What Are CEOs Worth? Even after a decade of sharply rising CEO pay, the average compensation for some chief executives rose more than 25 percent last year, according to several surveys. That increase was far more than the 3.1 percent increase received by the average worker.
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What Are CEOs Worth?

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What Are CEOs Worth?

What Are CEOs Worth?

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And joining us now is Theo Francis, a reporter for the Wall Street Journal who covers executive compensation among other topics. He's with us from the studios of member station WUSF in Tampa, Florida.

Welcome, Theo.

Mr. THEO FRANCIS (Reporter, The Wall Street Journal):

Hi, how are you?

MARTIN: How did you -- first of all, an interesting beat, executive compensation. How did you get on to that beat?

Mr. FRANCIS: Well, it is an interesting beat. And I got on to it sort of through a back door. It's not my main beat at the paper. I'm not the main person covering executive compensation. But, at various times, I've happened to have the expertise to look at different issues. And it started out because I was writing about investments, and then about retirement, and that was right around the time of the Enron scandal breaking and Enron's bankruptcy. And I took a spin through some of Enron's filings and noticed some stuff about Ken Lay and Jeff Skilling's executive compensation packages that made an interesting article. That's how I got the start.

MARTIN: Is it hard to get the information to write about this? It seems to me that one of the issues is whether that information is as readily available as some investors think it ought to be.

Mr. FRANCIS: It can be difficult, especially when you get away from salary, bonus, stock options, which are complicated in and of themselves, but there's a fair amount of disclosure. When you start getting into the realm of pensions, life insurance, perks, also the different scenarios under which they can collect different kinds of payment and changes of control, and if they get fired for cause, if they get fired without cause, if they quit for good reason, if they quit without good reason. There's all kinds of different scenarios that are built into employment contracts. And, often times, those can make the difference between a really big payout and a really small one, or a comparatively small one.

MARTIN: Okay, we need to take a short break. When we come back, the Enron, WorldCom and Tyco scandals made headlines, but executives continue to make millions in pay and perks. What are CEOs worth? And who decides? And we're taking your calls at 800-989-TALK. You can send us e-mail. The address is talk@npr.org. I'm Michel Martin. It's TALK OF THE NATION from NPR News.

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MARTIN: This is TALK OF THE NATION. I'm Michel Martin in Washington. We're talking about executive compensation. Last year, CEO pay increased dramatically faster than the salaries of average workers. As the highest paid executives now earn more than $100 million, we ask how much is too much. A bit later, we'll hear from a former CEO. You're invited to join the discussion. Give us a call at 800-989-TALK. Our e-mail address is talk@npr.org. And we're talking with Theo Francis. He's a reported for the Wall Street Journal covering executive compensation. Theo, CEOs didn't always make so much money. I mean, at least, our sense is that CEOs' salaries as a multiple of the average worker's salary was not always so large. Is that an accurate perception? And, if so, when did it start to change?

Mr. FRANCIS: It's hard to say exactly when it started to change. You see a number of cause and effect scenarios that go on over time where, and I'm most familiar again with some of the sort of niche areas aside from salary and bonus, but what you see is you see either regulators or sometimes lawmakers, actually Congress, trying to crack down on one practice or another that has attracted attention, or is seen as abusive, or seen as a loophole. And as that avenue gets closed off, there are some very creative people who are able to come up with, either over time, or sort of even right away sometimes, who are able to come up with alternatives. And so what makes up executive compensation changes over time. And you...

MARTIN: Who decides -- I'm sorry, go ahead.

Mr. FRANCIS: Well, so for example, you see there was for many years in the 1990s, a very common form of executive compensation called split dollar life insurance. And this is something very few people are aware of because it didn't get great disclosure. But these are essentially big life insurance policies that employers could buy for their employees. There were virtually no tax consequences for the employees, for the executives. And the executive ended up walking away with millions of dollars in life insurance that they could then borrow from or cash out in various ways that, again, might not incur any tax consequences. So again, all of a sudden, they're getting essentially tax free pay. And so this came about, in part, because there were some limits put on other kind of compensation and so this looked like an attractive way to compensate the executives. And...

MARTIN: Who decides what these executives make? Who sets compensation levels?

