324 Part 3: Strategic Actions: Strategy Implementation
Do CEOs Deserve the Large Compensation Packages They Receive?
Strategic Focus
This question often circulates in the media regarding the large
compensation packages that CEOs receive as leaders of large
publically traded firms. The negative aspect played up in the
media often pertains to the growing inequality between the
top executives’ pay and the average wages of U.S. workers.
In 1983, average pay for leaders of the six largest banks was
40 times the average of all U.S. workers, while the average pay
for leaders of the largest Fortune 500 companies was less than
38 times. However, since then large bank CEO compensation has
grown exponentially compared to the average worker and now
stands at 208 times, while non-bank workers average 224 times.
In other words, large industrial companies’ top executive
compensation has grown even more than the bank executive
compensation. Although average worker pay has grown 2.9 times
over the last 30 years, bank executives pay has grown 15.4 times,
while non-bank executives pay has grown 17.4 times.
Large oversized compensation packages, such as that
awarded for 2014 by Discovery Communications CEO, David
Zaslav at $156.1 million, add to the media fervor relative to
executive compensation. Discovery Communications has
primarily focused on developing cable channels, such as
Discovery, Animal Planet, and TLC. However, in 2014, while
the CEO’s pay increased, the adjusted value of Discovery’s
stock fell 25 percent. The media focused on this discrepancy.
However, CEO compensation is more complex than might be
explored in the media headlines. Although the stock value
was down in 2014, the company’s revenue rose 13 percent
while its income increased 5.6 percent. Parts of Zaslav’s con-
tract were attached to increases in revenue and net income.
His package was also facilitated because he has grown market
capitalization from $5 billion to $20 billion under his leader-
ship. Some of the awards in the current year were because
of value creation in previous years and value associated with
future restricted stock option grants. Notwithstanding the
complexities, CEO compensation continues to rise although
not as much as in the pre-financial crisis period.
Interestingly, among the large diversified financial banks,
such as JPMorgan Chase, Citigroup, Morgan Stanley, Goldman
Sachs, and Wells Fargo, the CEOs average pay was around
$18 million. In 2014, the average pay was 121 times that of the
average worker at these large diversified banks, down 55 per-
cent from 273 times in 2006 near the end of the pre-financial
crisis period. This is obviously due to closer regulation of these
large banks because of legislation such as the Dodd-Frank
Act. Furthermore the Securities and Exchange Commission
is working to finalize rules requiring all public companies to
report how much the CEO makes more than the firm’s typical
employee. This will give fodder to media outlets to dampen the
oversized pay packages that CEOs have increasingly received
over the last 30 years. In part, research from the field of
sociology shows that these large pay packages have not
always been due to performance increases, but due to the
tight networks of managers who sit on executive compensa-
tion committees and boards of directors and do comparisons
between firms. These inter-board networks have been asso-
ciated with increases in compensation to help firms keep up
with the trends at other firms. Also, because of large mergers
and acquisitions such as those that have taken place among
the large diversified banks, firms are much larger and executive
compensation is associated with size and complexity of the
operations top-level executives manage.Research from the finance discipline (versus sociology)
finds that the mix of the pay package that most top executives
receive has been changing. Instead of an over emphasis on
stock options, top executives have been receiving compen-
sation that is based on restricted stock ownership, which
cannot be realized unless they meet significant performance
targets over time. As such, there is less oversized risk taking
that can result in disastrous consequences for these large firms.
Accordingly, research finds that managers are taking more
measured risks due to the compensation packages that they
are receiving.Frederick M. Brown/Getty Images
President and CEO of Discovery Communications, David
Zaslav, presenting at a conference in this photo, has had
his 2014 pay package scrutized heavily by the media.