This year’s first pay ratio disclosures are not entirely accurate, according to Ralph Nader and Steven Clifford in USA Today, because they omit the biggest category of CEO pay, stock and option grants.
Apity reported that CEO Kevin P. Clark’s total compensation was $13,800,347. He also received $17,699,452 from exercising stock option, an amount not included as compensation.Where did this $17,699,452 come from? According to the company, it came from the tooth fairy. The rest of the shareholders lost money because their shares were diluted when the company printed more shares to give to the CEO. But the company, abetted by the accounting profession, says nothing happened. Add in gains on options and Apity’s CEO ratio soars to 5,760 to 1.
Clark is hardly alone. Manpower reported that CEO Jonas Prising was paid $11,987,873. This number excluded $11,292,785 of gains from exercising options and from vesting of restricted stock. With these the CEO pay ratio is 4882 to 1. Performing similar calculations Six Flags’ ratio climbs to 2741 to 1 and Del Monte 2239 to 1.Outsize CEO pay harms companies. The millions they waste on executive pay is a small fraction of the total cost of the machine. The effects on employee morale are much more costly. When the boss makes 2,000 times what you do, it is difficult to believe that “employees are most important asset.”
More costly is the short-term focus that discourages sound investments. CEOs want a high stock price when cashing options and vested stock. To achieve this they buy back their own stock. From 2005 to 2016,S&P 500 firms paid out $4.2 trillion to its shareholders with repurchases. This equaled over half of their net income and exceeded dividends by 50%. This is $5 trillion that could have created jobs and spurred economic growth if invested in new technology, workforce training, higher pay and lower personnel turnover, product development, and new plant and equipment. Instead, a study showed American corporations cut their R&D publications by 50% between 1980 and 2007.