Exploring the Ethics and Economics of CEO Salaries
In some countries, companies may need to provide more detailed disclosures about executive compensation.
Companies are increasingly required to disclose executive pay and compensation policies to shareholders and the public.
Executive Pay or CEO salaries are very much in the news lately. Are CEO salaries getting out of control? Are they really worth it? There is no right answer to these questions. Whoever you ask, the answer is likely to be ‘it depends’.
There is no set answer to what a CEO’s salary should be, as it can vary depending on a number of factors, including the size and profitability of the company, industry, location, and the individual’s qualifications and experience. In general, CEO salaries tend to be higher in larger, more established companies and industries with higher profit margins. Additionally, CEOs with more experience and a proven track record of success may command higher salaries.
Factors that occur
However, many factors come into play, including corporate governance, ethical standards, shareholder expectations, and company culture. Ultimately, the CEO’s compensation should align with the company’s overall financial performance, growth goals, and the value they bring to the organization. In Fiji, I have heard of a CEO with an annual salary of $ 48,000 as well as at the other end a CEO with an annual salary of $1,150,000. These are unverified numbers. The CEO’s salary is typically much higher than the average worker’s salary. The exact ratio of CEOs pay-to -average worker pay can vary widely depending on the industry, company size, and location.
According to a report by the Economic Policy Institute, in the United States, the average CEO of a top 350 company made 320 times more than the average worker in 2020. This means that the CEO earns in one workday, what the typical worker earned in a year. Is this normal? Is it right? Again, no right answer. There are ongoing debates about the appropriate ratio of CEO pay to average worker pay, with some arguing that the gap is too wide and can contribute to income inequality, while others argue that CEO compensation is justified by the value they bring to the company and the competitive market for executive talent. Ultimately, the appropriate ratio may depend on individual company circumstances and priorities
The highest paid CEO in Australia earned USD 16 million in 2022 whereas the highest paid CEO in NZ gets less than USD 15 million per annum. In India, it is USD 15 million and USD 12 million in China. In the US, at least two CEOs get more than USD 500 million. There are many reasons why CEOs salaries are not comparable.
CEOs and resposibilities
CEOs are some of the most highly compensated individuals in the business world. However, there is often controversy surrounding these high salaries, with many people questioning why CEOs earn so much more than the average worker. One of the main reasons why CEOs’ salaries are not comparable to those of average workers is the complexity and responsibility of the job.
CEOs have a unique set of skills and qualifications that are often difficult to find. These skills may include exceptional leadership, strategic thinking, and the ability to make difficult decisions quickly and effectively. The experience and knowledge required to succeed in such a role are not easily found, and CEOs are often in high demand, which can drive up their compensation.
CEOs are also responsible for making critical decisions that can impact the entire company. These decisions can range from hiring and firing employees to developing and implementing long-term strategic plans. The stakes are high, and the consequences of a poor decision can be significant. CEOs are expected to be accountable for their decisions and to navigate complex business challenges, often in a highly competitive market. They are responsible for managing the company’s finances, including revenue, profits, and shareholder returns. This requires a deep understanding of the business and industry, as well as the ability to make sound financial decisions. Additionally, CEOs are often responsible for managing a large workforce and ensuring that the company operates efficiently and effectively. Another reason why CEO salaries are not comparable to those of average workers is the fact that they are often paid in a variety of ways, including performance-based bonuses and other benefits. These compensation packages are designed to incentivize CEOs to perform at the highest level possible and to reward them for achieving specific goals and milestones.
ThE BEnEfits
The increased benefits provided to CEOs can be attributed to a number of factors. One key reason is the competitive market for executive talent. As companies compete for top talent, they may offer increasingly generous compensation packages to attract and retain the best CEOs.
The pressure to deliver results too need consideration. CEOs are often responsible for driving growth and profits, and they may be incentivized with shares and other performance-based rewards to achieve specific financial goals. CEOs benefits may also be seen as a way to align their interests with those of the company’s shareholders. For example, if the CEO is compensated based on the company’s share price, they may be more motivated to make decisions that increase shareholder value.
Top Management including CEOs would normally face increased scrutiny and regulatory requirements in today’s business environment. The size and complexity of the company can also play a role in determining CEO compensation.
Large multinational corporations require CEOs with a different set of skills and experience than a small startup company. CEOs who manage larger companies often face more complex challenges and need to make decisions that impact many stakeholders, including shareholders, customers, and employees.
Duration of the Tenure
Another point to note is duration of the tenure. On average CEOs are the employees with fastest exit. It is less than 5 years in the US and 5.5 years in the UK. It’s just above 6 in Australia. This is an indication of their job. They come, strategize to earn more and create value. If they fail within first few years, that is the end. It is considered that becoming a CEO is risky business as such higher remuneration and benefits.
