Academic journal article Journal of Managerial Issues

Cross-Sectional Differences in Corporate Compensation Structures

Academic journal article Journal of Managerial Issues

Cross-Sectional Differences in Corporate Compensation Structures

Article excerpt

The relation between chief executive officer (CEO) remuneration and the remuneration of other employees has become very controversial in recent years, as evidenced by the attention it has attracted from the financial press, Congress, shareholders, and employees. Articles in the financial press consistently compare executive pay to that of the average worker. For example, in the 1996 Business Week Executive Pay Scoreboard, top executive salary and bonuses are reported as growing 18%, whereas white-collar and factory workers received increases of 4% and 1%, respectively (Byrne, 1996). In a similar vein, the lead story in a special section of The Wall Street Journal dealing with executive pay was on the "great pay divide". The article begins:

Thee EARNINGS GAP between executives at the very top of corporate America and middle managers and workers has stretched into a vast chasm (emphasis original) (Lublin, 1996: R1).

Shareholder activism is also on the rise. Evidence that shareholders are attempting to link top executive compensation to that of employees is demonstrated by shareholder proposals at board meetings. For example, a shareholder proposal at Immaculate Heart Mission Inc. asked the board to compare the pay of top executives with the lowest wage earners. Similar controls are already in place at Herman Miller Inc., which limits its CEO cash compensation to 20 times the average paycheck earned by the company's factory workers (Mitchell, 1992).

Employee groups also are making an issue of pay differences. For example, members of the union representing Dow Jones & Co. employees filed a shareholder resolution for the 1994 annual shareholder meeting advising that CEO compensation be limited to 20 times average non-CEO employee compensation. In 1996, a GTE Corporation union filed a resolution that would cap corporate officers' compensation at 75 times the wages of an average hourly GTE employee.

Pay differences have become an issue in government. When pressure began to build over CEO compensation relative to compensation of other employees, congressional bill H.R. 3056 was introduced. The bill would have disallowed a tax deduction for compensation paid to an individual in excess of a multiple of the lowest paid worker. Although the bill did not make it through Congress, Lublin (1996) reports that a group of congressional Democrats is currently revisiting the issue of compensation linkage. (Compensation linkage was even an issue in the 1996 presidential primaries (see Lublin, 1996; Yates, 1996)). The potential for social pressure to influence legislation and regulation related to compensation practices should not be understated. For example, social pressure related to the magnitude of executive compensation resulted in an amendment of the Internal Revenue Code disallowing deductions for salary and bonus in excess of $1 million unless certain conditions are met. Separately, the Securities and Exchange Commission (SEC) required that proxy statements include an explanation of CEO compensation practices and that firms provide charts comparing their performance with that of peer firms.

Given the attention to differences between CEO and average non-CEO employee compensation, a question that naturally arises is: how and why do corporate pay structures differ across organizations? Although no analytical social welfare model exists that can be used to determine what the pay difference should be at a given firm, research can explore why pay differences vary across organizations. The nature of the criticisms above suggest that some firms may benefit (from reduced stakeholder pressures) by providing proxy statement disclosures that explain why their pay differences are greater than those in other firms. For example, are the differences connected to performance, or are they related to the power that the CEO can exert over the board of directors? Are there attributes of the firm that influence the ratio of CEO pay to average non-CEO pay? …

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