The exponential growth of executive compensation is a highly debated topic in both business and politics. According to the Economic Policy Institute, CEO compensation has risen 940% since 1978 while worker compensation has only grown 12% in that time. This has contributed to widespread inequality and has helped the United States reach its highest level of income inequality in 50 years. In my opinion, executive compensation is excessive and is the result of CEO’s having the power to set pay rather than a reflection of their high productivity or high-demand skills.
There are a number of components of executive compensation. These include their core compensation, deferred compensation, and benefits. I would change executive compensation by eliminating the core compensation and focusing on long-term incentives like equity plans. I believe that CEO’s should not accept a salary but rather be compensated based on their equity plans and benefits. This ensures that the CEO is fully invested in improving the firm because their compensation will be based entirely on their performance.
One example of a CEO who took a $1 million pay cut in order to pay all of his employees at least $70,000 a year has reported great results almost 5 years later. During an interview with the BBC, Dan Price described how increasing his employee’s wages increased their capability. His employees no longer have to come to work with a mindset of “I have to go to work to make money”. Now that their needs have been met and they feel financially secure they come to work each day focused on “how do I do good work”?
I am sure that most executives will not be happy with a decrease in executive compensation. However, according to the Economic Policy Institute, in 2019 the average CEO made 320 times that of their typical employee. I do not believe that one individual can be 320 times as influential to a firm compared to the average employee. Limiting executive compensation may result in difficulties recruiting CEO’s. However, as long as the compensation package is competitive in the market and allows room for growth, this should not be a major issue.
The component of compensation that I believe is most essential to recruiting and motivating executives to lead companies toward competitive advantage is their long-term incentives, particularly equity plans. Long-term incentives will ultimately motivate the CEO to work harder than simply offering them a lucrative base pay. By tying executive compensation to CEO performance, executive compensation will become more realistic and executives will have a greater motivation to lead the firm towards competitive advantage.
