This is an audio transcript of the Behind the Money podcast episode: ‘Why executive pay is skyrocketing’
Michela Tindera
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Dave Calhoun voice clip
Chairman Blumenthal, Ranking Member Johnson, Members of the Subcommittee: thank you for inviting me to appear before you today, along with Boeing’s chief engineer, Howard McKenzie, seated to my right.
Michela Tindera
Last month, Dave Calhoun, who’s the CEO of the aeroplane manufacturer Boeing, appeared in Congress.
Dave Calhoun voice clip
I am proud of having taken the job. I’m proud of every action we have taken.
Michela Tindera
Lawmakers wanted to hear from Calhoun after a string of scandals that had rocked the company. This included two deadly plane crashes that killed hundreds in 2018 and 2019, as well as other recent safety failures. But company conduct and practices weren’t the only thing on lawmakers’ minds. The Missouri senator Josh Hawley also wanted to ask Calhoun this . . .
Josh Hawley voice clip
What is it you get paid to do, exactly?
Dave Calhoun voice clip
I get paid to run the Boeing Co.
Josh Hawley voice clip
I mean, do you get paid for transparency?
Dave Calhoun voice clip
I think the board counts on me for transparency.
Josh Hawley voice clip
Really? Because you’re under investigation for falsifying 787 inspection records.
Michela Tindera
Calhoun’s compensation is a sticking point during this hearing. That’s because earlier in the year, company shareholders approved his annual pay package worth some $33mn. That’s a 45 per cent pay rise from the previous year.
Josh Hawley voice clip
It’s working out great for you. For the American people, they’re in danger. For your workers, they’re in peril. But you’re getting compensated like never before.
Patrick Temple-West
Clearly, members of Congress see his pay increase as questionable, as potentially problematic amid all the troubles Boeing has had. The company didn’t have to award him all this stock, but they chose to anyway.
Michela Tindera
That’s Patrick Temple-West. He covers corporate governance for the FT.
Patrick Temple-West
This pay increase was pretty extreme and caught people off-guard. Analysts who covered the company said, yes, it was mostly for future performance of Boeing’s share price, but targets for how Calhoun would be getting paid this much were not clearly disclosed, and he was already paid a special bonus in 2023, totalling 5mn.
Michela Tindera
While this specific instance certainly stands out, Boeing, a company facing a range of scandals, and its CEO receiving a massive pay rise, Patrick tells me this is part of a larger trend, whether it’s a company with a range of scandals or one that’s just been cruising along. Pay packages among America’s top corporate bosses have been on a tear lately.
Patrick Temple-West
If you look at annual year-over-year pay increases for CEOs this year, in what was disclosed so far in 2024, it’s been a record.
Michela Tindera
Patrick’s reporting has found that median chief executive pay at companies that are a part of the S&P 500 has risen by 12 per cent, according to recent disclosures. Meanwhile, the pay for workers in the S&P 500 rose just over 5 per cent in the same timeframe.
Patrick Temple-West
There’s a trend in corporate America that’s been going on for decades, in that executive compensation just creeps up higher and higher. It’s creating an ever bigger gap between people at the top — CEOs and other executives — and the workers who report to these executives. We’ve heard headlines about how income inequality is leading to growing unhappiness and anxiety among working people. And that has spillover effects. It affects the politics in this country. It even has geopolitical effects. And the way things are going now, it doesn’t look like it’s going to slow down anytime soon.
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Michela Tindera
I’m Michela Tindera from the Financial Times. Annual compensation for CEOs in the US is reaching new heights. Today on Behind the Money, we’ll look at how we got here and what it means for the rest of us.
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Hey, Patrick. Welcome to the show.
Patrick Temple-West
Hello, Michela. How are you?
Michela Tindera
Great. Glad to have you here. OK, so regular people like you and me get paid, obviously, in different ways. There’s, you know, salaried workers, hourly workers, people that get paid on commission, what have you. But how does this compare to the way that CEOs are paid in America? How does it work?
