ARE CEO SALARIES OUT OF CONTROL ?

The results of the latest Executive Horizons survey show that 56.5% of respondents consider that their CEO is overpaid. Debates and public denunciation of unjustified CEO remuneration packages continue to make the headlines across the globe, but is the issue more complex than is widely portrayed?

CEO PAY COMING INCREASINGLY UNDER FIRE 

The gap between senior executive remuneration and that of the average employee has never been greater, with CEOs now being paid around 300 times more than the median salary of employees within their organizations. This gap is certainly much wider than what people around the world consider to be ‘fair’, that is to say 4.6 times the median employee salary. It is also much greater than most people think. When asked what they believed the discrepancy to be, the average response was a ratio of 10:1. With growing concerns over global economic inequality, widespread criticism of CEO salaries is likely to continue for the foreseeable future.

GREAT CEOS ARE A RARE BREED

It can however be argued that capping CEO remuneration is by no means the fairest or the soundest economic way of resolving the issue of global economic inequality. The thinking here being that the impact of individual CEOs on the profitability of their organizations justifies their pay packages. Given the limited number of individuals with the strategic and leadership skills to successfully run high-performing businesses, demand exceeds supply. Substantial financial incentives can therefore be considered necessary to attract these rare and highly sought-after talents. In an increasingly complex international business environment, CEOs who steer their company in the right direction, ensure growth, generate employment and create value should be rewarded and incentivized commensurately.

A BROADER SYSTEM OF MEASURES AND GREATER TRANSPARENCY

In August 2015, the U.S. Securities and Exchange commissioners voted in favor of public companies reporting their CEO’s total annual compensation as a ratio of their employees’ average pay. There is undeniable mounting public pressure for greater transparency and accountability to ensure that CEOs are rewarded for success and not failure. The question now is what is the most effective way to do so?

Many emphasize the need for closer alignment between CEO pay and company health. Harvard Business Review’s  Graham Kenny urges boards to design and implement a wider “system  of measures that together reflect the needs of all key stakeholders — not just investors” and that accounts for both short and  long-term performance. “The current push to justify CEO compensation stems from short-sighted governance,” Kenny writes.

If boards don’t start thinking more broadly about how to track performance – measuring a range of outcomes both for today and the future – they’ll continue to face harsh criticism for being weak and for short-changing their organizations. And executive pay will keep skyrocketing.”
– Graham Kenny

Sources: “How to Justify a Breathtaking CEO Pay Ratio,” by Theodore Kinni, Strategy + Business, 22 December 2015); “CEOs Get Paid Too Much”, by Gretchen Gavett (HBR Video, 7 October 2015). “How Boards Can Rein in CEO Pay,” by Graham Kenny (Harvard Business Review, 1 December 2014).