Rising Public Pressure Will Slice CEO Pay Hikes

CEOs will get smaller raises next year than they're used to—but still more than most workers.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

November 28, 2006

CEO pay will slow somewhat in 2007, rising only about 6% to 7%. That's still well above the 3.7% increase we expect for most workers, but it's more modest than the double-digit increases chief executives have become accustomed to in recent years.

Chief executives take home, on average, about 300 times what their rank-and-file workers make, and the gap has been widening for decades. That's one reason public pressure on companies has been growing, with Congress, federal regulators and outraged investors all weighing in.

Democrats in Congress plan to highlight the issue in hearings next year on the ballooning rift between the rich and the poor. Barney Frank (D-MA), incoming chairman of the House Financial Services Committee, will push legislation giving investors a vote on CEO compensation at annual shareholder meetings. To win over Republicans, the bill will likely make the shareholder vote nonbinding, letting companies reject the outcome if they feel strongly about it. But firms ignoring shareholders run the risk of bad publicity and may face proxy fights challenging management's nominees for directors, the ultimate decisionmakers on how much to pay the CEO.

The Securities and Exchange Commission (SEC) will also take up the issue, and if Congress doesn't pass a law requiring shareholder votes on pay, the agency will likely rewrite its rules to at least make it easier for shareholders to press for such a vote.

Investor complaints over CEO pay will only get worse as new SEC rules take effect next year requiring that companies let investors know exactly how much CEOs are making, including a line-by-line breakdown of perks such as stock options, bonuses and lifelong health care. The sticker shock will prompt more shareholders to demand that companies tie CEO salaries to a company's performance.

But progress will come slowly. Many investors and lawmakers believe that free-market forces should ultimately be the determining factor in how much a firm pays its top talent so there's little appetite to regulate or legally cap pay packages. Still, the forces focusing on CEO pay will take a toll over time, and many firms will think twice about what they include in salary packages for top executives.

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