A History of Executive Compensation as a Function of Shareholder Priorities

Posted: February 15, 2022

In 2020, the average CEO raked in about $24.2 million. This is about 351 times what the normal employee earned – It’s also a dramatic change from the 1970s when CEOs only earned about 3.3 times more than the standard employee. This drastic rise in inequality has started to raise serious flags about why CEOs and other top executives earn so much more than their workers. Few people disagree that CEOs should earn more than the standard employee. But does the average CEO really deserve $24.2 million when the median annual wage is only $34,000? Interestingly, there’s a very logical reason why the system has evolved into the way it is - looking at the issue through the lens of an executive compensation consultant can be very illuminating. Let’s take a look at the history of executive compensation as a function of shareholder priorities. Tying executive pay to the stock market Corporations are constantly changing their approaches regarding the best ways to compensate their top executives. For a long time, executive compensation was primarily made up of salaries and bonuses. Bonuses were then tied to meeting financial targets. This was a fairly simple way to go about paying executives. However, starting in the 1990s, boards began to prioritize shareholder value. The best way to increase value for shareholders, they deduced, was to link executive compensation to the price of the company’s stock. Doing this would align the CEOs' values with shareholders’. Basically, a higher stock price would be better for all parties involved. This ideology still dominates today. At the largest U.S. companies, stock options account for more than half of total CEO compensation. While this thinking makes sense, it doesn’t account for one thing. What if the stock market as a whole rises independently of corporate performance? During bull markets, it’s not uncommon for nearly every single publicly traded company to enjoy stock gains. This has resulted in CEOs receiving large compensation packages, even if their stock underperforms competitors. Tying executive pay to the stock market is one of the main reasons that executive pay has ballooned over the past few decades. Changing who companies serve In light of this massive inequality, many companies are starting to reevaluate their corporate missions. For decades, the main purpose of a corporation was to provide value to shareholders. This was done by issuing stock, which would rise in value. Over time, a consistent increase in stock price would return value to shareholders. This was the best way to provide value to shareholders. However, in recent years, companies are starting to redefine who company’s should be serving. In fact, 181 CEOs recently voted to change the definition of corporate purpose. Now, the corporate purpose of many companies is shifting from serving just one stakeholder (shareholders) to serving 5. These 5 stakeholders are shareholders, customers, employees, suppliers, and the community. The future of compensation packages? In the past few decades, many companies have grown into massive corporate global conglomerates. Due to this, their decisions impact many different parties. Although income inequality is certainly at an all-time high, it does look like companies are starting to shift their priorities. Instead of focusing entirely on stock price and shareholder value, many companies are starting to also consider customers, employees, suppliers, and the community that they operate in. Due to this, there is a good chance that we will start to notice a shift in how America’s top executives are compensated in the coming years. More specifically, compensation will most likely be tied to meeting targets that are not solely focused on improving the company’s stock price. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.