Executive pay is undoubtedly a controversial topic, especially with the drastic 940% growth we have seen since 1978 (Lecture: Executive Compensation). While executives play an important role in organizations and make countless contributions throughout their tenure, my opinion is that executive compensation is excessive and promotes inequality in organizations.
According to the PBS video on Executive Pay, CEOs made nearly 500 times more than the average employee back in 2002, and likely much more than that now. No level of performance can account for a pay gap this drastic. Additionally, the video mentioned multiple examples of CEOs from large corporations that made hundreds of millions each year despite poor company performance and plummeting stock value — Cisco Systems ($280 million), Tyco ($332 million), and Oracle ($795 million). If CEOs are really paid by performance and in a manner that mimics their organization’s financial success, then why are these CEOs continuing to make more even when their company’s success is declining?
It is no doubt that CEOs put immense amounts of time and effort into their organizations through leadership and innovation, and that they deserve to be compensated for that work. However, it is the mere degree to which they are compensated that may do more harm than good. This pay gap can be discouraging to employees as promotions become more limited and their pay growth flattens. What can be especially discouraging is when a company’s profits are declining and a CEO’s pay is increasing, despite the perception that their compensation is directly correlated to company performance. To combat this, it may be beneficial for companies to properly define and justify CEO compensation and communicate that to the company.
In my opinion, the most important aspect of executive compensation as far as motivating executives goes is stock options. At their level of experience and caliber, these executives don’t typically have to worry about receiving too low of a base wage — they will receive competitive pay regardless. In contrast, providing stock options for executives will motivate them to actively work to improve the organization and lead their firm to competitive advantage. Stock options build a sense of ownership and added respnsibility because their compensation is directly correlated with firm performance and financial success. It also aligns the executives interests with that of the organization and its shareholders (Lecture: Executive Compensation). While base pay and benefits packages may be what helps companies recruit and retain top executives, stock options and profit-sharing programs are whata motivates and engages them to make progress and accomplish new achievements.
All in all, I think CEOs deserve to be paid significantly more than average employees because each of their contributions impacts the company in powerful ways. However, I think pay should be more proportional and such large pay gaps can be extremely harmful in many cases. Additionally, properly defining and justifying pay is vital at any level, and I think it could make a big difference in how people view CEO pay as well as how it is structured in the future.
