Business Roundtable Releases Research on Executive
Washington, DC, July 5, 2006--Business Roundtable, an association of 160 chief executive officers of leading U.S. companies, today released new research conducted by executive compensation expert Frederic W. Cook indicating that the growth in median total compensation of CEOs of 350 large companies surveyed is consistent with the growth of the market value and shareholder returns of those companies.
Over a ten year period from 1995-2005, median total compensation for CEOs in Mercer Human Resource Consulting’s Mercer 350 database increased 9.6 percent per year. This tracks closely with the 9.9 percent median annual shareholder returns over the same ten-year period, and the 8.8 percent annual growth in median total market capitalization.
“As leaders of multi-million and billion dollar organizations, we fully appreciate that the media and the general public would be interested in executive compensation,” said John J. Castellani, President of Business Roundtable, “But misleading reports that large numbers of CEOs make hundreds of millions of dollars every year are simply untrue. Executive compensation has closely followed the growth that companies have experienced in the last ten years.”
According to Cook’s analysis of Mercer’s data, CEO salaries and bonuses for a ten-year period from 1995 to 2005 grew more slowly than companies’ revenue and net income.
Median salaries grew at a compound annual growth rate of three percent ($729,000 to $975,000) but median company revenues increased at a greater rate, from $5.1 billion to $7.6 billion (4.2 percent). The compound annual rate of growth in median company net income (8.5 percent) exceeded growth in CEO bonuses (7.4 percent) by more than one percentage point during the same ten-year period. The Mercer 350 database, which has 14 years worth of executive compensation and organization performance data, tracks general industrial and service companies with median revenue of $7.6 billion. Median figures for CEO pay and incentives are used to ensure a fair and accurate representation of compensation.
Peter Chingos, a senior executive compensation consultant with Mercer, said that pay for performance is now standard operating procedure at most American corporations. “The close alignment of CEO pay and performance reflected in Mercer’s survey numbers over the last decade indicates that most organizations have embraced responsible executive compensation,” Chingos said.
Recent coverage of CEO compensation has inaccurately and unfairly included realized stock option gains in single, annual amounts of compensation, even though they often represent many years worth of accumulated stock. Options should be valued using their fair value at grant instead of the realized gains when the option is exercised.
Inaccurately inflating executive compensation is also linked to reporting the average compensation of CEOs instead of median compensation, or the middle of a broad range of CEO pay, because the average includes outliers at the top of the range which skew the resulting figure.
“The media has been flooded with a multitude of distorted, misleading and oftentimes erroneous statistics to portray U.S. CEOs and board governance in a negative light,” said Fred Cook, founding director of Frederic W. Cook & Co. and author of the Business Roundtable report, during recent testimony before the House Financial Services Committee. He added, “The purpose of business reporting should be to inform, not inflame, public opinion.”
The business community should “... defend itself by: (1) countering misleading facts with better facts, (2) advocating pay for performance and executive ownership, (3) extending performance-based compensation broadly in the organization, and (4) promulgating and defending best practices, while marginalizing and excoriating bad practices,” Cook concluded.
