Rather than exploring why executive compensation is so high, these studies examine CEO compensation in terms of final effects. The Corporate Library Study reveals shareholder value was being lost at the expense of CEO compensation. The University of Southern California/Heidrick & Struggles Study reported on the results of their corporate director survey. A third paper, Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation, authored by University of Arkansas finance professor Craig Rennie, looks at changes in stock-based and cash-based CEO compensation from over 120 companies during a five-year period.

The Corporate Library Study

This CEO compensation study shows that Sutardja had the largest percent growth in total pay, according to the new study completed by The Corporate Library. Sutardja exercised $75 million in stock options to achieve this distinction. The Corporate Library is a repository for research, study and critical thinking about the nature of the modern global corporation, according to Reuters.

The study has found that 4 percent more executives exercised stock options than in 2004. Reuters reports that the study excluded companies that award stock options to attract and retain employees.

Sutardja might have had the largest percent growth in total pay, while Barry Diller, CEO of IAC/InterActiveCorp, was found to be the highest paid CEO in 2005 in the Corporate Library study. Diller received 100 percent of all his stock options, to reach a total compensation of $295 million, according to Reuters, and 98 percent of Diller’s compensation came from stock option profits. Diller’s stock options are contradictory to the fact that data shows that shareholders in IAC/InterActiveCorp have been losing money over the last 60 months.

The University of Southern California/Heidrick & Struggles Study

Another study, completed by the Marshall School of Business at the University of Southern California and the executive search firm of Heidrick & Struggles, finds that executives justify their huge compensation packages because of a supposed shortage of CEO talent. Board members, on the other hand, held opinions on the other side of the argument.

In the Marshall Business School/Heidrick & Struggles study, released last week, 38 percent of corporate board directors think that most CEOs are overpaid. AJC.com reported that less than 25 percent of the directors surveyed selected scarcity of talent as “very important” or “extremely important” factors in growing executive pay.

The study also found that some 40 percent ranked job difficulty as “very important” or “extremely important” in their salary decisions. More contradictory to the opinions of the executives themselves, 12 percent of directors surveyed agreed that compensation is “generally in line with CEO performance, competitive conditions and good economics,” according to AJC.com.

The Corporate Library reports that median CEO compensation was up 16 percent in 2005. This equates to $3 million, according to AJC.com. The Los Angeles Times reported last week that the current median CEO compensation in the largest companies is $7 million. This is 150 times the median household income in the U.S.

A most telling survey finding was that most directors are convinced that CEO compensation would trend lower only if shareholders were allowed to vote on salary packages for CEOs. It is sad that shareholders are more willing than the corporate directors to hold executives accountable for their huge salaries, according to AJC.com.

The Wade/O’Reilly/Pollock Paper

A paper authored by James B. Wade of Rutgers University, Charles A. O’Reilly III of the Stanford Graduate School of Business, and Timothy G. Pollock of Pennsylvania State University’s Smeal College of Business, is the most comprehensive study of its kind. Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation, focuses on data from over 120 companies over a five-year timeline.

Concerning shareholder returns, O’Reilly said, ”Given the large sums paid to some senior executives, the total cost for overpayment could be a big number – and, in some cases, significantly affect shareholder returns.”

The Wade/O’Reilly/Pollock research shows that although arguments can be made that large companies can easily absorb the cost of executive overpayment, CEO compensation has a direct affect on employee compensation at lower levels.

The Wade/O’Reilly/Pollock research shows that CEO overpayment has higher realized costs than previously shown. Based on their research models, the CEO overpayment cascade is shown below. When a CEO was overpaid 64 percent:

• Level 2 employees, such as COOs and CFOs, were overpaid by 26 percent and,

• Level 5 employees, such as division general managers, were overpaid by 12 percent,

• Such systematic overpayment impacts overall organizational performance and shareholder value.

When subordinates are determining if their pay is fair, subordinates are more likely to leave one business organization for another. This turnover becomes more marked as you go further down the corporate ladder. The Wade/O’Reilly/Pollock research shows that the propensity to leave is greater if their company CEO is paid by a larger percentage than subordinates are.

“CEO compensation impacts employee retention more than we realized," Wade said. "Our research found that CEO overpayment is related to turnover, which can have more important long-term consequences. It is quite possible that those most likely to leave because of perceived unfairness are precisely those employees coming up in the organization that would eventually rise to the top management team (TMT) level,”

Concerning underpayment of CEOs, the Wade/O’Reilly/Pollock research also found that CEO underpayment had multiplying effects as they cascaded through a business organization.

“Underpaying a CEO could reduce turnover if subordinates are underpaid less than the CEO is underpaid,” Wade added.

Powerful CEOs also seem to pay employees more at certain managerial levels. These CEOs who also serve as Chairman of the Board tend to pay employees between Levels 2 and 4 (the top management team down to junior vice president ranks) more. The Wade/O’Reilly/Pollock research shows that the effect disappears at Level 5 employees or that of division general managers.

Concerning fairness, Pollock said, “Our research show evidence that CEOs are concerned with fairness, and that they are likelier to share rewards than they are to share burdens, but this can be expensive and has the potential to hurt a firm’s bench strength if the rewards aren’t fully shared.”

A study of 229 firms that laid off employees at least once between 1993 and 1999 found that the CEOs of layoff firms received 19.6 percent more stock-based compensation than CEOs of non-layoff firms. That figure increased to 42.6 percent one year following layoffs and rose to 44.9 percent two years after layoffs. After two years, the figure increased dramatically to 77.4 percent.

Cash-based compensation took an inverse direction to stock-based compensation for the same period. CEOs of layoff firms received 6.5 percent less cash compensation than those CEOs of non-layoff firms. CEO salaries and bonuses were 10.4 percent lower during layoff years.

The Rennie Study

“Changes in CEO compensation after layoffs resulted in higher [stock-based] pay levels that persist. These rewards are not one-time or one-year events,” said Craig Rennie, University of Arkansas finance professor and author of the study, said. “The fact that CEO cash pay is somewhat lower during the layoff year is consistent with political or union pressure on companies during periods of cutbacks.”

After all these study results, the lingering question might be why directors seem to be incapable of controlling escalating CEO compensation, especially since they are the only group determining CEO’s pay? The answer may be that be that many boards and directors have not figured how to connect pay and performance, according to AJC.com. Directors don’t seem to realize that simply receiving a regular paycheck is adequate motivation for the rest of us to do our jobs right.

Caleb Standafer , Oct-13-2006  62% of Directors believe CEO's not overpaid The USC/Heidric & Struggles Study found that 38% of corporate board directors think that most CEOs are overpaid. That means that 62% think CEOs are not overpaid. So, are the directors right, or are they wrong? If shareholders disagree with the CEO's compensation package, then they need to persuade the directors to change their minds about what is the appropriate level of compensation. Facts will be necessary. It will take hard work to change minds. And maybe minds will not be changed because the directors are right about the compensation. The federal government has made efforts to control compensation through the tax code change in 1993, but that has not decreased compensation. It would be interesting to see if compensation packages would change if the tax code was changed back to its pre-1993 law regarding executive compensation.