Planet Money: "When CEO Pay Exploded (Update)"

NPR | September 17, 2025
Hosted by Stacey Vanek Smith, Jacob Goldstein, and Kenny Malone

Episode Overview

This episode revisits a core mystery of modern American business: Why did CEO pay skyrocket in the mid-1990s? Through storytelling, interviews, and analysis, the hosts explain the policy changes and industry attitudes that caused CEO compensation to soar, notably focusing on performance-based pay (stock options), unexpected incentives, and the long tail effects on inequality. The updated segment explores more recent trends—how CEO pay has evolved since 2016 and how transparency efforts have impacted the landscape.

Key Discussion Points and Insights

1. The Banana Moment: When CEO Pay Took Off

• Jacob Goldstein starts by describing a chart showing CEO pay at big U.S. corporations. The line is relatively flat until the "mid-1990s, where CEO pay goes bananas" ([01:27]).
  • Quote:
    "Anybody would look at this chart, point to this moment in history and say, what happened right here?"
    —Jacob Goldstein [01:23]

2. Before the Boom: The Flawed CEO Pay Model

• Kevin Murphy (economist) explains that previously, CEO pay was only loosely connected to performance—mainly determined by company size ([04:00]).

  • Quote:
    "The biggest sole determinant of your compensation was how big of company you were running. And it turned out to be just a lousy way to do business."
    —Kevin Murphy [04:00]

• CEOs got paid regardless of results, leading to complacency.

3. Pay for Performance—An Appealing Fix

• Murphy's research advocated tying CEO pay to company performance, ideally aligning interests between executives and shareholders ([04:22]).
• Climate ripe for reform: early '90s recession and public anger over executives getting rich while laying off workers.
  • Quote:
    "Executives were getting rich at the same time they were laying off their employees. And of course, that's a minefield."
    —Kevin Murphy [04:43]

4. The Clinton Tax Law: Policy Shift That Changed Everything

• Bill Clinton's campaign seizes on public anger ([05:05], [05:22]).

  • Quote:
    "No incentives for executive compensation that's excessive."
    —Bill Clinton [05:22]

• Result: 1993 tax code change. Companies could only deduct up to $1 million in CEO salary as a business expense, unless additional pay was "performance-based" ([06:17]).

• Performance pay (like stock options) was exempt from the cap ([07:16]):

  • Jacob Goldstein explains:
    "As long as the pay is clearly tied to performance, there is no limit, no matter how much you pay, you can deduct it all."
    —Jacob Goldstein [07:16]

5. Stock Options Take Over

• With the law change, Boards started compensating CEOs using more stock options ([08:10]).
• Why stock options? They were considered "performance-based," and, due to prevailing accounting rules, they seemed "free" ([12:47]):
  • Quote:
    "We thought they were free. That was the bottom line."
    —Barbara Franklin [13:08]
• Accounting quirk: Companies didn't have to record options as an expense on the books—so their real cost was invisible ([13:34], [14:03]).
  • Consequence:
    "This extra pay for the CEO, these options, they are coming from you."
    —Jacob Goldstein [14:19]

6. The Downside: Unintended Consequences and Rapid Escalation

• Don Delves (consultant): Options grants exploded, up 40% in one year—so fast consultants thought it was a mistake ([11:05]).
• Average CEO pay at top companies doubled between 1992 and 1996; by 2000, it had nearly quintupled ([11:31], [17:52]).
• Peer pressure: Even when some understood the real cost, boards kept granting options because "everybody else was doing it" ([15:17]).

7. Efforts to Rein In Options and Pay

• The accounting standards board (FASB) tried to close the options loophole, but tech sector mobilized (protests, "stock options equal jobs" signs), and FASB backed down ([15:47], [16:26]).
• Consequences for insiders:
  • Delves: "Uncomfortable. Uh huh. Very uncomfortable." —Don Delves [17:01]
  • Murphy felt he'd unleashed the equivalent of "giving CEOs a bottle of wine every night" ([17:41])
  • The largest increase in wealth transfer from shareholders to workers, though disproportionately impacting CEOs ([17:41])

8. Correction: The Dotcom Bust and Post-2000s Slowdown

• Dotcom bubble bursts, market falls—shareholders finally notice the scale of options ([20:15]).
• Boards cut pay for the first time; accounting rules eventually change—options must be expensed.
• CEO pay actually drops from $19 million in 2000 to $12 million by 2014 ([21:49]).

9. Update 2025: What Has Changed Since 2016?

• Kenny Malone and Don Delves return for a post-2016 update ([22:00]).
  • CEO pay rising again, but not as steeply; growth is about 10% per year since 2014, compared to 3% for average worker pay ([23:28]).
  • Pandemic Impact: 2020 saw a drop in performance-based pay (companies missed targets), followed by a rebound ("big spike and drop situation") as targets were smashed in 2021–2022 ([22:35]-[23:17]).
• Transparency Effects:
  • Since 2018 (Dodd-Frank Act), companies must disclose CEO-to-median-worker pay ratio.
  • Ratio increased: from 160:1 in 2017 to 190:1 now ([24:03]).
• Notable final insight:
  • "It's neither spiraling nor is it out of control, but it is high."
    —Don Delves [22:13]

Notable Quotes & Memorable Moments

• "We thought they were free. That was the bottom line." —Barbara Franklin [13:08]
• "Once options took off...they all mentioned this thing that really seems to come down to five words: We thought they were free." —Jacob Goldstein [12:47]
• "Suddenly, boards of directors were a lot more interested in what Don Delves, that compensation consultant, had to say." —Stacey Vanek Smith [20:26]
• "They'd go, oh, holy...Flip the page again and go, oh, holy." —Don Delves [21:01]
• "It's neither spiraling nor is it out of control, but it is high." —Don Delves [22:13]
• "In real time, the largest transfer of wealth from shareholders to workers that we'd ever seen in corporate America." —Kevin Murphy [17:41]

Important Segment Timestamps

• 00:29: Introduction—How much are CEOs paid today? (examples)
• 01:27: Key chart: CEO pay "goes bananas" in mid-90s
• 04:00: Kevin Murphy on early CEO pay
• 06:17: 1993 tax code: $1M salary cap unless performance-based
• 07:16: Exemption for performance-tied pay
• 08:27: Introduction to stock options in CEO compensation
• 11:05: Stock options "explode," shocking consultants
• 13:08: "We thought they were free"—Barbara Franklin
• 15:47: Tech worker protests prevent FASB accounting rule change
• 17:01: Consultant admissions of discomfort
• 17:41: Kevin Murphy: "Largest transfer of wealth from shareholders to workers"
• 19:00: CEO pay peaks—$19M in 2000
• 20:15: Post-2000 correction: Stock crash, shareholder activism
• 21:49: CEO pay drops to $12M by 2014
• 22:12: Update: Don Delves on the modern pay trend
• 24:03: CEO-to-worker pay disclosure; ratio hits 190:1

Conclusion

This episode masterfully traces how well-intentioned policy and accounting quirks sparked an explosion in CEO pay—far beyond what reformers intended. The stock-option boom, enabled by a tax loophole and misleading accounting, left a permanent mark on corporate America. While modern disclosure rules have increased transparency, the gap between CEOs and workers continues to widen, with pay ratios now approaching 200:1.

The story makes clear: choices about "how" we incentivize pay can have much bigger—and stranger—effects on "how much" gets paid than anyone expects.