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01 Sep 2009

Executive Pay: Onward & Upward

Topics: Human Resources-Executive CompensationEconomics-Financial CrisisHistory-Business History
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  1. 1984 To discourage “golden parachutes,” a controversial pay innovation at the time, Congress imposes a special tax on such payments valued at more than three times an executive’s average pay. Rather than curb golden parachutes, the tax cap becomes a target companies aim for, and large payments to departing executives soon become common practice.
  2. 1990 To better align executive pay with shareholder returns, academics — led by HBS professor Michael Jensen — and activists urge greater use of stock options. During the bull market years ahead, stock options become popular, and the value of option awards drives a sharp increase in CEO compensation.
  3. 1992 The SEC requires more disclosure of executive compensation, particularly stock options and perks. With more information in public view, the rules trigger an unintended upward pay spiral as boards strive to reward their CEOs with better-than-average pay.
  4. 1993 In response to outrage over executive pay levels, Congress imposes a $1 million cap on tax deductibility of executive compensation, except for performance-based pay. Afterwards, stock option awards explode as a way to tie pay to performance, and $1 million becomes the new base salary.
  5. 1994 Under intense pressure from industry, regulators decide stock options should not be reported as a compensation expense but as footnotes in financial statements.
  6. 2002 Following the collapse of Enron and WorldCom, Congress enacts Sarbanes-Oxley, which requires executives to file more timely reports on their stock trades and forces CEOs to return pay based on financial results that were later restated. The new disclosure requirements unexpectedly lead to uncovering the widespread practice of backdating options.
  7. 2003 With SEC approval, the New York Stock Exchange and Nasdaq Stock Market require listed firms to have a majority of independent directors and mandate compensation committees to be entirely composed of outside directors. The exchanges also require firms to get shareholder approval of overall executive compensation plans.
  8. 2004 The Financial Accounting Standards Board requires companies to expense (count as a cost) the value of employee stock option grants beginning the following year.
  9. 2006 The SEC increases pay disclosure requirements in an attempt to increase transparency.
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