Patrick Temple-West
Most CEOs are predominantly paid in their company shares. They’re paid in stock options, long-term bonuses and annual bonuses. But across corporate America, for publicly traded companies, 80 per cent to 90 per cent of your overall pay is in company stock. The share price, if it’s trading at $30 today and hits $50 at some timeframe in the future, then that can be a performance metric, if it sells a certain number of cars, if it hits certain number of revenue targets, that’s all, it can be included in the mix.
Michela Tindera
So what is the point of tying a CEO compensation to the stock price? What’s the reasoning behind that?
Patrick Temple-West
If the shares are doing well, then the CEO should be rewarded for that share price performance.
Michela Tindera
To arrive at how much a CEO gets paid, Patrick tells me that, ideally, there’s a process of checks and balances within companies.
Patrick Temple-West
A company’s board sets the pay package, and the board, especially on CEO pay issues, is supposed to be independent from that CEO.
Michela Tindera
That then gets voted on by company shareholders every year at the company’s annual meeting. So, Patrick, as you found in your reporting this year, you know, pay among top bosses in the US is reaching this zenith. Meanwhile, American worker pay isn’t keeping pace. So help me understand: how did we get here?
Patrick Temple-West
CEO pay for decades has been going up, but the financial crisis definitely shed a light on a whole host of banking and corporate behaviour. Executive compensation, particularly. There was a concern that executives were getting paid tons of money to juice up the share price. So, there was a big concern that this runaway executive compensation was actually leading to negative corporate outcomes that had terrible consequences for shareholders.
Michela Tindera
To rein that and these other problems in, Congress passed the Dodd-Frank Wall Street Reform Act.
Patrick Temple-West
As part of that, they included some new rules for executive compensation. The thinking being, if shareholders have more tools to evaluate CEO pay, they can benchmark them against others and evaluate a little bit better whether pay is getting out of control.
Michela Tindera
These rules focused on a couple of things. One was to require shareholders to vote on the pay packages proposed by boards, and the other required companies to report how their CEO’s pay compared to the median compensation of company employees.
OK, so really the point of this was to kind of offer some transparency to the difference between CEO pay and average worker pay.
Patrick Temple-West
Yes. I think Congress recognised the need for more transparency around this. Other countries had already gone in this direction. So it was something that, as Washington was looking for ways to shed more light on executive pay, this was one of the options that they decided to include in this big Dodd-Frank package.
Michela Tindera
So part of Dodd-Frank tried to increase transparency around executive compensation. But flash forward to 2024 and, well, it hasn’t really worked.
News clip
Tesla shareholders have agreed to give CEO Elon Musk the biggest pay deal in corporate history, hundreds of times more than any boss in America made last year.
Michela Tindera
Just last month, Tesla shareholders voted to give Musk a pay package worth more than $50bn in stock options.
Coming up, we’ll look more closely at the reasons why pay is rising. And is there anything being done to change course?
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Michela Tindera
So we’ve heard about how pay packages for CEOs in the US come together today, and we’ve heard about efforts that were made in the past to try and curb these big packages. But Patrick’s reporting has found that executive pay still hit this record high this year. So what’s going on here? Patrick tells me there are a few key things to understand, and the first one has to do with asset managers. That’s firms like BlackRock, Vanguard or State Street.
Patrick Temple-West
These firms hold the vast majority of companies around the world.
Michela Tindera
These are also the firms that manage millions of American workers’ retirement plans. They use that money to invest billions of dollars into publicly traded stocks.
Patrick Temple-West
And because of that, they are responsible for voting at these companies’ annual meetings. They vote on directors, accounting firms and executive compensation.
Michela Tindera
Because of how many shares they hold, the votes they cast at a company’s annual shareholder meeting can end up having a massive impact on the outcome of any issue that’s put up for a vote. And if history is a guide, these asset managers typically say yes to the pay packages proposed by company boards.
Patrick Temple-West
They almost routinely rubber stamp these, I mean in across the S&P 500. These firms have argued that they do vote against CEO pay and or directors who are in charge of approving this pay, but they do so in extremely rare circumstances.
Michela Tindera
But Patrick, why do they approve these packages? I mean, why isn’t there any more pushback?
