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Why Did America's CEOs Get Such A Big Raise?


Presidential candidates really like to talk about corporate executives' pay.


HILLARY CLINTON: Top CEOs make 300 times what a typical worker does.


BERNIE SANDERS: CEOs get raises.


DONALD TRUMP: You see these guys making these enormous amounts of money. It's a total and complete joke.

SIEGEL: Jacob Goldstein of our PLANET MONEY team takes us back to when CEO pay shot up.

JACOB GOLDSTEIN, BYLINE: The story of that moment starts in the early '90s with another presidential race - when candidate Bill Clinton promised to change the tax code to discourage high CEO pay.


BILL CLINTON: We need a new responsibility ethic in our tax system - no incentives for executive compensation that's excessive or moving our plants overseas.


GOLDSTEIN: Bill Clinton got elected, and he made good on that campaign promise. He changed the tax code. Now a company has to pay a tax penalty if they pay their CEO a guaranteed salary of over $1 million a year. But there's an exception. If a company pays the CEO in a way that is tied to the company's performance, there is no tax penalty. The theory was companies would give CEOs more pay that's tied to performance and less guaranteed base salary.

BILL WHITE: No. That's not going to happen in the real world.

GOLDSTEIN: This is Bill White. He was a CEO and board member back in the '90s.

WHITE: It's a very nice concept, but if you're a CEO, you're not going to want that to happen. And if you're on the board of directors and you have a good CEO, the last thing you're going to do is go to them and say, you know, we're going to take away some of your base comp.

GOLDSTEIN: Companies did add performance-based pay, but they did not cut the base salaries. And average pay for CEOs at the biggest U.S. companies doubled in four years. By 1996, it had $8 million a year, and it was still going up. The bulk of that new pay was stock options. This is how companies were tying pay to performance. I asked everyone I talked to for this story, why did companies give out so many options, and everyone said the same thing. It comes down to five words.

BARBARA FRANKLIN: We thought they were free.

GOLDSTEIN: This is Barbara Franklin. She's served on corporate boards for decades and is a former secretary of commerce for the United States.

FRANKLIN: We thought they were free. That was the bottom line, though.

GOLDSTEIN: Did you really think they were free?

FRANKLIN: Sure (laughter), I think we did.

GOLDSTEIN: Under an accounting rule that had been in place for decades, stock options were kind of free companies to give away. No matter how many options they gave out to employees, companies didn't have to account for them in their quarterly earnings, so they kept giving out more and more. Average pay for CEOs at big corporations hit $19 million in the year 2000. It had almost quintupled in less than a decade. Don Delves was a compensation consultant at the time, and his job was to help companies figure out how much to pay top executive.

How are you feeling at this point? You're in the middle of this.

DON DELVES: That's a very good question, Jacob. Let me just think about that for a second - uncomfortable, very uncomfortable.

GOLDSTEIN: And then pay stopped going up. The .com bubble popped. The whole stock market plunged, and that accounting rule changed. Companies could no longer treat stock options as free. Don Delves remembers a call he got from a board that was starting to worry about how much they'd been paying their executives.

DELVES: They just wanted, like, a five-page report. We gave them a hundred-page report. And they kept flipping the pages, and each one would go, oh, holy [expletive]; oh, holy [expletive].

GOLDSTEIN: That board wound up cutting CEO pay in half, Delves says. And maybe the most surprising thing in this whole story - average CEO pay actually fell from $19 million a year in 2000 $12 million a year in 2014. Of course, it didn't go down nearly as much as it went up. CEO pay today is still much, much higher than it was back in the early '90s. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.