Mr. FRANCIS: Well, sure. I mean fundamentally, especially when you're talking about the chief executive, the board makes the decisions. You know, the board ultimately runs the company on behalf of shareholders when you're talking about publicly traded companies. And so the board really is making these decisions. Usually boards have a compensation committee that these days is primarily, or entirely, made up of outside directors, or independent directors who aren't, obviously aren't executives themselves, but also aren't supposed to have ties to the companies they run. These compensation committees, increasingly it seems, are hiring outside consultants to sort of advise them and give them a sense of what's going on. Companies have always hired, or have long hired, outside compensation consultants. So, there's sort of, you know, a community of people who do this sort of thing, who pay attention to this sort of thing. I think your previous guest had mentioned that it was sort of a small group that sort of talked among themselves and that certainly is one of the criticisms is that...

MARTIN: Is that true though? I mean, that was his perception, but is that, in fact, accurate, that it is a small group? Because it sounds to me, in a way, that you're saying that the system's opened up more, that there are a lot of outside voices. It isn't just the guy's friends because, by definition, a chairman would not have selected a board who selects him. I mean subsequently...

Mr. FRANCIS: Right.

MARTIN: ...he or she, mostly he, but would have, may have hand on who's on the board. But at the time a CEO is...

Mr. FRANCIS: That's right.

MARTIN: ...selected, he would not know, he would not be picking the board who's picking him for the job.

Mr. FRANCIS: That's true. Although, it all depends who you talk to, right? If you talk to executives, if you talk to people in this part of the corporate world, it's a very large group. I mean, after all, they don't know all the executives who might end up on their board. They do often make an effort to get people from different companies, different industries, different kinds of companies, or different walks of, sort of, corporate life. On the other hand, if you look at it from the outside, if you look at it maybe from somebody in a clerical position at one of these companies or something, there's probably a lot of resemblance. So, are you talking about a small, cliquish club or are you talking about, you know, the entire, you know, managerial layer of corporate America? Well, depending on how you look at it, you might be able to come to both conclusions.

MARTIN: Let's go to a caller in Charlotte, North Carolina, and Tim. Tim, what's your question?

TIM (Caller): Hello?

MARTIN: Hello.

TIM: Hey, yeah, this is Tim. I've got a couple of questions. One is, if I understood correctly, compensation is not this severely out of proportion with the average wage earner in other industrialized countries. How did it get that way here? Or, maybe more to the point, how did it not get that way elsewhere? And the other one was, we keep talking about this issue in terms of executive compensation, like compared to the average worker, is that really a metric that makes any sense? Or do we sometimes have executives who are compensated really, really highly at the top of companies where the average workers don't make that much money?

MARTIN: Okay Tim, thank you so much.

Mr. FRANCIS: Well, that's a good question. Actually, that's several good questions rolled into one. And part of the problem is, that it depends what you mean when you talk about compensation. Compensation has a lot of different meanings. And the easiest one for most people to grasp is to look at salary and bonus. That's essentially an executive's cash compensation. On the other hand, there's a lot more. I've seen a compensation contract, employment agreements that lay out executives receiving free tax assistance, automobiles and, you know, office space when they retire, sometimes even including a secretary. So, you know, what actually qualifies as compensation? There's a lot of things, the SEC takes a very broad view of what qualifies as compensation. One of the other questions the caller had was, I think, taking a look at what it means for these executives to earn this compensation, and whether comparing with ordinary workers is the right way to do it.

MARTIN: Yeah, that is an interesting question. Is that a fair -- that's something that has become commonly used as a measure of fairness. What do you think about that Theo?

Mr. FRANCIS: Well, I mean in terms of whether it's fair or not, it's not really my place to judge. But if you look at what compensation is supposed to be, if you just look at an accounting idea of what compensation is, it's essentially, you're getting paid for services rendered. So one fair way to look at it, one fair question to ask at any rate it seems to me, would be, what does a person contribute to a company? What does the person contribute to the company's success? What do they contribute to the company's ability to keep going? And, in that case, maybe looking at a relative basis might make sense. You're still talking about a very subjective question. Who's most responsible for a company's success or lack of success?