Patrick Temple-West
They see it as justified. If their share prices are going up, they think the executives can continue to get paid commensurately. They would also argue they’re not in charge of being the arbiters of how much is too much. Their job is to make money for 401(k) investors, for retail investors or for their customer base.
Michela Tindera
Mmm. And I guess they could say that, well, if a company’s stock is going up, then that means our customers’ 401(k) are going up too. And you know, so why not compensate them for that success?
Patrick Temple-West
That’s right. We’re raising your 401(k), we want to incentivise these CEOs to do a good job at boosting the share price performance. We don’t want them talking to competitors. They don’t want the CEOs to leave. So this is why they’re incentivising them with the amount of money that they are.
Michela Tindera
So the way asset managers see it, a win for the CEOs is a win for their customers.
OK, so the first reason CEO pay continues to rise is that asset managers, which are some of the company’s biggest shareholders, keep rubber stamping pay packages.
Patrick Temple-West
A second reason why CEO pay goes up is because these boards use discretion to change the bonus plans in what’s called in mid-flight.
Michela Tindera
And what does that mean, changing mid-flight?
Patrick Temple-West
So long-term bonus plans are designed to smooth out the volatility in the market. The volatility in the company’s performance, say one year is really great, one year’s really bad. It’s designed to really have the CEOs focused on the three- or five-year outlook for the company. And then something like Covid comes up.
Michela Tindera
Patrick says that essentially when Covid hit in 2020, a lot of CEOs had various company targets that they had to hit in order to earn their long-term bonuses. Some of those were set in, say, 2018 or 2019.
Patrick Temple-West
In the worst of the pandemic, people thought this was going to go on for years. So the boards just rewrote the bonus plans and said, hey, the first six months of 2020, don’t worry about those. We’ll just take performance going on after that. But then the stock market rebounded and things went off to the races in 2021. So these executives, it did turn down on paper, they didn’t really take any hit from the troubles of 2020.
Michela Tindera
OK. So essentially these bonus plans were redone to account for how bad things were looking at the beginning of the pandemic. But then when the market conditions improved, these easier targets were kept all the same. So this was kind of a one big moment that happened during Covid, but it’s led to larger pay packages kind of in recent years.
Patrick Temple-West
And it just shows that there’s a bit of a different rule for people at the executive level and people at the mid-manager level, at the worker level.
Michela Tindera
Have you seen changes, quote unquote, mid-flight to executives’ bonus plans? Has that continued post-Covid?
Patrick Temple-West
Not to the same extent. I mean, it was like dozens or hundreds of companies that rewrote bonus plans. You don’t see that. You do see instances of it, but it’s a much smaller number.
Michela Tindera
A third factor has to do with the overall performance of the stock market in the US in recent years.
Patrick Temple-West
Again, just going back to the financial crisis for a simple starting point. From 2009-10, the stock market has done fantastically well. And if your compensation, take-home is dependent on the share price performance, you’ve made a lot of money. And so the CEO argument for why they should be compensated the way they are is, well, look, OK, the CEOs are getting paid, a lot of money, but everybody’s retirement savings, if you were in this invested in the stock market and that over that time, you’ve done well too. So, it’s a win-win for both parties.
Michela Tindera
So while it sounds like there might be little holding CEO pay back from growing ever higher, there are critics of this system, too.
Bill George voice clip
I feel executive compensation at the CEO level is out of control, and it just keeps escalating and escalating and escalating. There is no ceiling.
Michela Tindera
That’s Bill George. He’s an executive fellow at the Harvard Business School, where he’s taught leadership to CEOs for years.
Bill George voice clip
And most shocking of all was the pay package to Elon Musk. Some — depending how you measure the stock at any given time — $54bn. Incredible. None of us, you would think, do we mistake that, do we mean to say 54mn, which would be pretty incredible. No, we didn’t.
Michela Tindera
Now, Bill’s an interesting critic because he used to be the CEO of a company himself. He led the medical device maker Medtronic, and he’s also served on the compensation committees for companies like Exxon, Target and Goldman Sachs. So he knows a little something about CEO pay packages. And Bill thinks these huge pay packages are often a problem, especially because it impacts company employees.
