Leadership Feb 3, 2014

Will Work for Stock Options

A $1 CEO salary can sig­nal con­fi­dence — or danger

Yevgenia Nayberg

Based on the research of

Sophia J. W. Hamm

Michael J. Jung

Clare Wang

When Lee Iacoc­ca, for­mer CEO of Chrysler Cor­po­ra­tion, accept­ed a $1 salary as part of a fed­er­al loan pack­age for his com­pa­ny in the late 1970s, he seemed to embody the spir­it of sac­ri­fice that allowed Chrysler to sur­vive and return to prof­itabil­i­ty in the 1980s. Iacocca’s sub­se­quent recount­ing of his sto­ry in a best-sell­ing 1984 auto­bi­og­ra­phy helped val­i­date and pop­u­lar­ize the $1 salary.

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The arrange­ment has become rel­a­tive­ly com­mon since then. The CEOs of any­where from 15 to 30 pub­licly trad­ed firms earn a $1 salary each year — includ­ing, recent­ly, the CEOs of Citibank, Google, Ora­cle, and Whole Foods. Once it is known that a few high-pro­file CEOs have a $1 salary, oth­er CEOs and boards of direc­tors con­sid­er it, espe­cial­ly if they are in a sim­i­lar sit­u­a­tion,” says Clare Wang, an assis­tant pro­fes­sor of account­ing infor­ma­tion and man­age­ment at the Kel­logg School.

Wang’s research shows that $1 CEO salaries vary wide­ly in their ori­gin, struc­ture, and out­come. The token salary can sig­nal that CEOs — and their firms — are con­fi­dent and opti­mistic about the future. Yet it can also indi­cate that the CEO is vul­ner­a­ble and that the firm is going through hard times. Every­thing depends on the con­text. And despite Iacocca’s influ­en­tial turn­around of Chrysler after tak­ing a $1 salary, his sto­ry, as it turns out, is an anom­aly rather than the norm.

Feast or Famine?

In an inves­ti­ga­tion of 92 firms with $1 CEO salaries, Wang and her col­leagues—Sophia J.W. Hamm of The Ohio State Uni­ver­si­ty, and Michael J. Jung of New York Uni­ver­si­ty — found that ratio­nales for the token salary could be some­what even­ly split into two broad cat­e­gories. The first is that it aligns the CEO’s inter­ests with those of the cor­po­ra­tion: the CEO stands to ben­e­fit hand­some­ly if the val­ue of the corporation’s stock ris­es. The clas­sic exam­ple of a CEO in the align­ment cat­e­go­ry is Steve Jobs, Apple’s head dur­ing its emer­gence as one of the most valu­able cor­po­ra­tions in the world. In lieu of a salary, Jobs was paid in Apple stock options that helped make him, by the time of his death in 2011, a multibillionaire.

The sec­ond broad expla­na­tion for the $1 salary is poor recent per­for­mance by a firm, or a gen­er­al down­turn in the econ­o­my. The CEOs of com­pa­nies in this down­turn” cat­e­go­ry are more like­ly than those in the first cat­e­go­ry to lay off work­ers (60 per­cent vs. 10 per­cent), mean­ing that they are under pres­sure to show sol­i­dar­i­ty with employ­ees and demon­strate per­son­al sac­ri­fice. The CEOs of the Big Three” U.S. auto man­u­fac­tur­ers who accept­ed a $1 annu­al salary as part of the fed­er­al government’s bailout of the indus­try in 2008 are clas­sic exam­ples of this category.

Worlds Apart

So what do align­ment and down­turn CEOs look like? The groups share a few things in com­mon beyond their $1 salary. For exam­ple, a major­i­ty in both groups was also the firm’s chair­man of the board, while a sig­nif­i­cant minor­i­ty was a founder of the firm. But the dif­fer­ences were far more strik­ing than the sim­i­lar­i­ties. On aver­age, down­turn CEOs received a $1 salary for just 2.4 years — about half the aver­age dura­tion for align­ment CEOs. That is because down­turn CEOs were fre­quent­ly replaced by new executives.

The CEOs in the align­ment cat­e­go­ry like the prospect of a large reward after they lead the firm suc­cess­ful­ly.” — Clare Wang

More impor­tant­ly, align­ment CEOs were far more like­ly than their down­turn coun­ter­parts to receive stock options in lieu of a salary: 86 per­cent ver­sus 54 per­cent. (For Anup Srivastava’s thoughts on stock-based com­pen­sa­tion, read here.) And the ulti­mate worth of those options var­ied wide­ly between the two cat­e­gories. For align­ment CEOs, the val­ue of the stock increased dur­ing their tenure, exceed­ing the pur­chase price, 69 per­cent of the time. The same was true for just 44 per­cent of down­turn CEOs.

In oth­er words, exec­u­tives in the align­ment cat­e­go­ry oper­ate from a posi­tion of pow­er. They believe that the loss of their salary will be matched, or far exceed­ed, by the val­ue of their stock options. The CEOs in the align­ment cat­e­go­ry like the prospect of a large reward after they lead the firm suc­cess­ful­ly,” Wang says. They nat­u­ral­ly think that they will suc­ceed because they are con­fi­dent in their abil­i­ties.” In most cas­es, that belief is borne out. CEOs in the down­turn cat­e­go­ry, by con­trast, tend to oper­ate from a posi­tion of weak­ness. Their vul­ner­a­bil­i­ty is con­firmed by the poor per­for­mance of their stock options (among the rough­ly half who are for­tu­nate enough to receive them) and their brief tenures.

The Iacoc­ca Irony

There is notable irony in the emer­gence of the $1 salary. The align­ment CEOs who receive large amounts of stock options in lieu of a salary are some­times derid­ed as engag­ing in a gim­mick or a ruse, while the down­turn CEOs who take a $1 salary with no oth­er form of com­pen­sa­tion are some­times laud­ed. And yet a CEO of a suc­cess­ful firm who takes a $1 salary along with stock and options seems to main­tain the suc­cess of the firm, ben­e­fit­ing both the CEO and share­hold­ers,” Wang says.

So appear­ances can be deceiv­ing. Sac­ri­fice for the sake of the cause might seem noble, demon­strat­ing the ded­i­ca­tion that made Lee Iacocca’s sto­ry so com­pelling. But the token salary does not nec­es­sar­i­ly trans­late into long-term suc­cess for the firm, much less the CEO. It may be a good pub­lic rela­tions move for a CEO to make a per­son­al finan­cial sac­ri­fice when a firm is strug­gling,” Wang says, but it does not change the eco­nom­ic fun­da­men­tals of the strug­gling firm.”

Featured Faculty

Clare Wang

Member of the Department of Accounting Information & Management faculty until 2017

About the Writer

Theo Anderson is a writer and editor who lives in the Boston area.

About the Research

Hamm, Sophia J. W., Michael J. Jung, and Clare Wang. 2013. “Making Sense of One Dollar CEO Salaries.” Available at SSRN.

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