Stock Options Drive CEO Pay (Editorial)

It seems as though every year about this time the media come out with a rash of stories of excessive pay for CEOs.
These stories always make a big splash. No one knows better than we do the enduring curiosity about other people’s money.
Prompting this latest bit of attention is an analysis by the Associated Press of the total pay for the CEOs of 386 Standard & Poor’s 500 companies. The median pay for those CEOs? That would be $8.3 million. CEOs of companies in the S&P’s 500 that filed proxy information in the first half of this year received a combined $4.16 billion in 2006.
Behind it all, though, is the Securities & Exchange Commission requirement, which went into affect this year, that companies must disclose a more complete picture of their top executives’ pay.
Sen. Carl Levin, D-Mich., says the gap between the pay of executives and average workers has become a chasm. A recent report by the Congressional Research Service said CEOs make, on average, 179 times as much as rank-and-file workers.
He’s looking to fix what he calls a “loophole in the tax code” that encourages companies to pay executives with stock options.
Levin cited a Forbes magazine article that said nearly half of CEO pay at the 500 largest U.S. companies in 2006 came from stock options, which paid an average of $7.3 million per person. Salary and bonuses account for only a small portion of total compensation.
The senator claims that part of the reason companies can afford to hand out so much stock-option pay is because stock options also produce outsized tax deductions for the companies. So at the same time stock options are driving up executive pay, companies are letting Uncle Sam pay for them through legal stock option tax deductions.
The SEC disclosure rules were supposedly brought about by shareholder anger over executive pay not based on performance. But when annual stockholder meetings have been hosted, executive pay has rarely been brought up. Any investor backlash simply never materialized.
As long as investors and company directors don’t seem to care, very little will change. Levin is correct in saying the government should not be in the business of telling companies how much they pay their executives. But, he added, the government “shouldn’t provide unfair tax deductions that subsidize sky-high executive pay.”