CEO Pay: What Role Will Perception Play?

Posted by: Jena McGregor on February 04, 2009

Today, President Obama and Treasury Secretary Tim Geithner plan to announce a new executive compensation plan at the White House, the New York Times is reporting. The report says that the Obama administration is expected to impose a cap of $500,000 for top executives at companies that receive large amounts of bailout money, and would limit them from receiving bonuses above their base pay, beyond normal stock dividends. (Other reports say long-term compensation such as restricted stock would be allowed.) The new plan, it appears, would only apply to companies that come back for further funds, and it was not clear whether it would apply to all companies or those considered “exceptional.”

But what does this mean for companies far from the chasms of Wall Street or the snows of Detroit? It could have a big impact—at least over the long term. Perception is playing an escalating role in executive pay. And that works both ways. On the one hand, new rules in 2007 from the SEC, which required companies to disclose perks worth more than $10,000 in a company’s proxy, prompted companies to cut back on shame-inducing perks like country club dues. (Corporate jets, of course, endured.)

But at the same time, it’s all relative. As bank CEOs pulled down massive pay packages in recent years—four of the 10 best-compensated CEOs in 2007, according to this analysis, headed financial services firms—compensation at other companies could be huge, but still look small in comparison. What’s a meager $12 million—the median total actual compensation in 2007 for the largest 269 public companies, according to the Corporate Library—when John Thain was paid nearly $84 million? Many compensation experts believe the extreme pay packages on Wall Street have long propelled the rest of executive pay upward, too. A rising tide lifts all boats.

So what will happen if top executives on Wall Street are only bringing home $500,000? It’s too early to tell. But if that happens, I’d guess there could eventually be plenty of boards in other industries whose CEO’s pay, once perceived to be middle-of-the-pack, suddenly thrusts them uncomfortably higher onto those annual lists of the highest-paid CEOs. If current economic conditions endure, the risk of shame could one day do even more to dampen pay across the board than any regulation.

UPDATE: How does that $500,000 salary cap compare to what CEOs of public banks receiving TARP made recently? Equilar, a research firm specializing in executive compensation, ran the numbers for fiscal year 2007, the last year for which a full set of proxy statements are available.

Companies with total assets over $10 Billion

• Average Base Salary: $844,229
• Average Cash Bonus: $2,529,229
• Average Benefits & Perquisites: $292,238
• Average Equity Awards: $ 7,407,394
• Average Total Pay: $11,073,090

Companies with total assets between $1 Billion and $9.9 Billion

• Average Base Salary: $397,162
• Average Cash Bonus: $134,717
• Average Benefits & Perquisites: $115,201
• Average Equity Awards: $ 211,674
• Average Total Pay: $858,754

Companies with total assets under $1 Billion

• Average Base Salary: $247,135
• Average Cash Bonus: $76,339
• Average Benefits & Perquisites: $38,514
• Average Equity Awards: $ 22,023
• Average Total Pay: $384,011

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Reader Comments

Richard Wil

February 4, 2009 11:59 AM

Congress is happy to cast bankers as villains if only to distract from the terrible job Congress is doing itself. I haven't seen the NY Times editorialize on Nancy Pelosi's taxpayer funded private plain.

RW

February 4, 2009 12:29 PM

However, the idea that limiting Bailout Bank Exec Compensation is anti-capitalist is flawed, simply based on the fact that these private enterprises are seeking government assistance. If we called it a welfare check for failed private institution would you feel differently?

I listened to your example of an exec that is working hard to turn it around being told his pay would be capped. This exec would consider his options on the open market and resign.

There's a deep fallacy in that argument.
Why would a similarly sized enterprise pay more for an exec that drove a purely administrative, pseudo government institution like a bank into the ground? Let the buyer beware!

I think Pres Obama, Sen McCaskill may be resetting the wage scale at the top for government funded institutions. If these guys have proven they cannot be good steward of private shareholder money, why give them a 2nd bite at the apple with taxpayer money, then reward them if it turns around? Send these guys on their way.

