The Evolution of Executive Pay in the United States

Abstract

Charges of excessive executive pay combined with financial malfeasance in some situations have been featured in the business press the past several years. But how did this happen? As one might suspect, it did not occur in a vacuum. Dating back to when President George Washington was paid about 1,000 times that of the average worker, there have been examples throughout U.S. history where top executives were paid handsomely. This can be examined in the following four time frames: (a) up to 1913 with the appearance of stock plans and no taxes or pay regulations; (b) 1913 to 1933 with the introduction of personal income tax and a booming stock market up to the 1929 crash; (c) 1933 to 1972 with insider trading rules coupled with fluctuating tax rates, three periods of pay controls, a relatively flat stock market, and significant creativity in executive pay plan design; and (d) 1972 to present, which added the importance of stock plan accounting to the mix. Tax law, SEC-required disclosure, and APB/FASB accounting rules have provided headaches for many companies but also opportunities for the few creative executive pay planners.