In-Depth

Careers: CEO Compensation Leaves Rank-and-File Workers in the Dust

Corporate chiefs still earn significantly more than IT staff—although the gap <em>has</em> narrowed

• By Stephen Swoyer
• 04/18/2006

Corporate chiefs last year found it a little bit harder to make ends meet, according to a recent survey sponsored by The Wall Street Journal. Even so, their compensation grew 5 times the rate of IT pros.

The >Journal’s survey—conducted by Mercer Human Resource Consulting and based on the proxy statements of 350 major corporations—found that total direct compensation for CEOs grew by nearly 16 percent last year, an increase that significantly outpaced average wage and benefit growth (3.2 percent according to The Wall Street Journal; 3.4 percent according to HR specialist Hewitt Associates) for rank-and-file employees.

According to the Journal, “total direct compensation” includes salaries, bonuses, stock grants, gains from exercising stock options, and other incentives.

The Journal’s new CEO compensation tally actually marks a decline from the halcyon days of 2004: Last year’s 16 percent improvement significantly underperformed the 41 percent increase top CEOs realized in 2004.

If there’s a bright spot, it’s that executive pay is increasingly correlated to performance, such that CEOs at better performing companies typically earn more than CEOs at also-rans.

Consider, for example, the fortunes of the corporate chiefs at the 10 companies with the highest overall shareholder returns. Total direct compensation for these CEOs grew by 51.3 percent in 2005, exceeding $10.2 million. On the other hand, CEOs at the 10 companies with the poorest overall stock performance did much, much worse—hemorrhaging total direct compensation (by an average of 72.5 percent) such that they earned less than $1.6 million last year.

The Journal’s results loosely tally with research from The Corporate Library, which found that total CEO compensation rose by a median of 11.3 percent last year—a substantial decline from 30.2 percent growth in 2004. The Corporate Library—a for-profit research firm that focuses on earnings and corporate governance—based its study on an analysis of CEO compensation for companies listed in the Standard & Poor’s 500.

Although based on different sample sizes and research methodologies, both surveys agree very closely on a percentage basis: the Journal finding that total CEO compensation declined by 61 percent year-over-year; while The Corporate Library puts the number at 62.6 percent.

Corporate chiefs are hardly headed for the poor house, of course. The recent Corporate Library study yielded an additional interesting nugget: average base salary increases for CEOs outpaced those of rank-and-file workers by 250 percent—8.5 percent to 3.4 percent (based on Hewitt’s data).