Over the last 30 years, Chief Executive Officer (CEO) salaries in the United States have grown from 40 times that of the average worker to over 600 times (Jones, 2013). As those salaries have grown, so has opposition to the ever growing levels of executive compensation. Although activists that oppose the current level of executive pay frequently focus on how pay levels are determined (i.e., return on equity), there is an equally interesting discussion regarding how chief executives are compensated.
Among the top ten highest paid CEOs in 2013, Larry Ellison of Oracle is unique in that his entire compensation package is composed entirely of stock option grants. Other CEOs whose compensation packages include significant levels of stock grants, both stock options and restricted stock, include Michael Fries of Liberty Global and Richard Adkerson of Freeport-McMoRan. Although these executives have recently come under scrutiny like all of the top paid executive, their companies have chosen a compensation method that ties the executive directly to the company’s long-term success.
Whether or not these executives are paid too much, shareholders can at least rest-assured that their executives have a long-term stake in the company. Other executive pay plans that tie monetary bonuses to annual financial results may unintentionally incentivize executives to make decisions that result in short-term returns rather than the long-term health of the company. By rewarding the chief executive in stock of the company they manage, the shareholders ensure that, like them, the chief executive’s long-term success is tied to the long-term health of the corporation.
Jones, G. (2013). Organization theory, design, and change (7th ed.). Upper Saddle River, New Jersey: Pearson Prentice Hall.