The Evolution of Executive Compensation from
The Early 20th Century to Today
Executive compensation has been studied for many years. While the average person probably does not think about it on a daily basis, it is necessary to watch trends. Tracking the amount of money they make as well as the bonuses, stock options, and other benefits shows how these executives are making such high rates of pay compared to the ordinary worker. Tracking how much an executive makes began in the 1930’s. Since this time not only has it been tracked but there have been many changes in the type of tracking, the tax laws and what is available as compensation. This paper highlights the changes that have occurred since the early 20th century until today and changes that still need to occur.
The ability to track executive pay began at the beginning of the 1930’s. This is when the Securities and Exchange Commission (SEC) began to require disclosure of executive pay (Fryman 2010). Before this time there is really no clear record of remuneration. In 1953, the Revenue Act determined that “restricted” stock options could be taxed at the much lower rate on capital gains (Fryman 2009). Throughout the 1950s, only about 16 percent of the executives were awarded an option in any given year. The frequency of stock option grants has increased steadily since then (2009). They could pay a 25% tax rate on stocks versus a 70 to 90% rate on labor income (2009). The obvious thing to do would be to take the stock options.
For the most part, the value of compensation from the time of World War II (mid 1930’s – 1945) until the 1970’s did not change (Fryman 2009). Many executives are on a Pay-to-perform compensation plan. The most surprising fact is during the 1950’s and 1960’s firms were growing but executive compensation was not growing at the same pace. As a matter of fact it grew very little. From 1980-1990 firms were growing and so was the pay of the executives. The pay increase from 1950-1960 was about an increase of 1.3 percent per year. During the 1980-1990 period the growth rate was at an annual rate of 5.9 percent. An even greater rate of 9.2 percent per year was given during the 1990-2000 year period (2009).
Around 1975, the gap between the compensation of an average worker and the compensation of an executive began to grow considerably larger (Dew-Becker 2009). The rate at which executives’ pay was increasing was much faster than that of average workers. This is probably due to the fact that board members set CEO’s salaries. Many times these board members interests are more in line with the CEO then with the stack holders. By the 1990’s, executive compensation was so outrageous that it caused congress to make some major changes. In 1992 congress made these changes beginning with the mandatory disclosure of executive pay was expanded dramatically, with far more detailed explanations of precisely what executives are paid and why they are paid it (2009). Second, the tax...