Is Skyrocketing Executive Pay Justified ?

Excessive Executive Pay is the Problem

In recent years, the topic of excessive executive pay has been at the forefront of efforts to promote good corporate governance. This is because there have been understandable and genuine concerns about this aspect, which is leading to, some effects on the governance structures of companies. For instance, the CEO of Wal-Mart takes home a pay that is 150 times more than the lowest paid worker is. This is indeed a matter of concern as in an ideal scenario, the gap between the lowest paid worker and the CEO must not exceed double digits and that too within a multiple of 50. Further, the fact that greed leads people to do things that they would not otherwise do is a truism that has to be taken into consideration in this respect.

Apart from this, excessive executive pay is having a corrosive effect on organizational cultures, which results in heartburn and a sense of powerlessness at the lower levels of the hierarchy.

Misalignment of Incentives

One of the reasons put forward for the ongoing global financial crisis is that the misalignment of incentives or the culture of unrestrained risk that was brought about due to greed manifested in the corrupt practices at the core of the financial crisis.

The misalignment of incentives we are talking about relates to paying the bankers and the CEO’s too, much, which led them to take greater risks in the hope of garnering ever-larger bonuses. As the aftermath of the crisis proved, with so much at stake and since the CEO’s and the bankers are human after all, there was inevitable corruption starting from the top. Because the reward systems did not incentivize only performance measured in a broad index but rewarded humungous profits at the expense of everything else, there was a tendency to throw caution to the winds and indulge in risky behavior.

Some Strategies to curb Skyrocketing CEO Pay

A possible strategy to limit skyrocketing CEO pay would be to design a reward system that places performance at a premium but limits how much of it can be translated into monetary and non-monetary terms. For instance, making CEO’s accountable for a broad range of performance measures like corporate responsibility, organizational dynamics like culture and wellbeing of employees, apart from profits and bottom line imperatives alone would be a reward system that is holistic in nature. Further, making the CEO’s accountable to their shareholders in a more direct manner would place curbs on excessive CEO pay, which has been the topic of many heated debates in company AGM or Annual General Meetings.

Closing Thoughts

Given the fact that excessive CEO pay has deleterious effects on organizational health and that this has contributed in some measure to the ongoing global economic crisis makes a compelling case for limiting the CEO pay. The reward systems must be designed in such a way as to incentivize performance but not excessive risk. Finally, the reward systems must take into account the fact that the CEO alone does not make the company exist but it is the combined efforts of all employees that keeps the ship afloat.

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