MARTIN: We have an e-mail question that speaks to that point; it's along the same lines. It's from Mike in San Francisco. And I'm condensing a bit here, but Mike, he starts his e-mail by saying, you started the discussion by saying the CEOs of the top 100 companies make an average of $17 million. It's actually the Median; that was from the USA Today survey, but you don't provide context. How much revenue do these companies generate? How many employees do they have? So, I'm not saying the $17 million number's correct, but what's the context for this? Is $17 million wrong just because it's a lot of money? And that raises an interesting question, because Chris Satullo, our first guest, was saying that it -- part of it is that -- he's an editorial writer, so let me just stipulate that he has a right to his opinion. That's kind of what we're paying him to do. But he's saying it offends the sensibilities in some way and it just seems unfair based on what the perceived value of these folk's labor. But Theo, what about you, do you, and I'm not asking you to, because you're not an editorial writer...

Mr. FRANCIS: Sure.

MARTIN: But what I am asking you is the way in which we think about this, is this, is that culturally determined? I mean is there a sense among the CEOs who receive this money that there's something, something to be ashamed of? Is there, sort of, a cultural value? I mean on the other hand, we respect people who earn a lot of money. It's something, it seems to me, culturally, we're very interested in. When people win the lottery we get excited about it. It's a hallmark of success in one sense. And we get very excited when people win Power Ball or Mega Millions or something like that. We write about what they would do with these millions. So, I don't know, what do you think? Is the way we think about this as Americans a kind of a culturally determined question?

Mr. FRANCIS: Well, part of the problem is that it's very difficult to get a handle on just what executive compensation is. And this gets back to the disclosure issue that you brought up a little bit ago. Because it's -- when you start talking about fairness and then you start talking about whether somebody deserves to make the money they're making, part of it is it's hard, I think, for most individuals to sit down, look at a company and say this is how much the executive makes, this is how well the company is doing, let's figure out whether that makes sense. And so, any of us who work for publicly traded companies have some sort of sense of, A, who are bosses are, B, we can look up what they're making. You have to look it up though in the proxies, and this is what the SEC proposal is getting at. There's long been complaints that the disclosure of executive compensation has sort of been this pastiche of requirements as different kinds of compensation come into vogue or, you know, become more significant. And so deciphering all of that is just really difficult. And so therefore, making the evaluation, as an individual, whether an employee at a company or a shareholder, about whether this company's executive compensation is fair depends, not only on what your sense of fair is, but also on how well you can compare that compensation to whatever benchmark of success you might want to use.

MARTIN: Let's get an insider's perspective on all this. And to do that, we are joined now by Bill George. He was the CEO and chairman of the board of Medtronic, a medical technology company. Medtronic is a former underwriter of NPR. Bill George now sits on the boards of Goldman Sachs, Novartis, and Exxon-Mobil. He also teaches at Harvard Business School. Welcome, thanks for joining us.

Mr. BILL GEORGE (Former CEO and Chairman of the Board, Medtronic): Good to be with you.

MARTIN: Now as a former CEO and chairman of the board of a corporation, what's your view on how much top executives should be paid? And do you think that that the number that we so often use, the compensation as a multiple of what the average worker makes, is that fair?

Mr. GEORGE: Well, I've often thought that we need have closer alignment with what people are making within our organizations, and not just compare one CEO to another. And we've seen a huge escalation of CEO compensation. In part, that's because we've tried hard to align CEO compensation with shareholder interest. And where that's been done, I can be quite supportive of that, but we still have tremendous number of egregious examples of people who failed and walked off with huge sums of money, what I call pay for non-performance.

MARTIN: You chaired a blue ribbon commission that looked into this issue of executive compensation. Tell us a little bit more about that, if you would. What did you find? What recommendations did you come up with for addressing the issue?

Mr. GEORGE: One of our key recommendations was to have the compensation committee of the board of directors be totally independent from the management. And part of that independence to hire their own compensation consultant, so they were not hiring management's compensation consultant. And I think many of the leading-edge boards are moving in that direction right now, so that they get independent recommendations and there's no concern about compromise, which I think clearly was there during the decade of the '90s.

MARTIN: Bill George, where's the escalation coming from?

Mr. GEORGE: Well, more recently, it's coming from, in some cases, tremendous increase in shareholder value. But we still haven't cutoff the notion of paying people who don't perform, and give them a big termination settlement. But I think it really started with the almost frenzy to hire corporate saviors from outside the company. And I think, you will find that people who've worked within a company for a long time, compensation is much more in line. But we've had these big contracts, like Michael Ovitz at Disney where you brought him in, Lay lasted for 18 months and got fired and walked away with a heck of a lot of money. And that's just flat out wrong. And so you had these big contracts being negotiated and I think you'll find people that been there a long time, they're compensation tends to be very much in line with the company's performance.

