Pay for Performance
According to Business Week, the average CEO of a major corporation made 42 times the average hourly worker's pay in 1980. By 1990 that had almost doubled to 85 times. In 2000, the average CEO salary reached an unbelievable 531 times that of the average hourly worker.
"Pay for performance", tying executive compensation to the financial success of their company, has become very popular in the past decade. In the face of the largest bull market ever, that isn't surprising. It also isn't realistic. What CEO honestly believes that all or most of the appreciation in value of their company is due to their own talent?
ZD Net's Total Compensation Vs. Total Return To Shareholders chart (no longer online), shows that total return to shareholders was higher for many companies whose CEO compensation was under $500,000 than for companies who paid their CEOs multi-million dollar compensation.
The AFL-CIO Executive Paywatch site gives people a lot of information about what they consider "the excessive salaries, bonuses and perks of the CEOs of major corporations". The site features a calculator that shows how your salary increase over the past five years compares to that of a CEO. They also give you tools to "take action to stop runaway CEO pay."
Is It Justified?
John Mariotti, president and founder of The Enterprise Group, asks "CEO Pay: How Much is Too Much?" and answers the question himself. Citing Derek Bok, he points out that as business becomes more complex, the demand for top executives increases and thus they command greater and greater pay. He also noted that such huge awards do little to motivate these outstanding performers, who are generally more motivated by challenge.
Mike Hughlett, Staff Writer for PioneerPlanet, thinks the reason why CEO pay soars so high is that CEO's pay generally is set by the compensation committee, usually comprised of other chief executives.
Graef Crystal, writing for the San Francisco Business Times, Uses Steven Jobs, co-founder of Apple Computer to prove his point on CEO compensation: the composition of a CEO's pay package has nothing to do with his future performance and the CEO may not make all that much of a difference in whether the company is a success or a failure.
In her article "Lowering the Bar", WSJ writer Joann S. Lublin notes "Pay for performance? Forget it. These days, CEOs are assured of getting rich -- however the company does."
So Why Bother?
CEOs are paid too much. It has minimal effect on their performance. It has no quantifiable effect on the performance of their companies. The only measurable effect is to drive an ever widening gap between the CEOs and the people they depend on to produce results.
It is up to us as Management Professionals to return some equity to compensation of upper management and the individual contributors while trust and respect between the two parties still can be salvaged. If we don't, worker motivation, and resultant innovation, will plummet.
Fight The Greed
So what can we do to fight the greed of a few CEOs that is destroying the rest of us? Michael Brush, writing for MSN Money has a few suggestions:
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