Study one: One Dollar CEO Salaries: An Empirical Examination of the Determinants and Consequences
In recent years, top executives taking a $1 salary (or less) has become a high-profile phenomenon across many types of organizations. The CEOs of numerous publicly-traded corporations, both successful and distressed, have a $1 salary (e.g., Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), American International Group Inc (NYSE:AIG)). Politicians with this salary include the Mayor of New York City, the Governors of Tennessee and Michigan, and the former Governor of New Jersey. Regulators consider the practice important, as members of the Senate Banking Committee pressed the CEOs of the three major U.S. automakers to accept a $1 salary during hearings of their bailout (Wall Street Journal 2008). The practice even shows up among leaders of professional sports, with pledges by the commissioner of the National Football League (NFL) and head of the NFL Players’ Association to work for $1 if the two sides cannot agree on a new labor agreement (New York Times 2011).
The precedent was set in 1978 by Lee Iaccoca, former Chairman and CEO of Chrysler, who tried to “lead by example” as the company sought and received a bailout package from Congress (Forbes 2002). The practice has grown since the mid-1990s, particularly among CEOs of public firms, and so have the various arguments put forth in the business press. Proponents claim that during difficult times, it is a symbolic gesture to employees that shows the CEO is willing to make a sacrifice, and it also shows investors that a CEO with equity in the firm will only be rewarded when they are too. Critics, including some labor unions, claim that it is merely a publicity stunt by egotistical CEOs who are already paid millions in stock and options (Businessweek 2007).
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Despite the use by highly visible leaders, newsworthy anecdotes, and debate among the media, regulators, and investors, $1 CEO salaries have not been systematically examined in the academic literature. One reason for the lack of attention from academics is that prior research on executive compensation has shown that a CEO’s annual salary accounts for only a small percentage of his or her total annual compensation, which includes bonus, grants of stock options and restricted stock, and long-term incentive payouts (Hall and Murphy (2002), Core, Guay and Larcker (2003)). Importantly, prior studies linking pay to firm performance have shown that the managerial incentives provided by a CEO’s portfolio of stock and options far outweigh the incentives provided by annual salary (Murphy (1985), Hall and Liebman (1998), Core, Guay and Verrecchia (2003)). Therefore, if one views annual salary as a de minimis component of a CEO’s compensation and incentives, then there is no need to examine anything when it is reduced to $1.
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Study two: Why Do Some CEOs Work for a One-Dollar Salary?
Even as scholars debate whether U.S. CEOs are drawing excessive compensation (Frydman and Jenter, 2010, Frydman and Saks, 2008, and Gabaix and Landier, 2008), why have some CEOs settled for a mere dollar-a-year salary? Recently, in the wake of the worst economic downturn in decades, the CEOs of all three major U.S. automakers pledged to work for an annual salary of just a $1. This presumably sacrificial step, to share the pain with shareholders and employees, is not unique to economic crises, however. Scores of CEOs, including those with thriving firms like Apple and Google, have also adopted this compensation arrangement since the early 1990s. In fact, the first striking feature about firms with $1 CEO salaries is their banality: Many of these firms are household names, and are drawn from a very wide variety of industries (see Appendix A). In this paper, we address a number of unanswered questions regarding this apparently contrarian behavior.
Specifically, we ask the following questions about adoptions of $1 CEO salaries: What are the motivations behind these adoptions? Are these adoptions merely publicity gimmicks to divert attention from other enormous, less visible payoffs in the form of bonus, stocks or options?1 What is special about these CEOs and their firms that led them to adopt uncommon salary scheme? Why are adoptions of $1 CEO salaries rare and temporary? Importantly, how do these CEOs and their shareholders fare in the aftermath of these adoptions? Altogether, the answers would address an overarching question about these adoptions: Are they the result of arm’s length bargaining between boards and CEOs seeking to minimize managerial agency costs and obtain optimal compensation contracts, or are they driven by the rent-seeking motives of CEOs? These alternatives sum up contrasting views of adoptions of $1 CEO salaries, drawn from the two main approaches to executive compensation.
According to the traditional approach based on the principal-agent framework, ‘the optimal contracting approach’, the board uses compensation schemes to provide the CEO with efficient incentives to maximize shareholder value (see surveys of extensive work on this by Murphy, 1999, and Core, Guay, and Larcker, 2001). Market forces and effective corporate governance help enforce the optimal contract. In the competing approach, ‘the managerial power approach,’ executive compensation is not necessarily a part of the solution to the managerial agency problem, but is itself a potential problem as a mechanism for rent-seeking in the hands of powerful CEOs (Bebchuk, Fried, and Walker, 2002).
See full document on Why Do Some CEOs Work for a One-Dollar Salary? in PDF format here.