MARTIN: I just need to take a short break to say you're listening to TALK OF THE NATION from NPR News. Theo Francis, do you have a different perspective on this? Where do you think the escalation is coming from?

Mr. FRANCIS: Well, it seems that some of it is, sort of a need to trend. I mean, if one executive gets a particular benefit or particular kind of compensation, I think chances are gonna be pretty good that it starts propagating, at least throughout that industry as other executives become aware of what they're getting, or other boards maybe become aware of what they're getting. You hear a lot of talk from both consultants, and also from executives, and also from boards, about the need to attract and retain top talent. And if you look at two parts of that, if you want to attract people, you've got to give them something, you've got to give them enough to make it worth their while to come to your company. If you're not a considerably bigger company then where he is now, then, you know, you may have to offer him a lot more money, if he... And then retention is the other part of that. And if you're worried about retaining an executive, and worried that some other company might lure him away with more money or more perks then one of your ways of keeping him is to try to do the same.

MARTIN: Here's a question that came in on e-mail, I'd like for Bill George to answer. It's from Sally in Cary, North Carolina and she says that as a stockholder I want good dividend. When the CEO is paid millions, of course, dozens of executives down the line get huge salaries too. This lessens the amount of money paid in dividends. As a citizen, I want businesses to perform at their best. Those millions could go into research resulting in better products and services. They could also go into paying people at the bottom good wages and healthcare, and my tax burden would be lighter, not having to subsidize the poor. I simply don't believe that such huge salaries are necessary to get good people. Of course, I realize that now that we've gotten on this rollercoaster and it will be hard to dismount. Bill George, what about that? As a person you've been on both sides of it now, the level of compensation that you enjoyed as a CEO. Now, I've heard people say that they would do those jobs for free, because they're so much fun. It's so, that it's so exciting to be, you know, kind of in charge if you are built that way. Now, do you think these salaries are really necessary to attract top talent?

Mr. GEORGE: Well again, I think the talent should be promoted from within, and I think people should be paid fairly, and so I'm not a big believer in having to attract all your talent, or the majority of your talent, from outside the company. But I think Sally makes some very good points about the workers should be paid fairly and should have adequate benefits and up and down the line. And I think incentives and stock options and other forms of rewards, over and above basic salary, should be spread throughout the workforce. When I was CEO of Medtronic, we tried very hard to do that. But let me give you an example on a personal case of how it works. When I came to Medtronic, I gave 25,000 shares of options, not an excessive amount. But over the time I was there, the stock price went up by a factor of about 45 times. And as a result of that, those options became worth a lot of money. And I wanted to hold them as long as I possibly could, but they had a 10-year limit, so when I cashed them in, they were worth quite a bit of money. And even though I've been holding back on my compensation, it looked like, and I was in fact making a lot of money...

MARTIN: What's a lot?

Mr. GEORGE: Oh, in that case about $25 million for those options. Now you can look at that as 10-year results, or you can look at it as one year. People look at it as one year, wow, that's a huge amount of money. But spread over a 10-year period, when the shareholders, the dividend had been going up at like 20, more than 20 percent a year. and the stock price had been going up at like 30 percent a year, so the shareholders were very handily rewarded. So, I think if the leadership brings all those in line, good compensation with the employees, good dividends for the shareholders, stock price increasing, great results, then I think it's quite reasonable to expect that you're gonna have, you're gonna pay your executives up and down the line handsomely.

MARTIN: I bet Christmas at your house was nice. When we come back from a short break, we'll continue the conversation, corporate executives earning millions in pay and other benefits. Some say they earn every penny. That's after the break. I'm Michele Martin. It's TALK OF THE NATION from NPR News.

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MARTIN: Today, we're talking about CEO pay. What makes a CEO worth their salary? Who comes up with the figures? Our guests are Theo Francis. He's a reporter with the Wall Street Journal, covering executive compensation, and Bill George, former CEO and chairman of Medtronic, which has been an underwriter of NPR. And we have a question for you. Mr. George, I know you have to go, but we have one more question for you from Nicolas in Oxford, Mississippi. Nicolas, what's your question?

NICOLAS (Caller): I'm about to graduate from college with a bachelor's degree, and if this is such a wonderfully, insular and profitable group, what career path do I need to follow to join it?

MARTIN: Well, Bill George, what do you say? What does Nicolas do if he wants to join the rarified ranks of the highly paid?

