Fiji Sun

Exploring the Ethics and Economics of CEO Salaries

- Nouzab Fareed is a consultant specialize­d in corporate restructur­ing, business strategy and governance. He has a Masters of Arts in Economics and a MBA. He is a past president of Pacific Corporate Governance Institute.

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.

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