Making Sense of One Dollar CEO Salaries

In recent years, top executives taking a $1 base salary (or less) has become a high-profile phenomenon across many types of organizations. The Chief Executive Officers (CEOs) of some of the most recognizable corporations, both successful and distressed, have had a $1 salary (e.g., Google, AIG and General Motors). Regulators consider the practice important, as members of the Senate Banking Committee pressed the CEOs of the three U.S. automakers to accept a $1 salary during their bailout hearings (Wall Street Journal 2008). The precedent was set in 1978 by Lee Iacocca, the former Chairman and CEO of Chrysler, who tried to “lead by example” as he sought a loan guarantee from Congress (Forbes 2002). The practice has grown since the mid-1990s among CEOs of public firms, as have the various explanations asserted in the media. Proponents claim that during difficult times, a CEO sharing in the sacrifice sets a “good example” for employees and other stakeholders. Critics, including some labor unions, claim that it is merely a gimmick used by egotistical CEOs who are still paid millions in stock and options (Businessweek 2007).

Despite its use by highly visible CEOs and subsequent debate among the media, regulators, and investors, this distinctive compensation practice has not been examined systematically in the academic literature. We believe one reason for this lack of attention is that about 15 to 30 firms in a given year have a CEO with a $1 salary, representing less than 0.5 percent of all public firms. However, the size and visibility of the firms that chose this practice are substantial. Between 1993 and 2011, the combined market capitalization of firms with a $1 CEO salary grew from $0.5 billion to $875 billion. As a percentage of the S&P500 total market capitalization, it grew from 0.01 percent to 7.5 percent over the same period. The largest firms include Apple, Google, Oracle, Cisco, Citibank, Bank of America, PepsiCo, and Eli Lilly. Given that shares of these high-profile firms are widely held by investors, their products and services are used by a broad set of customers, and the executive compensation practices of these firms draw much attention from various stakeholders, we believe it is worthwhile to examine the determinants and outcomes of a CEO taking a $1 salary.

We hand-collect a sample of 93 CEOs from 91 firms between 1993 and 2011 who received a $1 salary to examine and provide evidence on several aspects of this compensation practice. From reading these firms’ proxy statements, we quickly discover that not all $1 CEO salary cases are alike. There are many stated reasons for the $1 salary decision, but two broad categories are apparent and we classify them accordingly: (1) seeking alignment with shareholder interests (hereafter, the Alignment category) and (2) showing sacrifice during a downturn or crisis (hereafter, the Downturn category). The first category consists of cases in which “alignment of shareholder interests” is mentioned in the proxy statement in describing the CEO’s new compensation agreement, and the second category consists of cases in which a firm is experiencing poor recent performance, receiving a government bailout, or citing a negative outlook due to the terrorist attacks of September 11, 2001. This partitioning of the sample allows us to perform separate analyses on each subsample and provide more granular details about the $1 salary firms after we perform our initial tests on the entire sample.

In our tests of the determinants of the $1 salary decision, we include variables capturing characteristics of the CEO and the firm, as well as proxies for the presence of a crisis, labor unions, general employee relations, and a geographic peer group effect. Our results indicate that CEOs with higher equity ownership in their firm, and CEOs of firms with a depressed stock, tense relations between upper management and employees, or located in the Silicon Valley area of Northern California, are more likely to adopt a $1 salary, relative to CEOs of control firms. In the subsample tests, we find that these results hold for the Downturn category of firms. Given the 10-K and proxy statement disclosures of these firms describing government bailouts, terrorist attacks, and workforce reductions, along with our results for a depressed stock and employee tensions as determinants, we posit that the decision to accept a $1 salary is a gesture of sacrifice made to alleviate stakeholder pressures faced by an embattled CEO. Our analysis of these CEOs’ total compensation shows that bonuses, options grants, and stock awards also declined from prior levels, which supports the gesture of sacrifice explanation. The longer-term outcomes for these CEOs suggest that they may have prolonged their tenure by roughly one and a half years by taking a $1 salary.

In contrast, our subsample analysis of the Alignment category of firms indicates that CEOs who are also the Chairman of the Board and CEOs who are leading a firm with higher sales growth are more likely to adopt a $1 salary, relative to CEOs of control firms. Assuming that CEOs who are also the Chair have more insights into the firm and board’s direction than non-Chair CEOs, and that they are more secure in their CEO position than non-Chair CEOs, we posit that the decision to take a $1 salary is a signal of better future firm performance. When we examine stock returns one and two years after the $1 salary decision, as well as over the entire duration of the $1 salary period, we do find that returns are generally positive and higher for Alignment firms than for Downturn firms and control firms. This outcome provides ex post corroborating evidence for the signaling explanation.

One could suspect that $1 salary firms are simply a subset of firms that changed the mix of a CEO’s compensation towards more variable or equity-based pay. In additional analyses, we examine whether the determinants of adopting a $1 salary differ substantially from the determinants of shifting a CEO’s mix of compensation from fixed to variable pay. Our results indicate that the determinants previously discussed are unique to our sample of $1 salary firms, which suggests that $1 salary firms and their CEOs are distinct from firms that shifted CEO compensation towards variable pay.

Overall, our study sheds light on a distinctive CEO compensation phenomenon that has long been a subject of debate among investors, regulators, and the media. While much of the past commentary on CEOs with a $1 salary has been based only on anecdotal evidence for a few visible firms, we draw inferences from examining all CEOs with a $1 salary. We highlight two distinct circumstances in which CEOs accept a $1 salary, document the corresponding outcomes, and offer intuitive explanations for the $1 salary decision.

The preceding post comes to us from Sophia J. W. Hamm, Assistant Professor of Accounting and MIS at The Ohio State University Fisher College of Business, Michael J. Jung, Assistant Professor of Accounting at New York University, Stern and Clare Wang, Assistant Professor of Accounting Information & Management at Northwestern University, Kellogg School of Management. It is based on their paper entitled “Making Sense of One Dollar CEO Salaries”, available here.