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Policy update: Are CEOs paid too much?

  • Law
  • Political Science


Are CEOs Paid Too Much? 12 R e g i o n F o c u s • S p r i n g 2 0 0 9 S p r i n g 2 0 0 9 • R e g i o n F o c u s 13 In June, President Obama announced the appointmentof a Washington attorney as the administration’s new“special master” for executive compensation. Kenneth Feinberg, the appointee, will oversee pay packages of company executives whose firms are receiving government assistance. Feinberg will review and approve any compensation for the senior executives and the next 20 highest-paid employ- ees at seven firms who received money through the Federal Government's TARP program. Those companies include Bank of America, Citigroup, AIG, General Motors, GMAC, Chrysler, and Chrysler Financial, according to the Treasury Department. Feinberg’s duties also include advising 80 more financial companies that received government money about executive pay. Part of the debate in Washington about executive pay has centered on the question of whether CEOs are overpaid relative to their contribution to firm value. Another ques- tion has revolved around whether their compensation packages create incentives for them to take excessive risks. Across the corporate sector, the size of executive com- pensation packages has soared. The gap between the salaries of the workers and the CEO of a corporation has widened considerably. In 1994, the ratio of median CEO pay to median production worker pay was 90 to 1, according to a Congressional Research Service report. In 2005, that ratio had increased to 179 to 1. Executive compensation packages often contain multiple elements. CEOs can receive company stock, stock options, deferred compensation, long-term bonuses, and nonmone- tary perks. Not all of these are new. Stock options have been an important element of CEO pay since the 1950s, although executives receive those more frequently now. In a 2008 paper, New York University economists Xavier Gabaix and Augustin Landier write: “[T]he sixfold increase of U.S. CEO pay between 1980 and 2003

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