The Arguments for and Against CEO Compensation

by Chris Rhatigan on Nov 16, 2016 11:00:00 AM

ceo compensation

CEOs are easy targets. Everyone sees the headlines about another millionaire executive from Merrill Lynch or Countrywide Financial being hauled in on fraud charges and assumes that the fat cats are being overpaid.

The New York Times reported that the average CEO is paid 200 times more than their employees and that many executives for the country’s largest corporations are being paid more than $15 million a year. Are they really worth that much more than other employees?

But there’s a case to be made that well-performing CEOs generate tremendous value for their companies.

 

The Case for CEO Pay

One common misperception is that well-paid executives are “taking” money from employees. However, employees are paid according to the market and so are executives. A CEO’s pay is unrelated to employee pay. If the executive were to be paid less, those revenues would be redistributed among shareholders.

But paying a CEO less simply because their pay appears too high won’t benefit shareholders. One study found that companies paying their executives more outperformed those that artificially restricted pay, according to USA Today.

Critics of high executive pay may say that it’s not the amount so much as executives being paid no matter how well or how poorly the company does. But efforts to make pay based on performance are also often flawed. Take this example: An oil company paid its executives based on the success of the company. Of course, its success is highly dependent on the price of oil, a factor that the CEO has zero control over. In cases like these, the executive is paid more or less based on luck. 

ceo pay

 

The Case Against CEO Pay

Nevertheless, few people argue that executive pay in the 1990s was reasonable, when CEOs made 300 times as much as the average employee. That’s when the market boomed with dot-com executives riding the wave. This led to a cultural shift that made executives (at least appear to be) more corrupt.

“A good number of senior executives treated their companies like ATMs, awarding themselves millions of dollars in company loans and corporate perks,” Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, writes in Harvard Business Review. “It’s hard to dispute the idea that executives were somehow corrupted by the dazzling sums of money dangled in front of them.”

All of this created what appeared to be another Gilded Age — robber baron business leaders who bankrupted their companies. Critics say that it’s not good CEOs leading successful companies that are necessarily the problem. Instead, it’s criminals who escape from their failing businesses with the proverbial “golden parachute.” In this case, legislation and enforcement may be better tools for addressing the problem.

For business leaders, remaining humble about success and taking responsibility for failure are keys to maintaining a strong rapport with employees. When workers see a leader who is invested in the business’s success, they’re less likely to be concerned with how much that executive is getting paid.

 

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This post was written by Chris Rhatigan

Chris Rhatigan is a freelance writer and editor. He is a former newspaper reporter for The New Haven Register and The Iowa City Press-Citizen. He enjoys playing old video games, studying (and trying to speak) Hindi, and walking his dog on the local trails. He lives in India.