I think this strategy may draw out top level, next tier, diverse talent from the private sector, not identified by the top exec recruiting firms (that would be diametric to the recruiting firms interest) to take on these great roles in the banking sector, in this bleak employment market. This would be a great outcome from this mess.

Finally, the private sector wages may be reset, if they follow the government's lead on this. It is not a long leap to say that this capping compensation may in turn create more goodwill for shareholders, which will get investments moving due to the perception of goodwill and good stewardship from the board level.

I'd love to know what the bad news is in the Senator's idea. the only loser's I see in this idea are the exec, the recruiting firms, and the Ivy league brand

trh

February 4, 2009 08:21 PM

well ,what obama should have said is that you guys ain;t going to make more than me.i am going to be acountable and so are you.

DJC

February 4, 2009 11:26 PM

This socialist mentality could really hurt the tax payers in the end. Its our money that has been loaned to these institutions. Our new govt will turn away the real talent at the top and the companies will have a lesser chance of success. My executive managers are comparitively worth thier money. The cream usually does rise to the top. There is a reason most of them are there.

Bill

February 5, 2009 02:39 AM

While I agree that the best talent tends to rise to the top and should be rewarded accordingly; they should also be subject to severe
"punishment" if they fail to enhance shareholder value. They must lead their organizations by example and when cash flow is poor, its raining losses and problems; how can someone lead the workforce (or army) without suffering the same deprivations as the troops. A "let them eat cake" attitude will destroy shareholder value. Obama's program does not go far enough!!! If you want government support for your organization; then you've lost your ability to command your salary. It's your choice. If I had my way, No one in the organization could earn more than $400,000 per year in total compensation - including salary, bonus, benefits, retirement, stock options, health insurance, limo and drive, golf memeberships, etc. No stock grants period!!! Only when the taxpayer is repaid, can the executive receive any additional compensation on a prospective basis. Your motivation will be to get out of the government's requirements as soon as possible by developing a new strategy and repaying your debts.

Hayli @ Rise Smart

February 5, 2009 05:56 AM

OK, seriously? Are we arguing over whether $500k is enough? I agree with RW - if you don't like it, don't take the government funds. The main flaw I see with this plan is that, without some type of bonus structure, there may be less incentive to perform. Then again, the performance of these organizations hasn't exactly been stellar anyway, though some would argue that's due to the housing market and bad legislative policy.

Chris

February 5, 2009 12:35 PM

This information is completely irrelevent and doesn't look like anything more than a useless Obama ploy to look effectual.

2007 Data right now has nothin to do wtih reality. What about 2008 data? Or even projected 2009? How many CEO's were even planning on making that much after recieving bailouts? After being on the news for the last few months I highly doubt very many of them were coming close to the cap.

Jena McGregor

February 5, 2009 12:40 PM

Hi Chris,

Many companies don't come out with their proxies until later in the first quarter, so determining what CEOs actually made in 2008 is not possible to do on this broad of a scale until then. There are many companies that have participated in the TARP, and so the only way to calculate this is to use proxy statements, for which there are not enough released yet from the past year. We'll be blogging throughout proxy season, however, so stay tuned! I'm sure the pay packages for last year and the upcoming year will be very interesting, indeed.

Eduardo M. Nogoy

February 6, 2009 11:36 AM

The government and even president Obama should not dictate the CEOs and senior executive's pay for Banks that got TARP money. That decision should be left to the board of directors and is an internal matter. We have to remember that all the banks who got bailed out will have to repay the government plus interest. The government should focus instead on helping the banks grow their business by giving tax credits for policies that help create more jobs and helping other businesses grow. We are not a socialist country and we're not ruled by a dictator!

Ben M

February 6, 2009 04:46 PM

They'll probably lose their homes...

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How can you manage smarter? BusinessWeek writers Nanette Byrnes, Patricia O’Connell, Emily Thornton, Matthew Boyle, Michelle Conlin and Diane Brady synthesize insights from the brightest business thinkers, critique the latest management trends, and comment on leaders in the news.

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