To dive deeper into the compensation for Estee Lauder Companies, Inc. I chose this company
because I am familiar with it, but do not know much about the salary ranges and compensation
packages. This was a very interesting journey.
The current CEO of Estee Lauder Companies is Fabrizio Freda. His total compensation for the fiscal
year of 2021 was $65,996,985. Of this, his base salary was $1,666,667. Most of his earnings came
from stock awards, which were valued at $50,429,620. Interestingly, in the category of "Other
Compensation", his earnings were listed at $721,792. To me, it is quite compelling that his
earnings that aren't significant enough to earn their own individual categories are much, much
higher than the salary I am expected to provide for my family with. In comparison to other
employees in the company, Fabrizio's earnings were 1,925 times more. (AFL-CIO, 2022) This means
that the average employee at Estee Lauder Companies makes an annual salary of about $34,284.
For a family, this would be considered low-income. In my honest opinion, I do not believe the
executive is worth that salary. Yes, I understand that executives often (but not always) have quite
a full plate, but they rarely work alone. The business is comprised of many individuals who also
have full plates and carry a lot of stress with them. To then carry this stress home while making
significantly lower wages than those at the executive level, it is disheartening. Fabrizio's yearly
salary alone is more than what many hardworking people will see in their lifetime.
Based on my independent research, along with the discussion posts of my peers, it appears that
compensating CEOs with stock is quite common and the value typically far exceeds the base
salary. In my opinion, this gives the CEO even more influence in the company, which can be a
good or bad thing, depending on the business and CEO. On one side, this compensation
encourages the CEO to keep the company's best interest in mind, since the performance of the
stock will have a direct impact on the CEO. On the other hand, I do not believe this is fair to other
employees and continues to add to the very apparent difference between employee and executive
pay. It is not common for lower employees to be given compensation greater than their base
salary in awarded stock. The cost to the company can be severe if the CEO is not responsible with
their decisions and hurts the stock price with their actions (for example, think about how Tesla's
stock price fluctuates based on Twitter posts and other public actions and decisions made by CEO
Elon Musk). If the CEO uses their ownership in the company to make a change that is not well
received, it can hurt the stock price at a cost to the company.
To mitigate the risks associated with fraud and misstatements in compensation packages, it would
be best for auditors to closely follow Auditing Standard No. 12 - 10A. This requires auditors to look
closely at the relationships between a company's finances and their executive officers. This
includes a thorough reading of the employment contracts set in place for each executive, as well
as examining regulatory filings with the Securities and Exchange Commission, specifically regarding
those that detail transactions made to executive officers. (PCAOB, 2022) Auditors are also
responsible for ensuring that internal controls are in place that adequately identify and mitigate
risks. This includes Human Resources and Payroll internal controls that require approvals and
regular compensation reviews. (Messier, et al., 2019) Further, at my company, our payroll
department has a control regarding pay increases. All out-of-cycle pay increases (any increase that
occurs outside of our mandated annual raises in March) that exceed 10% require VP and executive
level approvals, even up to the CEO, in some instances. Our CEO's compensation is reviewed by
the Auditing Committee that my company reports to quarterly, and by my boss, the Chief Audit
and Compliance Officer. To prevent fraud, it is crucial that every employee, including executive
officers, have their pay reviewed regularly and that internal audit ensure the internal controls are
effective.
References
AFL-CIO. (2022). Highest Paid CEO's - The Estee Lauder Companies, Inc. (EL). Retrieved from
https://aflcio.org/paywatch/highest-paid-ceos
Messier, W. Glover, S. Prawitt, D. (2019). Auditing & Assurance Services: A Systematic Approach
11th Edition. McGraw Hill Education.
Public Company Accounting Oversight Board. (2022). Auditing Standard No. 12. Identifying and
Assessing Risks of Material Misstatement. Retrieved from
https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-
interpretations/details/Auditing_Standard_12
