For my last blog
this week I’m going to be discussing CEO pay. CEO’s have always been paid a lot
and I believe CEO’s should be paid a lot for several reasons – the job is tough
and often short lived due to very difficult challenges and impatient Boards of
Directors and because people in organizations need a highly paid position they
can aspire to in order to help motivate them to want promotions. However I don’t
agree that CEO’s should be guaranteed enormous compensation packages or astronomical
pay regardless of the performance of the organisation. CEO’s are one of the
first to say employee pay should be based on performance, claiming it’s the
fairest way to pay employees. So why should CEOs, Chairman or anyone else be
exempt? And how has the pay got so out of hand?
No rule as yet is
in place in the UK but in 2010 the US passed the Dodd-Frank Act. This act means
public companies are now legally obliged to publish the ratio which compares
the pay of their CEOs to that of their median employees. This act should hopefully
educate the general public on just how much CEO’s earn and give an
understanding of which CEOs are focused on personal greed.
Ironically this
push for CEO salaries to be public and more transparent could be to blame for
benchmarking. When hiring a CEO every company wants the best and most of the
time the best isn’t just waiting around to get picked he/she will already be a
CEO somewhere else at a successful company. To poach a CEO you naturally have
to offer them a better deal than anyone else in the industry and thus this Dodd-Frank
Act has made this easier to do. Myself like others would want a considerably
better package if it means leaving a good position and taking a risk with an
unfamiliar company. This increase in pay every time a new CEO is hired and the
fact that CEO’s on average are fired every three years; it takes a
significantly short period of time for CEO’s packages to get at ridiculous
levels. This doesn’t just happen with CEO’s it happens in the sports industry
and this is the reason why footballer’s salaries have gotten out of control. To
regulate this NFL set a wage cap, but would this work for CEO pay? I believe for
it to work in England a salary cap of the same
amount would need to be enforced globally. If it’s not, the best CEO’s in
England will go chasing the money and move elsewhere, it’s just human nature!
What other things
can be done to control CEO’s salary? Peter Drucker created the 20 to 1 ratio in
1984 basically stating that CEO pay should be no more than 20 times the average
worker’s pay. Rick Wartzman in an article for business week stated “Widen the
pay gap much beyond that, Drucker asserted and it makes it difficult to foster
the kind of teamwork that most businesses require to succeed”. Following
Ducker’s idea Starbucks CEO Schultz in
2014 earned a total pay valued at $21.5 Million this would have to mean that
the average Starbucks worker earns just over $1 million for 2014. A little over
the going baristas rate don’t you think? Based on analysis results from 2014
only 4% of US companies would meet Drucker’s standard! And CEO’s at FTSE 100
Company earn 149 times more than the average worker; which is a pretty
disgusting figure.
I’ll stop being so
negative for a minute and I’ll just mention a couple of organisations which
have actually started to consider Drucker’s theory. The CEO of Grant Thornton,
Sacha Romanovitch has capped her pay at 20 times higher than her average
worker. Although not as low TSB’s CEO Paul Pester salary is capped at 65:1. Yes
companies that use this can be seen as a publicity stunt but the more companies
that use this ratio can only be a good thing. Imagine all the money saved that
could be used for CSR activities or used to increase all employee salaries.
These two examples
are of companies where the average worker’s pay is relatively high but
sometimes large pay gas could just show the nature of the industry. Companies
like Primark are obviously going to have a higher ratio than accountants
employing smaller numbers of highly skilled staff.
Another option to
try and control this increase is to company CEO compensation to the value they
bring to the corporation. To many this may seem the best way to pay CEOs there
pay rises and bonuses would be set to how successful the company has been
throughout the year. Helping CEO’s think more about how to use the company’s
money and how it affects performance. However just to be devil's advocate not
all value is directly reflected in financial impact and a company’s financials
can fluctuate with the market in ways that simply does not reflect the quality
of the CEOs leadership.
To finish even though I agree that CEO’s salaries should be
high I don’t believe it is right that in the US the average CEOs earned $11.7
million in 2013 and the US president earner $400,000. Above I have given
examples of how we can look at correcting this but not one of these policies
will work alone. Multiple policies will need to be in place and it would need
to be a global agreement. I know that the likely hood of this ever happening is
extremely rare but what do we do? Sit and watch as the CEOs fill their deep
pockets?
Thank you for reading
and as always feel free to leave any comments?
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