Mr. GEORGE: Well, let me just say, this is something I dreamt up when I was graduating from college, too. And I can tell you that a career in leading businesses is one of the most fulfilling things you can do, because you have an opportunity to impact so many people lives, not just your own, or not just one or two, but many, many people's lives. And so the thing I would suggest you do is not go into it for the money, because if you do, you probably will not feel fulfilled. But to go find a place in a business that you really love and go with your passion and go with your heart and develop yourself as a great leader and the money will follow, so to speak. And I think the great leaders that I know, and some of the ones that are reaping very great rewards, it's because they're really passionate about their companies and their business.

MARTIN: Nicolas, what are you thinking about?

NICOLAS: Well, I've been accepted to law school, but after hearing that you can make $100 million running Exxon-Mobil, I think I'd rather do that.

MARTIN: I think Exxon-Mobil probably hires one or two lawyers. I don't know what do you think, Bill George?

Mr. GEORGE: I think they do, but I'm not sure if they're looking for people that are out for the money. Most people there make rather modest compensation, and you work there 43 years and you create hundreds of millions of dollars for your shareholders maybe you've come off very, very well. But...

NICOLAS: I completely agree. Thanks for taking my call.

MARTIN: Okay. Thank you, Nicolas. Bill George, though, that speaks to my earlier point, if it's so fulfilling, and you can affect so many peoples lives, why not do it for free? Bill George?

Mr. GEORGE: Why not do it.

MARTIN: Yeah. Why not do it for free?

Mr. GEORGE: Well I think...

MARTIN: It's great. It's a great life. You get to be a leader. You get to shape, you know, be a captain of industry, and shape people's lives, and create value, and all that good stuff.

MR. GEORGE: I think we want to align all the interest incentives. That's the way great businesses are built, when you can have that level of alignment. And what upsets me a lot, Michele, is when I see people that don't create the value, and their compensation stays high, or goes higher, or they fail and they are asked to resign, and they do resign, and they walk away with big chunks of money. I think we've got to stop that. There's just no justification for that...

MARTIN: But why does that practice continue, Bill George? I think a lot of people would be interested in your point of view on this, but why does that practice continue of continuing to reward people whose performance has not been outstanding? Or who have indeed been asked to leave? What's the logic of that, and why does that practice continue as it does?

Mr. GEORGE: Two reasons. One, in a high percentage of these cases people have been hired from the outside, they were talented people who did not fit with the culture and they got what amounted to a no-cut contract and walked away with a big termination settlement. And the only solution to that is, develop your own people internally, which I am a very strong advocate of. And the other case, I think some of the boards sometimes feel sorry for them and want to avoid litigation, which to me is not sufficient reason. I think we have to, if we will, stiffen our backs and pay only for performance, and certainly, with our executives, including myself, if the performance if off, the compensation's got to go down. And I think that's the only way it should be.

MARTIN: Bill George was the CEO and the chairman of the board of Medtronic until 2002. He now teaches at Harvard Business School. He joined us from his office in Minneapolis. Thank you, Bill.

Mr. GEORGE: Thank you very much, Michele. Nice to be with you. Have a good day.

MARTIN: Thank you. And joining us now is Mark Reilly. He's a partner in 3 C, a compensation consulting firm in Chicago, and he joins us from his office. Welcome to TALK OF THE NATION.

Mr. MARK RILEY (partner, 3 C Corporation, Chicago): Thank you.

MARTIN: Mark Riley, I assume you've been listening to the conversation so far.

Mr. RILEY: Yes.

MARTIN: I think, what I'm hearing is that a lot of, sort of, anger directed at the individuals for earning this money, because people don't understand what it is that they're getting paid for, and it just seems wrong. So, I think that the thing you can do to help us would be to tell us, first of all, who hires you, how do you begin? How do you figure out what pay package should be?

Mr. RILEY: Well, typically we're hired by the board or the manager of the company, and the process is for us to understand the business, and the roles and responsibilities of the manager and team, and then we look at survey data to come up with the right amount of pay to give them. We're basically looking at their competitors in similar industries to see how they're paid, just to make sure they have a competitive pay package, in a sense.

MARTIN: So the board hires you, and to whom are you accountable? The board? They hire you, they pay you?

Mr. RILEY: Well, it's -- I think Bill sort of alluded to this earlier when he talked about most compensation consultants are now being hired directly by the board. And, so it, but that's sort of an evolving process. I mean, in the past we were primarily hired by management, but we would work in conjunction with the board.

