NPR’s Planet Money podcast covers a wide range of topical and historical events in American business history. One interesting phenomena they researched was why and when CEO pay exploded within the United States. Before the 1990’s, CEO pay increased at a steady rate as did other pay for the average worker in a company. In the 1992 the average pay exploded. Between 1992 the average pay for a CEO went from $4 million to $19 million in 1996. The main reasons were tax codes being altered and an accounting rule that helped companies maneuver through the tax code.

(Image of Mark Hurd. CEO of Oracle Corporation and a member of the Baylor Board of Regents)

One major cause of the explosion of CEO pay was Business, State, and Society. In 1992 while Bill Clinton was campaigning to become governor he called out the tax system that was rewarding CEO’s for laying off thousands of workers during a recession. He championed the call to change the tax system that did not incentivize expanding CEO pay and moving manufacturing overseas. Within the next few years congress felt the same and changed the tax code that put a limit at $1 million in deductibles for CEO pay. This deductible formerly allowed companies to pay their CEO’s whatever they felt and then deduct that pay from the companies overall earning, thus lowering their taxes. The tax code, however, let companies go around the rule if they clearly showed they payed CEO’s based on performance.

Changing the tax code created both unacknowledged assumptions and unintended consequences. The huge increase in pay may was certainly an unintended consequence. The tax code was trying to prevent CEO’s from being grossly over payed compared to the average worker in the company, but it had the opposite affect. The cause is tied into the unacknowledged assumption. Companies began paying their CEO’s in stock options. Each year their options would increase in their pay package. While this payment method did incentivize CEO’s to actually better the company and not sit back and collect a paycheck, it also hurt the stockholders and the company. Companies did this due to an accounting rule that was not accounted for. The rule allowed companies to not report the options given to CEO’s, so people thought stock options were free. Unfortunately, they did not assume and realize that for every stock created to pay the CEO, the other stocks went down in value and so did the company. Someone ends up paying for it.

In 2000 when the .com bubble burst and shareholders noticed what was happening, companies realized how vastly over payed their CEO’s were being payed. The accounting rule regarding options changed, and CEO pay started to decrease. in 2014 the average pay for a CEO was $12 million. Although still very high, it is much less than what it was before, and it stopped the continuation of the massive increase.