All too often policy debates regarding executive compensation appear driven more by populist politics than any real basis in fact. In order to add some light to this debate, two professors at New York University’s Stern School of Business, Gian Luca Clementi and Thomas Cooley, recently released a working paper, offering their findings on trends in executive compensation, many of which I found surprising.
First off, Professors Clementi and Cooley measure executive compensation more broadly than just salary, perks and bonuses. They include annual change in value of own company stock and option holdings, as well as the value of own company stock sales and newly awarded securities. This broader measure is intended to give a fuller picture of how closely an executive’s wealth is tied to the performance of their firm. Not too surprising given this broader measure, the professors find that salary and bonuses are actually a small faction of overall compensation. Stock holdings, awards and options are far larger shares of compensation.
Among their other findings: A $1,000 increase in shareholder wealth is associated with about a $35 rise in CEO wealth. One factor behind this relationship is the relatively high own company stock holdings of CEOs. For 2006, about a fourth of CEOs held more than 1% of their company’s stock, while 10% held more than 5%.
A surprisingly finding was that it was quite common for CEOs to actually see negative compensation. For instance in 2002, the professors find that 40% of CEOs lost money, driven many by their own company stock and option losses. These are just a few of the paper’s findings. Hopefully this research, and others, will provide a more factual basis for debates surrounding executive compensation.