July 25, 2002
Total Executive Pay Declines but Still High
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After years of increasing pay packages, Washington D.C.'s executives found their average pay lower in 2001, the Washington Post reports. A study conducted by the Post found that declining corporate performance and declining stock prices led to the reduction of managers' income.
In addition to those factors, stock options count for over half of the top executives' compensation, and the constant decline of those options has caused overall compensation to decline. Options became a popular way of compensating executives because companies' accounting departments are not required to count them against earnings.
"I think it certainly was the definitive year for people to say that, yes, we believe pay does correlate with performance," Peter Oppermann, senior executive-compensation consultant with Mercer Human Resource Consulting, told the Post. "There was a decrease in earnings, a decrease in stock prices, and a decrease in cash compensation for executives."
All of the executives who participated in the study reported that on average, 66 percent of their compensation is comprised of stock options. Their average option award was worth $2.6 million.
This year, real estate and financial services executives replaced biotechnology and telecommunications executives as the highest paid, the Post reports.
Despite the fact that executives in all industries are seeing declining pay, some people remain unconvinced that the decline is directly related to performance.
"How strong the link is would take further study," Paul Hodgson, senior research associate on compensation at the Corporate Library, an investor advocacy group that has long criticized executive pay as too generous, told the Post.
"Whether an executive's pay is actually being linked to performance all depends on what target is being used," Hodgson said.
Washington is not the only city seeing executives' pay decreasing. Mercer's annual national survey showed that median executive compensation fell 2.8 percent, to $1.6 million. This finding marked the first time in a decade that executive pay declined.
The median total compensation which includes stock options and other incentive pay increased in 2001 by 6.9 percent, to $7 million. It was the smallest annual increase since 1994, the first year Mercer started tracking incentive pay.