MARTIN: So, you were hired by the people who were already there.

Mr. RILEY: Right. Right.

MARTIN: And did you typically receive a percentage of their compensation package, or did you receive a flat fee?

Mr. RILEY: We just receive a fee for our projects. A flat fee.

MARTIN: So, your fee is not tied to their compensation?

Mr. RILEY: No. No. We're not tied at all to their compensation. As a matter of fact, the reason why we're hired is that, so the board can fulfill its fiduciary responsibility to have an independent outsider look at the pay package and tell them that it's fair and reasonable.

MARTIN: Let's go to a question in Denver, Colorado. Tom?

TOM (Caller): Yes.

MARTIN: Tom, what's on your mind?

TOM: What's on my mind as an investor, I hate to, the guy we're talking to now, I feel bad, but, basically, why do we have, why can't we have a much simpler structure? Meaning that a guy's going to get his options and his pay package based on the increase in stockholders' equity in the company. Not necessarily is this the only thing, I would disagree with Mr. George. I don't think it matters what the outside stockholders, ultimately it does, of course. But if we base pay packages on internal metrics, mainly what the value of the company is, then, why can't we award options on that basis?

MARTIN: Tom, that's an interesting question. What about that, Mark Riley?

Mr. RILEY: Well, I mean, basically, most of the pay packages that we design, and, you know, other companies design, are really, for the most part, tied to the price of the stock. And also the, you know, net income, the growth in sales, and all those measures. In most cases, all of those things really drive the pay packages. And I think Bill alluded to it before when he talked about his option grant, that of 25,000 shares that were granted ten years ago, but the stock price went up, and up, and up, and that really created all of the value. So really, I mean, if you look at most of the pay packages, they are directly related to the increase in stock price. And, you know, one of the questions is, is that, in a sense, really fair? Because the typical stock price, if you look back over the last 50 years, increases on the average six to eight percent. And so, if you give somebody an option, it's probably going to be in the money if you just perform on average, because, on average, the stock price is going to grow six to eight percent.

MARTIN: Mark Riley, I'm putting you on the spot here, and I apologize. But do you think that the pay packages for most executives are justified?

Mr. RILEY: Well, I think that most pay packages are justified. The ones that come out in the media that are highlighted are typically the ones that are outliers, the ones that are not justified. And the reason why most pay packages are justified is that this is a very unique job. This is a hard job to do. And it's not just something you can go to school for, or law school for, as the earlier caller mentioned. It's something, it's people that have a lot of leadership skills, they have a lot of charisma, and they have a lot of imagination, they're risk takers. And it's difficult to find people that are able to do it, to be successful at these jobs.

MARTIN: Well, let's go to a call. Let's go to Fredericksburg, Virginia and Tim.

TIM (Caller): Hey. I just wanted to put maybe another side of the coin in, and that is that, I'm president and CEO of a small corporation. Most of the companies in America that do business are small corporations. And when you talk about CEO pay, you know, you can kind of give the impression to people that work in these smaller businesses that the guys that own the companies, that, you know, have their houses, you know, at risk if the company fails, are making, you know, tons and tons of money. Where, you know, I get paid more than my average employee, but I take a lot of risks. And most of the companies in America are small businesses, you know. You're talking about, you know, the Bruce Willises of Hollywood compared to the character actors, and I think that's kind of, you know, you need to keep it in perspective. That's really all I have to say about that.

MARTIN: Tim? Tim, can you hang on for a minute?

TIM: Sure.

MARTIN: Do these stories make your life more difficult? Do your folks come looking to you for, they think, okay, where is my swimming pool?

TIM: Well, they think I've got a money tree in my back yard, you know.

MARTIN: You don't?

TIM: It doesn't happen that way. You know, my company, the last two years I've taken a pay cut because our performance has not been what it was three years ago. And, you know, there are lots and lots of other small independent companies like my own, where, you know, if the economy's good and your performance is good, you make money, and if you don't, if it isn't, you know, you've got to take it on the chin a little bit. But you don't want to ask your employees to take pay cuts.

MARTIN: Okay, Tim. Thank you for calling.

TIM: Sure. I'm sorry?

MARTIN: I said thank you for calling.

TIM: Yeah. You're welcome.

