Planet Money

When CEO pay exploded (update)

September 17, 2025

Key Takeaways Copied to clipboard!

  • A 1993 tax law change, intended to curb excessive CEO pay by limiting deductions for salaries over $1 million unless tied to performance, inadvertently fueled the rise of stock options as a primary compensation tool, leading to a dramatic increase in CEO pay. 
  • The widespread adoption of stock options as CEO compensation in the 1990s was partly driven by a misunderstanding of their true cost, as companies did not have to account for them as an expense, leading to a significant transfer of wealth from shareholders to executives. 
  • While CEO pay saw a dramatic increase in the 1990s and early 2000s, it experienced a decline in the following decade due to factors like the dot-com bubble burst and increased shareholder scrutiny, before beginning to rise again, albeit with a notable pay ratio disclosure requirement introduced in 2018. 

Segments

The 1990s Tax Law Shift
Copied to clipboard!
(00:02:20)
  • Key Takeaway: A 1993 tax law change, limiting deductions for CEO salaries over $1 million unless tied to performance, inadvertently incentivized the use of stock options.
  • Summary: The segment discusses the historical context of CEO pay, highlighting how a 1993 tax law aimed to curb excessive compensation by limiting deductions for salaries above $1 million, but this led to companies shifting towards performance-based pay, particularly stock options, to avoid the deduction limit.
The Rise of Stock Options
Copied to clipboard!
(00:08:14)
  • Key Takeaway: Companies began heavily utilizing stock options for CEO pay after the 1993 tax law, driven by the perception that they were a ‘free’ form of compensation due to accounting rules.
  • Summary: This part delves into how stock options became a dominant form of CEO compensation following the tax law change. It explains the mechanics of stock options and how, due to accounting rules at the time, they were not treated as a direct expense, leading to their widespread adoption despite their actual cost to shareholders.
The Unintended Consequences
Copied to clipboard!
(00:14:51)
  • Key Takeaway: The belief that stock options were ‘free’ led to their excessive use, contributing to a massive increase in CEO pay and a transfer of wealth from shareholders.
  • Summary: The discussion focuses on the unintended consequences of the ‘free’ perception of stock options. It highlights how this led to a surge in their issuance, a significant rise in CEO compensation, and the eventual pushback from accounting bodies and shareholders who realized the true cost.
Post-2016 Updates on CEO Pay
Copied to clipboard!
(00:18:14)
  • Key Takeaway: CEO pay has risen significantly since 2016, outpacing average employee pay, and new regulations require reporting of CEO-to-median-employee pay ratios.
  • Summary: This segment provides an update on CEO pay trends since the original 2016 broadcast. It reveals that CEO earnings have continued to grow, at a faster rate than average employee wages, and discusses the introduction of pay ratio disclosures as a result of the Dodd-Frank Act.