While there is diversity across industries, sizes of organizations and countries, executive pay includes the common features of base pay and bonus based on performance.
CEO compensation has become one of the most important issues of concern in the field of corporate governance. With ever increasing economic activity and companies transcending all boundaries, geographic, economic and technological, the person in charge of steering the company has been thrust into focus. Typically, huge compensation packages were a phenomenon of the golden days of dotcom glory. The period of Internet boom may safely be termed the era of exorbitant pay-outs. The Internet made millionaires of people in a matter of days. In the Internet-rush' of the late 1990s, a number of small companies mushroomed redefining the principles of economies of scale and scope. The CEOs (as well as the employees) of dotcoms often burnt the midnight oil trying to float their talents. For their efforts, they were compensated handsomely, when the company took off and reaped rewards.
However, even after the burst of the Internet bubble and the decline of the software industry from its top position on the list of the most happening industries, huge pay-outs have remained. A quick recap of the origin of CEOs will give us a better understanding of the topic. When economic systems evolved from sole proprietorships to the company form of business, a need for a distinction between the owner of the resources and their managers arose. In some cases, owners stopped playing an active role in managing the business resources and turned them over instead to paid managers. These paid managers acted as agents of the owners and took up the responsibility for the success or failures of the business. As businesses grew in size and scope, the manager attained the glorified title of a CEO. The compensation system also became more complicated, evolving from a simple salary to benefits like bonus, perks and stock options. As time passed, the compensation packages grew in size until they attained such astronomical proportions that people began feeling the need for some control. This leads us to the question of whether CEOs merit the huge compensation they receive or not.
In the US, historically, CEO's in "utilities earn significantly lower levels of compensation than their counterparts in other industries, while CEO's in financial services earn higher pay" (Ashenfelter, et al, 1999, p. 5). Yet the relationship between firm size and executive pay is weakening. A comparison of executive pay in 23 countries shows that executives in the US receive a greater proportion of their pay from bonuses and incentives than from base salary.
Another reason for high CEO compensation was the fact that a major portion of their compensation package consisted of stock options and stock grants. In some cases, nearly two-thirds of the CEO's pay assumed the form of stock options. Some companies offered options packages to compensate for low salary and risk associated with the company, especially in case of a start-up company. Stock options had emerged as one of the most important factors, which made the CEOs salaries in big companies in the US to swell to almost 458 times the