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Earlier this year, Apple revealed that its new CEO, Tim Cook, earned $378 million in total compensation in 2011. He has an enormous job in steering the company his predecessor, Steve Jobs, founded and nurtured from its birth. The amount of money Apple, Cupertino, Calif., will fork over this year stands in stark contrast to Jobs' famous $1 a year total compensation.
More recently, Marissa Mayer took the top job at Yahoo, Sunnyvale, Calif. Yahoo will pay Mayer a base salary of $1 million, with a $2 million target bonus. Mayer's equity awards come in at $12 million and her so-called make-whole payment -- to compensate for stock left behind at her former employer, Google -- is a hefty $14 million.
As the blogosphere lit up with opinions over Mayer's value, the promised payout brings to mind the question: How much is any CEO really worth?
[Related: 10 VAR Executives Who Aren't Paid Enough]
Determining exactly how to pay a top executive is challenging. Public companies devote pages in their proxy statements to explaining how their executive compensation packages were derived, which experts were consulted, and what competitors pony up for their own top executives. The criteria used by boards of directors to pay CEOs reflect the talents each individual company values, as well as the corporate culture. The compensation packages also reflect the board's view of the roles of incentives and rewards.
"When you are talking about the IT industry, executive pay is mainly incentive pay," said PricewaterhouseCoopers Managing Director Rick Ericson. "It's complicated. A typical executive, in a typical year, receives a collection of complex financial claims."
Part of those packages, typically, is stock options. More than 10 years ago -- prior to the dot-com bubble bursting -- it was common for high-tech startups to pay executives with stock options for two main reasons. First, it allowed companies that were cash-poor to attract talent on a hope and a promise. Second, stock options were considered, more or less, "free," since they were not accounted for in a company's profit and loss statement.
"To be perfectly clear, though, those options were never free," said Ericson. "They did not allow companies to escape the valuation effects of dilution."
However, the promise of getting rich by working for a new dot-com superstar was infectious. Companies would sign a senior executive, sometimes wooing him or her from a venerable brick-and-mortar company. The largest part of the package was options. "There was a huge bias toward paying executives this way," Ericson said. "When the accounting rules changed [in 2005], they started using a lot fewer stock options. Corporate practices have changed a great deal, and so companies started to look at other forms of long-term incentive compensation."
