Executive Compensation

This week we learned about executive compensation and just how highly paid some of the upper management positions are at major companies. The typical understanding of why executive pay is so high across the board is because these people are a part of “special groups,” meaning they provide strategic benefits to the company that ordinary employees do not. However, according to a CNBC report, over the last 40 years, average executive pay has increased more than 1000% while the average worker’s pay has only increased about 12%. This raises concerns that CEOs and other executives are making too much money for what they contribute to the company, and the dissonance between them and their workers is unfair. Others believe that company executives should have enormous salaries, as it can provide motivation to lower tiered employees to work harder to become a high earner.

My opinion on this matter falls somewhere in the middle ground between the two beliefs. For starters, being a CEO or a high level manager of a major company is a difficult job; you have every employee, shareholder, and government official looking to you as the face of the company, and you must make decisions that are in the best interest of the organization. At the same time, when I see CEOs that make hundreds of millions of dollars a year, I do wonder how much they could possibly be contributing to the company that warrants this much money. Many people are in favor of cutting executive salaries and redistributing some of that pay to the average worker, but when the money is divided over all of the people in the organization, the average worker wouldn’t be making that much more money, and you now have a CEO who is upset that he/she had to take a pay cut. The entire situation seems to create more problems when you try and make changes to the current structure.

If I were in charge of compensation for these large companies with CEOs making hundreds of millions of dollars, I likely wouldn’t cut their pay. If you make a huge pay cut to the CEO, they would likely leave the company, and finding a new CEO that is willing to take a smaller salary compared to other companies would be difficult. I would instead institute policies that limit the amount of growth executive salaries could experience. As we’ve seen over the years, executive salaries are increasing at an almost exponential rate, so slowing that growth rate might provide some relief to the issue. These changes might be putting caps on the amount of company stock the CEO can hold, and limiting bonuses and other benefit packages that contribute to the bulk of their pay. This allows the CEO to still make enormous amounts of money, keep them happy and motivated to lead the company, but prevents their compensation from exploding in the years to come.

When it comes to hiring and motivating new CEOs to lead the company well, I think that stock options and bonuses are most crucial to capturing their attention within the realm of compensation. If the CEO does a good job and owns large portions of the companies stock, it motivates them to make decisions that will increase the stock price. It is the most logical way to motivate them, but I also believe that there should be limits on how much they can hold. My take is to give them enough that they can realize gains on stock when they make positive decisions for the company, but only give them enough that they need to make good decisions to make money off their stock options.

Cox. J. August 2019. “CEOs see pay grow 1000% in the last 40 years, and now make 278 times the average worker.” CNBC, 2019. https://www.cnbc.com/2019/08/16/ceos-see-pay-grow-1000percent-and-now-make-278-times-the-average-worker.html