MARTIN: You're listening to TALK OF THE NATION from NPR News. Theo Francis, what about Tim's point, that these are, these numbers, like the gentleman said, I can't say it better than he did, this is like talking about Bruce Willis, when, in fact, it's, you know, most people are not making those kinds of salaries. They're taking the bus to work. They're going, you know, what they're doing.

Mr. FRANCIS: That's a good point. And I think part of what you're looking at is that, although of course most of the companies in the country are small companies, just by, you know, sheer numbers, a lot of American workers work for the big companies.

MARTIN: But what about that point that Chris Satullo made at the top of the hour, which is that these pay packages, it's almost like keeping up with the Joneses. It's like, in your face, and it stimulates other executives at that level or close to that level to demand these things. And it kind of has an escalating effect on everybody. Do you think that that might be true?

Mr. FRANCIS: It's a lot like grade inflation. I mean, there's certainly an argument to be made that, as executives, that one of the reasons executive compensation has increased is because it has increased, and that the, you know, the ones that get the most attention maybe, the outliers, but at least one school of thought is that those outliers are really driving the growth. And even when you look at something as simple as pay for performance, which is a very simple concept, and is definitely, these days, I think, the watch word in executive compensation. Everybody, I think, would agree that pay for performance is the goal. But, how you get there is the real question. And then what exactly it means is another. And so, if you look at pay for performance measures, a lot of times you can't always figure out what the performance measures are that any particular executive was measured by. Other companies, it turns out, actually changed the performance requirements midstream, so during the course of the year, now there are certain rules about how they can go about doing that, but during the course of the year they might change what kind of performance benchmarks the executives have to meet. And that typically seems to make it more likely for them to be able to meet it, not less likely.

MARTIN: Mark Riley, just very briefly, I'm sorry, I wanted to ask you very briefly, Mark Riley, what about the keeping up with the Joneses point? Do you think that the news about these compensation packages kind of makes some of your other clients think, hey, why didn't I get that? Is that true?

Mr. RILEY: I think that's a good point. I think there is something to that. But, just to build on Theo's point, in terms of performance measures, I mean, I think that the SEC is trying to disclose more and more about the performance measures that companies use. And I think that that will be a good thing. Because, we all are trying to align pay with performance, and the question is, what are the right performance measures? And we don't want to set performance measures that are too easy, so that that pay is a giveaway. We want to set performance measures that are fair, that give executives the chance to earn the compensation, but that produce the performance that shareowners are expecting. So, that's what we're trying to do. I think that's what the SEC is trying to do in terms of expanding its disclosure with pay. And, you know, I think in terms of keeping up with the Joneses, I think that CEOs are very competitive. They're a very competitive group of people, and you know, they're looking to, you know, drive their company's performance. They're looking to earn the most that they can earn. And so, if they're performing well, they're expecting to be very well compensated, and they're looking to keep up with their, the others.

MARTIN: Theo Francis, it's curious in a way that the ire is directed toward the individuals when, although Mark Riley points out that many of the managers hired him to develop their pay packages after they had already been selected for the job. But it's interesting that a lot of the anger that's out there, or irritation, whatever you want to call it, is directed at the individual rather than the board that is making that decision. Why do you think that is?

Mr. FRANCIS: Well, I mean, part of it is human nature. We tend to be much ore interested in individuals than in institutions. But, part of it is also that ultimately the managers are the people running the company and there's a perception that they sort of personify the company. But you also have the fact, as we've seen in some high profile cases, that managers often bring the information, and this may be what's changing now, is, as boards hire their own consultants, and so on. But managers tend to bring the information and make the arguments to the directors, in a sense. Although the directors hire and oversee the mangers, the CEO, the CEO also is very much, in most companies, the gateway of information from the company to the board. And so if you accept the idea, and I think a lot of CEOs would want you to accept this, but they run the company, then it's understandable, perhaps, why people focus on the CEO. But again part of it is we are much ore interested in people than in sort of faceless institutions.

MARTIN: That has to be the last word. Thank you, Theo.

Mr. FRANCIS: Thank you.

MARTIN: Theo Francis is a Wall Street Journal reporter who writes about executive compensation. He joined us from the studios of member station of WUSF in Tampa, Florida. And we were also joined by Mark Riley. He's a partner in 3 C, a compensation consulting firm. He spoke to us from his office in Chicago. This is TALK OF THE NATION. I'm Michel Martin, in Washington.

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