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Why CEO Pay Is So High (And Going Higher)

The numbers are in on 2014 CEO compensation, and as the old Seinfeld joke goes, they are real and they are spectacular. CEO pay is also controversial as the income gap widens in America.

The average S&P 500 company CEO made 373 times the salary of the average production and non-supervisory worker in 2014, up from 331 times in 2013, according to the AFL-CIO.

Why is CEO pay rising sharply, and how are CEO pay packages structured to maximize executive compensation? Here are the basics you need to know to understand the big numbers behind the CEO headlines.

1. How much do CEOs get paid?

The average pay package last year was $22.6 million, up from $20.7 million in 2013, according to an analysis of companies' proxy disclosures by executive-compensation data firm Equilar.

The average gain in total compensation for the 200 highest-paid U.S. CEOs worked out to 9.1 percent last year. That handily thrashed the 2.4 percent economic growth and meager increase in personal income that other Americans enjoyed.

The average U.S. family made $51,939 in 2013, according to the Commerce Department. The average worker makes $24.87 an hour, up 2.2 percent in the last 12 months, according to the most recent unemployment report from the Labor Department.

2. How much of the money comes from salary, and how much from bonus and stock options?

A little more than a third of CEO pay comes in cash—the exact percentage fluctuates based on market conditions.

A survey by the Hay Group for The Wall Street Journal, released last month, found that 37 percent of CEO pay was in cash last year, up from 35 percent in 2013, while the percentage paid in stock and stock options dropped 4 percentage points, to 54 percent. Pensions and perks made up the rest of the CEOs' package at the 50 major companies studied.

Hay found that companies added to the stock portion of CEO packages after the 2008 financial crisis, when stock prices were low and giving execs equity was likely to make them richer in the long term. The shift toward cash now may reflect higher stock prices, according to the study.

3. How tightly is CEO pay tied to performance?

Not very tightly at all, according to a much-cited 2000 study in the Journal of Management. It found that variations in company performance account for only about 5 percent of the variation between how much companies pay their top executives. The No. 1 variable is the size of the company, accounting for 40 percent of the difference.

Last year, the CEO compensation growth of 9.1 percent trailed the S&P 500's 13.4 percent total return.

CEO compensation is not a good proxy for long-term company performance, either.

Of executives who were among America's top 25 highest-paid CEOs in any year between 1993 and 2012, 22 percent worked for financial firms that took federal bailout money, according to the left-leaning Institute for Policy Studies.

4. What do CEOs need to do to cash in big?

Equilar's data shows that there is a connection between the biggest CEO checks and companies that have been making deals, such as going public, doing big mergers or divestitures and reorganizations. Examples abound.

Yahoo CEO Marissa Mayer made $42.1 million, up 69 percent from 2013, as the search-engine company sold its shares in Chinese e-tailer Alibaba's initial public offering. That drove a 25 percent total return for Yahoo shareholders.

•John Malone's unending deal-making has long helped spawn big paydays for the executives who have led a multiyear effort to spin off many of the businesses of Liberty Media, where Malone is chairman, without having to pay taxes. Among the beneficiaries are Liberty CEO Greg Maffei ($74 million, paid by Liberty), Discovery Communications chief David Zaslav ($156 million), and Tom Rutledge ($16 million) of Malone-controlled Charter Communications.

GoPro founder Nicholas Woodman made $77.4 million. GoPro went public last June, and has zoomed in value to $6.88 billion.

5. What can shareholders do about runaway CEO pay?

The short answer: Not much.

Under the 2010 Dodd-Frank law, public companies must hold an advisory shareholder vote on executive compensation every three years. But the vote is nonbinding unless a company decides otherwise.

6. How is executive compensation regulated?

Not heavily. The tax code limits a company's ability to deduct pay of top executives above $1 million a year, but the provision exempts some forms of performance-based pay and has been criticized by politicians of both major parties as loophole-ridden.

The Securities and Exchange Commission is considering a proposal to make companies explain their executive compensation, including explicitly comparing executive pay to stock performance, both at the company and its peers and competitors. The proposal passed a preliminary vote last month and is now in a public comment period.

Courtesy of CNBC

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