing
others previously in place. Enlightened CEOs tried to address the issue, not by lowering their
pay, but by putting in similar pay-for-performance rewards throughout their organization.
Stock options, gain sharing, team-based pay, and company performance measurements for
defined contribution and incentive plans are examples.
On the other hand, there are a few greedy executives who are concerned only about their
own wealth and well-being. With these, pay multiples of 500 or more have been reported. It
is hard to imagine any of these overpaid individuals spending much time walking among the
employees and expressing any interest in their issues.

Pay Compression
Given the widening gap of recent years between CEO pay and that of others in the organ-
ization, it is difficult to believe there was ever the reverse problem: insufficient pay spread
to compensate for difference in responsibilities. This was an issue before, during, and
shortly after World War II primarily for two reasons. The stock market was not providing
big dollars to professional managers due to its lethargic state, and labor unions were able to
attain large pay increases for their members. It is hard to believe this problem could return,
because it would require a long-term meltdown of the equity market and a return to a
largely unionized workforce able to receive increases far in excess of the pay increases for
professional managers.
Therefore, employees paid little attention to executive pay as long as they had good-
paying jobs. Even during the Great Depression of the 1930s, because many of the “fat cats”
had been wiped out in the stock market crash of 1929, there was not much attention given to
what executives were paid. However, as shown in Table 4-5, all of that changed in recent
years as employees took offense that executives not only kept their jobs while they lost theirs,