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How Much is a CEO Worth?


A recent Congressional Research Service report says the pay for Chief Executive Officers, or CEOs, of America's top 350 companies has more than doubled during the past decade, outpacing inflation and growth in non-managerial salaries and spurring public debate and legislative action.

Some estimates put median annual CEO earnings at America's leading 350 companies at about $8 million, up from about $3 million a decade ago.

A recent study by the Federal Reserve, the nation's central bank, says the average CEO at the nation's top 367 companies earns more than $11 million a year compared to about $27,000 per year for the average worker. And according to the Congressional Research Service, CEO pay increased about 150 percent between 1995 and 2005, while average inflation-adjusted worker wages rose about eight percent.

Supply and Demand

The Heritage Foundation's labor expert, James Sherk, says that while supply and demand sets the benchmark for CEO compensation, the main driver is the increased use of performance-based benefits since the early 1990s.

"An ever growing portion of CEO pay comes from a form of stock options, instead of just a straight cash wage. So if the stock of the company does really well, the CEO is going to make a lot of money. But he only gets it if he does a good job managing the company. The CEOs who have done a good job running a company and earning more profits have seen the value of their compensation go up quite considerably,” says Sherk.

According to the Congressional Research Service, executive performance-based compensation grew by about 13% between 1995 and 2005. Sherk argues that executives create value for companies and investors, and deserve to be well paid.

"Someone like Jack Welch, the former CEO of General Electric, took a company that was teetering on the verge of bankruptcy, that was doing very poorly, producing goods that customers just didn't want to buy and totally turned it around to increase the value of the stock by something like a factor of seventeen times, made much better products that consumers were much happier with [and] created tremendous value for customers and for shareholders,” says Sherk. “And I would argue that it is fair that he received back payment for the tremendous value he added.”

Are they Worth it?

In 2005, William McGuire, CEO of the insurance firm UnitedHealth Group received more than $124-million in compensation. And last year, Yahoo's former CEO, Terry Semel, received more than $70-million in compensation, even as his company lagged behind its competitors in profit growth and stock performance.

No one is worth this much money says Anthony Buono, a management and sociology professor at Bentley College in Massachusetts.

"It is ludicrous to think that any one individual is worth tens-, if not hundreds-of-millions of dollars in terms of their role in the company. And I think that that is a model that needs to change. And I don't think that we will begin to see legislation that will begin curtailing CEO compensation. But I do think what you will see are increasing shareholder law suits that will question some of these packages," says Buono.

Highly paid U.S. executives such as William McGuire and Terry Semel are a small minority. But some analysts say hefty compensation plans create credibility problems for companies that are downsizing or performing badly.

Jarred Bernstein of the Washington-based Economic Policy Institute says productive CEOs deserve to be well paid - - relatively speaking.

"The problem is that the bottom 75 percent of wage earners, whose incomes have stagnated over the past five years, have clearly been contributing to the very high levels of economic productivity in this country,” says Bernstein. “We've been generating a bigger economic pie, but we have been cutting smaller slices for many of the people in the economy, while those whose positions and assets put them at the top of the scale in very privileged positions have been getting larger slices. I think that does violate a basic sense of fairness.”

According to the Congressional Research Service, the average CEO-to-worker pay ratio rose from about 300-to-1 in 2003 to more than 400-to-1 in 2004.

Shareholder Scrutiny

Meg Voorhes of Institutional Shareholders' Services in Washington, which advises firms on corporate governance, says this disparity and some corporate practices have increased public scrutiny. She cites fraud at the former energy giant Enron and the more recent controversy that netted the CEO of The Home Depot, a hardware retailer, more than $200-million in severance, despite his company's poor performance.

"There aren't very many issues right now where shareholders are willing to say, 'We think management must know what it is doing.' Executive pay is certainly an area where shareholders are becoming more active and there's a sense that pay levels have gotten out of line, that executives can get very high and increasing pay packages even when they turn in just an average performance at the company," says Voorhes.

The U.S. House of Representatives recently passed legislation that gives shareholders more say on corporate executive salaries. President Bush has threatened to veto the measure if it passes the Senate.

Whatever the fate of the bill, Tom Lehner of the Business Roundtable, an association of CEOs representing 160 leading firms in the U.S., says companies have already begun to take action to curtail executive pay.

"There's certainly a heightened sensitivity about it with the Democratic Congress right now and legislation that's been aimed at providing for mandatory shareholder votes on compensation,” says Lehner. “Companies have clearly sat up and taken notice that this is one of those issues that is very emotional and that it's in their best interests to make voluntary changes to get it right so that something is not imposed upon them that overall has adverse consequences on the whole system.”

Many experts say Congress should change existing laws that make it difficult for a company to oust a non-performing CEO without his or her consent, or without a huge payout. Meanwhile, the debate over executive compensation continues.

This story was first broadcast on the English news program, VOA News Now. For other Focus reports click here.

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