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Chairman Blumenthal, right? 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. Last month Dave Calhoun who's the CEO of the airplane manufacturer Boeing appeared in Congress. I'm proud of having taken the job. I'm proud of every action we have taken.
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.
What is it you get paid to do exactly? I could pay to run the Boeing company. I mean, do you get paid for transparency? I think the board counts on me for transparency. Really? Because you're under investigation for falsifying seven 87 inspection records. 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 $33 million.
That's a 45% pay rise from the previous year. 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. 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. That's Patrick Temple West. He covers corporate governance for the FT.
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, totaling five million. 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. If you look at annual Euro for a year, pay increases for CEOs this year in what was disclosed so far in 2024. It's been a record. Patrick's reporting is found that median chief executive pay companies that are a part of the S&P 500 has risen by 12% according to recent disclosures.
Meanwhile, the pay for workers and the S&P 500 rose just over 5% in the same timeframe. 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. I'm Michele Chendera 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. Hey Patrick, welcome to the show. Hello Michele, how are you? Great, glad to have you here. Regular people like you and me get paid in different ways. Salary workers, hourly workers, people paid on commission, what have you. But how does this compare to the way CEOs are paid in America? Most CEOs are predominantly paid in their company shares. Work options, long-term bonuses and annual bonuses.
But across corporate America for publicly traded companies, 80 to 90% of your overall pay is in company stock. The share price if it's trading at $30 today and hits $50 at some time frame in the future, then that can be a performance metric if it sells certain number of cars, if it hits certain number of revenue targets. So what is the point of tying a CEO's compensation to the stock price? What's the reasoning behind that?
If the shares are doing well, then the CEO should be rewarded for that share price performance. To arrive at how much a CEO gets paid, Patrick tells me that ideally there's a process of checks and balances within companies. A company's board sets the pay package and the board, especially on CEO pay issues, is supposed to be independent from that CEO. That then gets voted on by companies shareholders every year at the company's annual meeting.
So Patrick, as you've found in your reporting this year, 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? CEO pay for decades has been going up, but the financial crisis definitely shed a light on a whole host of banking and corporate behavior, executive compensation, particularly.
It's 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. To rein that and these other problems in, Congress passed the Dodd-Frank Wall Street Reform Act.
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. 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 CEOs pay compared to the median compensation of company employees.
Okay. So really the point of this was to kind of offer some transparency to the difference between CEO pay and average worker pay. Yes, I think Congress recognized 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 the decided to include in this big Dodd-Frank package.
So part of Dodd-Frank tried to increase transparency around executive compensation. But flash forward to 2024 and well, it hasn't really worked. Tesla shareholders 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. Just last month, Tesla shareholders voted to give Musk a pay package worth more than $50 billion in stock options.
Coming up. Well, look more closely at the reasons why pay is rising. And is there anything being done to change course? I'm Rob Armstrong. On our show Unhedged, my co-host Katie Martin, I talk about the big questions and finance like interest rates and AI and investment legends. Rob, how are you going? It's too bad we don't do video on this show because then viewers could see my tattoo of Warren Buffett, which is on my bulging bicep.
Thanks Rob for that horrifying mental image. Let's crack on. Unhedged is available. Where ever. 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 is 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. These firms hold vast majority of companies around the world. 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.
And because of that, they are responsible for voting at these company's annual meetings. They vote on directors, accounting firms and executive compensation. 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.
They almost routinely rubber stamp these. I mean, 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. But Patrick, why do they approve these packages? I mean, why isn't there any more pushback? They see it as justified. If their share prices are going up, they think that 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 401K investors, for retail investors or for their customer base. And I guess they could say that, well, if a company's stock is going up, then that means our customers 401Ks are going up too. And, you know, so why not compensate them for that success?
That's right. We're raising your 401K. We want to incentivize 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 incentivizing them with the amount of money that they are. So the way asset managers see it, a win for the CEOs is a win for their customers.
Okay, 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. 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. And what does that mean changing mid flight? 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 had the CEOs focused on the three or five year outlook for the company. And then something like COVID comes up. 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 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 will 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 turned out in paper. They didn't really take any hit from the troubles of 2020. Okay, 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. And it just shows that there's a bit of a different rules for people at the executive level and people at the mid manager level at the worker level. Have you seen changes, quote unquote, mid flight to executives bonus plans? Has that continued post COVID?
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 it's a much smaller number. A third factor has to do with the overall performance of the stock market in the US in recent years. Again, just going back to the financial crisis for a simple starting point from 2009, 2010, the stock market has done fantastically well.
And if your compensation, if you take home pay is dependent on 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, okay, 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 that over that time, you've done well too. So it's a win win for both parties.
So while it sounds like there might be little holding CEO pay back from growing ever higher, there are critics of the system too. 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. That's Bill George. He's an executive fellow at the Harvard Business School where he's taught leadership to CEOs for years.
And most shocking at all of all was the pay package Elon Musk, some depending on how you measure the stock in a given time, $54 billion. Incredible. None of us, you would think, did we mistake that? Did we meet say $54 million, which would be pretty incredible? No, we didn't. 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. 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 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. Patrick, what is Bill talking about here? 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. And why not? 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.
Bill is making as 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 this stock. For mid-love employees who are paid in cash, their boats are not even in the water.
Right, so unlike CEOs, normal employees can't just get their pay packages rewritten based on how well the year's going for the company. 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? CEO paying Europe is pretty dramatically lower. I mean, in 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.
Yeah, and why is that? It's cultural, the stock market, so 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 certain time frames. So over three to five years, you'll get X amount of stock. Rather than the performance stock pay, which we have here where, okay, 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 unsavory. 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 behavior in Europe. 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?
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 behavior and how shareholders vote on it have to take into consideration the social welfare of the country in addition to the corporate welfare. There are other ways that in Europe, the pay is rained in just by the way that their rules are structured and the cultural mentality there.
So despite this widening gap between the pay of workers and that of America 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? So the 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. So their 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.
So I'm wondering, will this year's election change anything? 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.
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 mold of Obama and more income equality. And we could very well see this come up again in 2024 here. Patrick, thanks for being here. You're welcome.
Behind the money is hosted by me, Mikhaila Tindira. Safiya F. Med is our producer. Our intern is procreate pan-war. Sound design and mixing by Sam G. Ivanko. Special thanks to Misha Frankl Duval and Simon Mundi. Tofer Forha's is our executive producer. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.
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