The defenders of high CEO pay like to argue that because executive rewards are so closely tied to the stock market, the surge in stock prices in recent years is what has caused pay to soar. If stock prices drop, they insist, then so will CEO pay. That being the case, there really is no executive-compensation problem in the U.S. Rather, the system is working just fine; it is, as it should be, paying for performance. Nice try. I recently analyzed the pay changes for 383 CEOs of large companies (that is, companies with market capitalization of $1 billion or more) for the four fiscal years between 1993 and 1997. (Pay is defined as the total of base salary, annual bonus, awards of free shares, long-term incentive-plan payouts, stock-option gains, year-to-year change in paper profits on unexercised stock options, and miscellaneous compensation.) What I found isn’t likely to warm the hearts of the high-pay apologists out there.
Although the average annual growth in total shareholder returns (stock price appreciation plus reinvested dividends) over the four-year period was a healthy 20.6 percent per year, the growth in CEO pay averaged an astounding 47.3 percent per year. When a variation on that statistic was published in the New York Times last fall, it brought forth a howl of protest from Holman W. Jenkins, Jr., a columnist for the Wall Street Journal, who argued in effect that Moses didn’t come down from Mount Sinai with a commandment that the rate of increase in CEO pay should precisely match the rate of increase in total shareholder returns. As he saw it, the increase that I calculated was merely an example of efficient markets in operation.
What Jenkins doesn’t know is that