Here's a surprise: A study commissioned by a group representing CEOs of some of the country's biggest companies has found that CEO pay isn't really out of control. The response from corporate pay critics: Tell us another good one! According to the report, which comes from compensation consultant Frederick Cook, the median pay of CEOs over the last 10 years has risen roughly in line with returns seen by shareholders of their companies. While big pay packages get lots of press, the median large- company CEO was paid about $6.8 million last year, which was actually about 3% less than the year before, according to the report. Business Roundtable, a lobbying group that represents large-company CEOs, commissioned the study in response to some of the "misleading reports" in recent years about executive compensation, representatives of the organization said. "Reports that large numbers of CEOs make hundreds of millions of dollars every year are simply untrue," said John Castellani, the Business Roundtable's president, in a statement. "Executive compensation has closely followed the growth that companies have experienced in the last 10 years." Setting aside the obvious conflict of issue concerns, the Business Roundtable's report itself isn't exactly telling the whole story, according to critics of executive pay. Not only does the report leave out scores of companies and some of the valuable perks that CEOs have been accumulating over the years, but the way it approaches the data it does report understates the true gains that executives have seen. The report "might give readers the impression that the relationship of pay to firms' economic fundamentals
has not changed significantly," said Lucian Bebchuk, a law professor at Harvard who focuses on corporate governance and executive compensation. "This impression would be completely incorrect." The Roundtable's report is based on data from the Mercer 350, a group of 350 large-cap companies whose executive pay packages are tracked by Mercer Human Resource Consulting. Cook and the Roundtable decided to use the Mercer database because they wanted to focus on big companies, because their packages tend to get the most scrutiny, and because it has a good reputation, says Thomas Lehner, the Roundtable's director of public policy. The Wall Street Journal uses the Mercer 350 for its annual compensation survey, he notes.
The Journal aside, there's reason to question just how representative the Mercer 350 is. Compensation experts tend to look at far greater numbers of companies when examining pay trends. In a paper on executive pay published last year in the Oxford Review of Economic Policy, Bebchuk looked at the pay practices of the 1,500 largest companies. Paul Hodgson, who writes an annual review of executive pay for watchdog group the Corporate Library, looks at a universe of about 2,000 companies. Of course, it's not just about sheer numbers. It's also about what companies are left in or out of the pool. For instance, while Home Depot ( HD), UnitedHealth ( UNH) and Exxon Mobil ( XOM) all have drawn scrutiny in recent months for hefty pay packages recently handed out, don't look for any of those companies -- or their pay data -- on the Mercer list. But the problem isn't merely that some important companies are left out of the report. It also doesn't consider some major elements of executive pay. The report focuses on salary, bonuses and long-term incentive awards, typically in the form of stock options or restricted shares of stock. What the report doesn't include are things like executive pension and retirement plans, severance packages, perquisites like taking personal trips on the corporate airplane and income tax payments for accepting those perks. And those things can add up. At Federal Express ( FDX), the Mercer data included the $4.6 million in salary and bonus and the 325,000 stock options CEO Fred Smith received last year. But it didn't include the more than $1 million worth of perks he got, such as the $476,000 worth of personal security services. The compensation pieces that Mercer doesn't include, particularly severance packages and deferred compensation, "potentially are far more valuable than anything the executives received during their career," says Hodgson. Many of the executive perks that have drawn protests in recent years "are not touched on here," he adds.
But a bigger problem with the Roundtable's report, say pay critics, lies in how the data are compiled and analyzed. According to the Roundtable report, CEO pay has risen about 9.6% annually over the last 10 years, which is roughly in line with the rise in their companies' market caps, which have grown at about an 8.8% annual clip. But in his own research, Bebchuk found a much less-direct link between pay and market capitalization. In other words, if a company's valuation tripled, you typically wouldn't see its executive's pay triple as well. Instead of lumping together a bunch of different companies of different sizes, Bebchuk argues that a more apt comparison is to show what a CEO of a company with a particular market capitalization has been paid over time. "The facts are that, at present, the CEO of, say, a $10 billion company is paid considerably more than what the CEO of a $10 billion company was paid in 1995," Bebchuk said. Ultimately, compensation is about particular companies and individual performances, says Hodgson. By lumping everyone's pay together, the Roundtable's report smoothes out the rough edges. So, companies that paid their CEOs richly for poor performance are balanced out by companies that paid much more modestly and got much better returns. More than that, focusing on the numbers tends to ignore a more basic issue: the general disconnect between executive pay and corporate performance, says Hodgson. Home Depot CEO Bob Nardelli, for instance, has drawn criticism for enjoying a rich contract while the company's stock has been stagnant. But Nardelli's contract isn't all that much different from those of most other CEOs, he says. Those contracts, which have typically been rich with options, tend to reward CEOs regardless of how well the company and its stock are performing, he says.
"The debate needs be raised to a more philosophical level," says Hodgson. "It's not whether they're paid too much, but is the way we're paying them the best way to pay them?" The Roundtable's report aside, the obvious answer for Hodgson and other pay critics is a resounding "no."