In some countries, companies may need to provide more detailed disclosures about executive compensation and ensure that their compensation practices are aligned with corporate governance standards. Even in PNG, listed companies are expected to follow similar rules.
It’s important to note that excessive CEO compensation can also be a cause for concern. In some cases, CEO pay may be seen as disconnected from company performance or may be seen as a symptom of income inequality. As such, there is ongoing debate around the appropriate level of CEO compensation and the role that companies, shareholders, and regulators should play in setting executive pay.
Rules and Practices
There are several standard rules and practices that are typically followed when setting executive pay, including market-based approach where companies often use market data to establish competitive compensation levels for executive positions. This involves benchmarking executive pay against that of similar companies in the industry and region.
In the pay-for-performance approach, companies tie executive pay to performance metrics such as revenue growth, profitability, and stock performance. This aligns executive incentives with the company’s financial goals while in the case of board oversight approach, executive pay is typically determined by the company’s board of directors, which is responsible for setting compensation policies and reviewing executive pay decisions.
Companies are increasingly required to disclose executive pay and compensation policies to shareholders and the public. This includes detailed information on the components of executive pay, such as base salary, bonuses, stock options, and other benefits. Companies may also consider the broader impact of executive pay on employees, stakeholders, and society at large. This can include considerations such as income inequality, ethical standards, and corporate responsibility.
However, it’s important to note that there is no one-size-fits-all approach to setting executive pay, and different companies may follow different practices depending on their size, industry, and corporate culture. Additionally, the appropriate level of executive pay may depend on a variety of factors, including the company’s financial performance, growth prospects, and the skills and experience required for the executive role. Ultimately, companies should aim to establish compensation policies that are fair, transparent, and aligned with the long-term interests of shareholders and the broader community.
Examples of CEO Salary Controversies
There have been many examples of CEO salary controversies over the years. In 2015, Martin Shkreli, the CEO of Turing Pharmaceuticals, sparked outrage when he raised the price of a life-saving drug by over 5,000%. Shkreli was also criticized for his own compensation, which included a salary of $1 million and a $2.7 million bonus. Shkreli was later convicted of securities fraud and sentenced to prison. In 2016, Wells Fargo CEO John Stumpf was called before US Congress to answer questions about a scandal in which bank employees had opened millions of unauthorized accounts in order to meet sales targets. Stumpf was criticized for his own compensation, which included $19.3 million in total pay for 2015. Stumpf later resigned from his position
In 2018, Disney CEO Bob Iger’s compensation package came under scrutiny after it was revealed that he could earn up to $423 million over a four-year period if he met certain performance targets. Critics argued that such a large payout was excessive, particularly given that Disney had recently laid off thousands of workers. In 2018, Tesla CEO Elon Musk’s compensation package came under scrutiny after it was revealed that he could earn up to $2.6 billion over a 10-year period if the company met certain performance targets. Critics argued that the payout was excessive, particularly given that Musk already had a net worth of over $20 billion at the time.
These examples highlight the ongoing debate around executive compensation and the need
for greater transparency and accountability in setting CEO pay. While some argue that high CEO salaries are necessary to attract and retain top talent, others argue that excessive pay can be a symptom of income inequality and a lack of accountability to shareholders and other stakeholders.
Is it ok for a regulator to decide on CEO salary? In general, it is not appropriate for a regulator or an independent entity to directly decide on the CEO salary of a private or public listed company. But when it comes to state owned enterprises or governmental agencies, it is admissible to have a set guidelines or rules with regard to the approach to be adopted by the board in setting the executive pay.
In a market-based economy, the compensation of executives is typically determined by the company’s board of directors, which is responsible for setting compensation policies and reviewing executive pay decisions. Regulators typically play a role in ensuring that companies comply with relevant laws and regulations, but they are not typically involved in setting executive compensation.
Importance of Regulations
However, there are some cases where regulators may become involved in executive compensation issues. For example, in the aftermath of the financial crisis of 2008, regulators in the United States and Europe implemented new rules and guidelines related to executive compensation at financial institutions. These regulations were aimed at aligning executive pay with longterm financial stability and discouraging excessive risk-taking.
In general, the appropriate role of regulators in executive compensation issues is a subject of ongoing debate.
While some argue that regulation can help ensure that executive pay is aligned with long-term corporate goals and is not excessively risky, others argue that excessive regulation can be counterproductive and may discourage companies from hiring top talent. Ultimately, the appropriate level of regulation will depend on the specific circumstances and needs of each industry and company.