Most executive compensation pay ranges are excessive. As stated in the PBS segment, “Executive Pay: The Issues”, in 2002 CEO pay was nearly 500 times more than the average employee’s pay. There is not a single job in a company where you can compare the responsibilities to a CEO’s responsibilities and that comparison results in the CEO doing 500% more work than the other employee. I agree with the 1973 ratio of 45 to 1 and can even see an argument for the 1991 ratio of 140 to 1. However, I truly believe that 500 to 1 is excessive. In addition, the ratio of 500 to 1 was in 2002, realistically that has only grown and the pay gap increased in the past 20 years. Nonetheless, I would never want to discount the work that CEOs do as being a CEO is a critical role in any company and comes with a significant amount of responsibility.
One factor that helps to explain the rise in executive compensation is that board of directors in this country are seeking leadership and consider the CEO to be the single most important factor in the future success of that company and they are willing to pay to have an outstanding leader to fill that role. Another factor that helps explain is the constant increase in the size of companies today. Companies are always increasing in size (even over long-term) and with larger companies, CEO’s compensation packages will continue to increase. Thirdly, stock market booms and stock options are another factor.
Changes are needed in the executive compensation realm and each individual company should consider their CEO compensation package separately from their compensation plan that decides the compensation of the rest of their employees. However, executive compensation has no reason to be in the tens to hundreds of millions, specifically when the company is losing profits by the year. My main recommendation is to pay for performance with CEOs. However, instead of literal pay for performance (ie. good performance means more money), I recommend starting at a median salary. If the company does well, each year, then the CEO will receive a bonus. If the company does not perform well that year, then a small chunk of the CEO’s compensation will be taken away for the following year. Of course, there are a ton of trade offs and considerations with this type of compensation structure; however, I do think it would be one worth considering.