Managing CEO pay


Over and over again we hear about this CEO here and that CEO there and his colossal paycheck. As the story goes, while these CEOs are sitting on top and racking it up, all the little people are running around down below living on pennies.

The CEO is an important role, which is why just about every company has one or some sort of variation of the role. Because of their importance and responsibility, CEOs require higher pay. However, questions arise when the CEO’s job performance is lackluster but he or she continues to receive pay increases while employees take the brunt of the financial losses that are essentially the CEO’s fault.

Even when the CEO is doing a good job, many organizations are challenged to determine how much pay is adequate and how much is excessive. More times than not, CEO pay seems to be on the side of excessive, which in turn leads to other issues such as decreased company morale, unwanted media coverage, and so on.

What should CEOs make?

Different companies take different approaches to managing CEO pay, and still the debate rages on. The general consensus seems to be that CEOs make too much. In fact, the gap between what the general public believes is fair and the reality is often astronomical. When researchers polled people from various countries, cultures, income levels, religions, and so on, the majority reported that they’d like to see the income gap shrink.

In a 1984 essay, the late Peter Drucker wrote: “I have often advised managers that a 20 to 1 salary ratio is the limit beyond which they can not go if they don’t want resentment and falling morale to hit their companies.” The current ratio is said to be closer to 400 to 1.

Bad for business

If something has the ability to sweepingly affect employee morale in a negative capacity, it is clearly bad for business and thus should be addressed. And yet, although various organizations have made different attempts to combat the sky-high pay of its CEOs, not much progress is being made, and morale continues to suffer.

Legislation

Across the world different countries are taking various regulatory approaches to the issue. When these approaches are properly executed, they’ve proven to be pretty successful. Many of these strategies allow for the voting of shareholders to help determine various aspects of adequate spending, including the pay of a company’s leadership. Thus far these measures seem to be making the biggest difference.

Do you think CEOs should earn less?

3 Comments

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  1. 1
    Deborah

    There has always been this disconnect between what a CEO should be paid and the employees who work for or with him/her. What seems to be lost in the equation is; the CEO would not even receive his/her salary without the hard work of the people under them that do the bulk of the work required for the company to succeed. CEO’s are many times promised bonus incentives if they can keep costs down, which usually translates to smaller employee increases if any. CEO’s should not be entitled to bonuses and raises if the employees underneath them are not eligible due to lost profits etc.

  2. 2
    Jim

    I always think perspective. If I add up the CEO salaries from the 100 top companies I get about $521M/year. If I look at the payroll for the NY Yankees, I see 26 players receiving $209M/yr. The 441 players in the NBA make a cool $2B/year. In all of baseball, $3.4B went to 856 players. If I take a glance over at Hollywood I see Robert Downey making $75M/yr for acting, Dwayne Johnson made $52M and the list goes on. As a country we seem perfectly content with this arrangement (and support it with our dollars) but strangely upset with CEO pay – I would argue that it is much more difficult to manage a large multi-billion dollar global organization than it is to play sports or act yet if we judge by pay the answer is no. The other logical “fail” with these types of analysis is that these CEO’s (or actors or ball players) are not the same over time. The CEO of IBM was different 5 years ago as was HP or Apple. Likewise the average worker changes over time. There is always movement among the salary levels of life up and down. Government regulation of how much any one makes is a poor idea, if you believe in freedom.

  3. 3
    Crystal Spraggins

    Hey Jim, I like your analysis, BUT I think a big difference between our attitudes about CEO pay and actors or sports player is (1) most of us don’t work in the entertainment or sports industry, so we’re not in a position to even think about comparing our work efforts to theirs and (2) actors and sports figures give us a certain amount of joy, and we’re willing to pay for that joy.

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