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CEO salaries balloon in age of stock options

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30 years ago executive salaries were 30 times larger than worker salaries. By the turn of the century, the ratio raced to 648 to one.

CORNELL (US)—In the 1970s, executive salaries were about 30 times larger than worker salaries. By 2000, the ratio zoomed to 648 to one. A recent Web seminar hosted by Cornell University’s IRL School suggests the dramatic surge is linked to stock options and record stock market growth.

Charlie Tharp, an ILR lecturer who took part in the seminar, says during the last 40 years a larger proportion of executive pay has become equity-based compensation versus salary. Many executives are rewarded for performance with stocks and stock options.

Add to that the enormous growth of companies and of the stock market over this time period, Tharp says, “It’s logical executive pay would grow.”

Median pay for executives was down 6.8 percent in 2008 from 2007 and bonuses were down 20.6 percent, according to Equilar, a California-based data provider. In 2008, the median executive compensation package was $1.856 million. In 2007, it was $1.473 million.

On average, the proportion of salary to other forms of compensation such as stocks goes down as company size goes up, says Kevin Hallock, director of research for the Center for Advanced Human Resource Studies.

For the largest 10 percent of companies in the United States, greater than half of compensation for CEOs comes in the form of stock or stock options, Hallock adds. Salary comprises an average of under 15 percent of total pay for CEOs of very large companies and about 40 percent of total pay for smaller companies.

Hallock says many organizations are facing “say-on-pay” shareholder votes this spring.

The shareholder proxy say on executive pay began in the United Kingdom in 2002, Tharp explains. Of 75 shareholder proxy votes on executive compensation in 2008 in the United Kingdom, only 12 received a majority vote, Tharp adds.

Hallock suspects American shareholders are not clamoring for the proxy vote. He contacted 20 of the largest 25 institutional investors in the United States in spring 2008. At the time, about half were against say-on-pay, one quarter were for it and one quarter were indifferent. It is not clear, Hallock adds, whether their views have changed during the current financial crisis.

Cornell University news: www.news.cornell.edu

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