Executive Decisions: Why CEO pay spun out of control.
During Angelo Mozilo’s tenure as CEO of the subprime mortgage giant Countrywide, he made more than $520 million. At one point, the board’s compensation committee tried to object to the lenient performance goals in his generous pay package. So Mozilo hired a compensation consultant—with the cost covered by shareholders—to squeeze the board for more. He got it, as well as subsidies for his wife’s travel on the corporate jet and for the associated taxes. By the end of 2007, when Countrywide finally revealed the massive losses it had previously obscured—the company had overstated its profits by $388 million and ended up paying $8.7 billion to settle predatory lending charges—Mozilo had made more than $103 million for the year. Countrywide’s shareholders, meanwhile, lost more than 80 percent of their investments.
In most high-paying jobs, people are basically paid according to performance. When a film makes millions at the box office, the star of the movie can demand more for her next contract. Conversely, when actors perform—or behave—badly, salaries slide and endorsement deals disappear. Similar market considerations apply to rock stars, athletes, investment bankers, and just about everyone else who makes eight or nine figures.
CEOs are different: They are almost certainly the only category of Americans who regularly get rewarded for failure with massive amounts of money. Mozilo of Countrywide was hardly an outlier. In 2009, Aubrey McClendon of Chesapeake Energy was among the highest-paid CEOs in the nation, despite a near-60 percent decline in stock price the previous year. He received more than $114 million in total compensation, including a bonus of $75 million. (The sale to the company of his antique map collection for more than $12 million was scuttled when shareholders filed a lawsuit.) When Hewlett Packard CEO Mark Hurd was ushered from the company for filing false expense reports for outings with a former soft-core porn actress, he left with his $12 million severance package intact. In 2011, 97 percent of companies paid their executives bonuses even if performance was below the median level of their industry peers.
The astronomical sums commanded by CEOs are the culmination of a decades long trend. In 1980, the average ratio between CEO salary and the median salary of a worker was 40 to 1. In 2010, it was 325 to 1. Among the top 50 corporations in the United States, the most extreme pay ratio, according to the compensation data firm payscale.com, is 1,737 to 1. That salary belongs to Stephen Hemsley, the UnitedHealth Group CEO, who received nearly $102 million last year, compared with the median employee salary of $58,700. Even in the midst of a lingering recession, median S&P 500 CEO pay has continued to climb—growing by 36 percent from 2009 to 2010. It is the single biggest factor in the widening income disparity that has occurred in the United States over the past two decades.
THIS ACCUMULATION of wealth by a small group of individuals came about for a number of reasons, none of which reflect market forces. The roots of elevated CEO salaries lie in the mergers and acquisitions and leveraged-buyout frenzy of the 1980s, plus the dot.com explosion of the 1990s, which made twerpy twentysomethings into billionaires overnight. I’m a captain of industry, CEOs said to themselves and their boards. Those kids should not be paid more than I am!
These CEOs were aided by a perfect storm of self-interest. The pay-consultant industry came up with new ways to justify higher salaries—and to ensure their own compensation. Boards of directors set the pay for CEOs, who set the pay for the directors. Boards sometimes included CEOs from other companies, who were eager to raise the bar so they could demand the same at their own firm. Something like the Lake Wobegon effect took place: In measuring performance, all CEOs were above average.