Bill George voice clip
It’s very important to keep your compensation strictly in line with performance and keep it in line with your own employees, because you never want to lose the trust of your employees. Because they’re the ones doing the work, they’re the ones delivering results. We give the CEO credit. No, we have to look at the people doing the work, you know, the creative people and the quality-oriented people and the people working with customers every day.
Michela Tindera
Patrick, what is Bill talking about here?
Patrick Temple-West
He’s making that case that this income inequality aspect is somewhat dangerous for the company. You rarely hear that argument from the companies and the people who are awarding these pay packages.
Michela Tindera
And why not?
Patrick Temple-West
They would make the argument that the CEO is the person in charge here, like Dave Calhoun. She or he is the one who’s hauled before Congress when things go bad, that the buck stops with the person at the top. So they should be entitled to these pay packages. What Bill is making is well, hold on a second here. How much different is the role of the CEO versus the people who are actually making the product. So when the company’s share price is doing well and when the overall stock market is doing well, the equity, the shares lift all boats of executives who are paid in the stock. For mid-level employees who are paid in cash, their boats are not even in the water.
Michela Tindera
Right. So unlike CEOs, normal employees can’t just get their pay packages rewritten based on how well the year is going for the company.
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So Patrick, the companies that we’ve talked about throughout this discussion are based in the US. But what about for CEOs of companies in Europe? How does their pay compare?
Patrick Temple-West
CEO pay in Europe is pretty dramatically lower. I mean, the grand scheme of things, it’s a lot of money, but it’s not usually tens of millions of dollars that Boeing and Disney CEOs earn.
Michela Tindera
Yeah. And why is that?
Patrick Temple-West
It’s cultural. The stock markets over there don’t rip as much as the US stock market. There is . . . tends to be more of a focus on paying CEOs over a certain timeframe. So over three to five years you’ll get X amount of stock rather than the performance stock pay which we have here, where OK, if your share price goes up X amount, you’ll get X amount of shares.
Culturally, it seems like people in Europe find these big pay packages unsavoury. There is more cultural distaste to executives making hundreds of millions of dollars when their mid-level employees aren’t making that much. It’s much more of a community approach to corporate behaviour in Europe.
Michela Tindera
Now, for the boards of European companies, there tends to be more worker representation on those boards, right? So how does that play a role in this?
Patrick Temple-West
So there are worker union representations at some of these boards which definitely have a role in that. Other countries, their governance are structured that the companies’ behaviour and how shareholders vote on it have to take into consideration the social welfare of the country in addition to the corporate welfare. So there are other ways that in Europe the pay is reined in just by the way that their rules are structured and the cultural mentality there.
Michela Tindera
So despite this widening gap between the pay of workers and that of America’s CEOs, there doesn’t seem to be a whole lot happening to slow down this rate of ever-increasing pay. So is there anything that could slow this down?
Patrick Temple-West
If asset managers, the shareholders of these companies got tougher on pay, started voting against it, started voting against board directors, that would definitely have implications for the companies. It would very likely slow down pay or at least prompt companies to think twice about increasing by the amount that, for example, Boeing did in David Calhoun’s situation.
The other implication is the political landscape. There just does not seem to be much attention to this from either political party. If there were more talk about this in Congress on campaign trails, that also might have a somewhat of a chilling effect for companies in increasing pay.
Michela Tindera
So I’m wondering, will this year’s election change anything?
Patrick Temple-West
Yeah, we’ll see if it comes up. I think because they are competing for middle-class voters and how much middle-income voters are getting paid, how confident they feel about the economy is very tightly tied to how much money they’re making every year. And it creates this income inequality question in this country, for better or worse. Donald Trump, some days he sounds like Bernie Sanders, some days he sounds like Mitt Romney. Kamala Harris is much more in the mould of Obama and more income equality. And we could very well see this come up again in 2024 here.
Michela Tindera
Patrick, thanks for being here.
Patrick Temple-West
You’re welcome.
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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Our intern is Prakriti Panwar. Sound design and mixing by Sam Giovinco. Special thanks to Misha Frankl-Duval and Simon Mundy. Topher Forhecz is our executive producer. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.
