CEO compensation can come in many forms. In a modern day corporation the CEO is often paid salary plus incentives and bonuses. There are several forms of compensation that are most commonly used, and these consist of salary, short term incentives sometimes known as bonuses, long-term incentives, paid expenses or perquisites, and insurance which can include a golden parachute. The growth of CEO pay shown below in figure 1 has escalated drastically over the last 20 years with its peak in 2000 and currently it has shown regression in the last 4-5 years.figure 1 – Ratio of average compensation of CEOs and production workers, 1965-2009. Source: Economic Policy Institute. 2011. Based on data from Wall Street Journal/Mercer, Hay Group 2010. http://stateofworkingamerica.org/charts/ratio-of-average-ceo-total-direc…
“While the actual CEO performance-review process varies from one company to the next, given the visibility of the CEO compensation issue in general, ‘hard’ metrics are used more now than in the past as boards try to insulate themselves from charges of dereliction of fiduciary responsibility to shareholders,” states John R. Kimberly (2007), a Wharton management professor. “That said, the metrics are more a veneer of legitimacy than an exclusive tool, and the ultimate decision about the compensation is only loosely linked to performance measures of any sort. So, in that sense, it is as much an art as a science” (Kimberly 2007).
Ira Kay, a consultant on executive compensation for Watson Wyatt Worldwide, argues that in general the pay of the CEO tracks the company’s performance, so in general CEOs are simply paid to do what they were hired to do—bring up the price of the stock to increase shareholder wealth (Newton 2012). Edgar Woolard, a former CEO himself, holds that the methods by which CEO compensation is determined are fundamentally flawed, and suggests some significant changes (Newton 2012).
In support of Ira T. Kay there are two myths, the myth of the failed pay-for-performance model and the myth of managerial power. The first myth hinges on the idea that the link between executive pay and corporate performance—if it ever existed—is irretrievably broken. The second myth accepts the idea of a failed pay-for-performance model and puts in its service the image of unchecked CEOs dominating subservient boards as the explanation for decisions resulting in excessive executive pay.
Edgar Woolard Jr. subscribes to four myths which he holds as the basis for why he thinks CEO pay is not justified by performance. The first myth denounces that CEO pay is driven by competition and that CEO pay is driven today primarily by outside consultant surveys. Myth #2 denounces that compensation committees are independent. The compensation committee talks to an outside consultant who has surveys that you could drive a truck through and that support paying anything you want to pay (2012 Newton). Myth #3 talks about CEOs taking credit for market bubbles when any CEO could have been along for the ride and looked spectacular. The fourth myth deals with CEOs who get large severance packages when they fail. CEOs should not get paid too fail.