Do CEOs Deserve Their Pay? The Myths That Drive CEO Pay

Do Ceos Deserve Their Paythe Myths That Drive The Ceo Pay Bonanzaacc

Do CEOs Deserve Their Pay? The myths that drive the CEO pay bonanza. According to the most recent report of the Economic Policy Institute, the average CEO-to-worker pay ratio in the United States has gone down from 286-to-1 (in 2015) to 271-to-1 (in 2016). This number may disappoint many top executives who were hoping to see it return to its peak of 383-to-1, achieved in 2000. But in spite of this “bad” news, it’s clear that CEOs will not receive a pauper’s wage.

Looking at these figures, it appears that nobody heeded the warnings of management sage Peter Drucker who determined that the proper ratio between a chief executive’s pay and that of the average worker should be around 20-to-1 (as it was in 1965). Drucker believed that larger discrepancies would bring about morale problems within the workforce. As things stand now, many CEOs earn more in a single workday than the average worker makes in an entire year. In many respects, extremely large CEO compensation packages are problematic. The practice over-emphasises the impact of a single individual and undervalues the contributions of other employees to the success of a company.

What makes these ratios even more troublesome are studies that show that companies with high CEO-to-worker pay ratios have lower shareholder returns than companies with lower ratios. The myths behind CEO mega pay I would argue that extremely high salaries for CEOs are abetted by the following myths.

Myth 1: CEOs need high pay to motivate them to exceptional performance. If CEOs were not paid so well, they would not work as hard. Thus, for the benefit of the corporation, it’s essential to offer them generous incentive packages.

Reality: High achieving CEOs will work hard whatever they are paid. Given our understanding of human motivation, the kinds of people interested in the corporate game tend to be high achievers. And most CEO-types fall into this category. From my experience working with these people, they will work hard regardless of salary. Companies that give CEOs grandiose pay packages are wasting resources that could be put to better use.

It’s very unlikely that cutting CEOs’ pay would affect the bottom line.

Myth 2: Large CEO salaries reflect market demands for a CEO’s unique skills and contribution to the bottom line. According to this argument, talented CEOs possess impressive but very scarce leadership skills. Generous pay packages merely represent the market forces of supply and demand. If there was an oversupply of people with such unique qualities, market forces would bring their salaries down.

Furthermore, they deserve high levels of compensation given their ability to withstand the enormous pressure they are under to create exceptional results for the corporation.

Reality: CEOs are not that exceptional and it's almost impossible to measure their singular contribution to the bottom line. What may be a downer to some is the fact that most CEOs aren’t that exceptional. Rare are those who have the impact of a Steve Jobs or a Bill Gates. Although they may imagine that their skills are in scarce supply, many are quite ordinary, fallible human beings who have only a limited impact on their companies.

To replace them is not an impossible task. After all, every year, worldwide, business schools crank out hundreds of thousands of MBAs, many with sights on a CEO’s office. In addition, no matter how talented, CEOs cannot run their companies alone. Other qualified people are needed to make it happen. Given economic upswings and downswings, it’s very hard to determine the exact value a single CEO creates or destroys.

A company’s success is always the result of a team effort.

The greed spiral: In order to understand why extremely high CEO pay persists and why people continue to buy into the illusion that they are getting their money’s worth, we need to look at systemic issues and dynamics that drive the cult of the CEO. In the CEO mega compensation game, peer comparisons play a central role. Both the board’s compensation committee and prospective CEOs are taking advantage of the “above average effect”. When determining salaries, members of the board assume that a prospective CEO must be above average and make remuneration comparisons accordingly.

Similarly, in bargaining for their pay, CEOs will not suggest that they are below average. All of them want to be paid more than the median. Board members may fear that if they don’t compensate CEOs according to the upper quartile of the compensation scale, they could lose them. They may worry that their CEO will be “poached”. These social comparison processes, when repeated year after year, have a dramatic, inflationary effect on pay packages.

To put even more oil on this inflationary compensation fire, many head hunters base their own fees on what a prospective CEO will be paid. And as they are operating in a highly irrational market, they have considerable leeway to jack up the pay package. Furthermore, the remuneration of most compensation consultants is based on a formula tied to their prospect’s pay package. When we combine all these escalating pressures with the fact that many board members often do not fully understand the convoluted pay structures designed by these consultants, it’s no wonder that there has been such inflation in compensation.

Given the existing pay bonanza, it is fair to say that many CEOs have lost their capacity for fair judgment when making a case for their own compensation, acting more like mercenaries than genuine leaders. They are reluctant to recognise that excessive compensation has negative implications, such as destroying the sense of community within a high-performing organisation, demoralising employees, and motivating some to leave.

Although some CEOs may acknowledge these downsides, greed remains a formidable barrier. Keeping the compensation game within boundaries: Self-policing by the CEO community is unlikely. Countervailing pressures are necessary to limit CEO compensation packages.

Board members should avoid making comparisons with outliers and be wary of overly complex compensation schemes that incentivize short-term manipulation. Emphasis on stock options and restricted stock grants often leads to manipulation. Compensation should focus on long-term company health, stakeholder interests, and avoiding short-term gaming tactics like share buybacks that artificially inflate stock prices without real company investment.

Transparency measures, such as publicly releasing top executive compensation and shareholder votes on executive pay, can help curb excesses. Implementing clawback provisions to recover improperly awarded compensation and revisiting tax policies can also serve as deterrents. For example, higher marginal income tax rates on top earners and increased corporate taxes for firms with disproportionate CEO-to-worker pay ratios could be effective.

Although some view excessive CEO compensation as a pillar of capitalism, it signals potential societal rot. Unrestrained capitalism exacerbates social inequality and unrest, making it crucial for future CEOs to prioritize building sustainable and fair corporate cultures with equitable pay systems.

Paper For Above instruction

In contemporary corporate governance, the debate over CEO compensation remains a contentious issue, highlighting the complex interplay of economic, social, and psychological factors that sustain exorbitant pay packages. The prevailing assumptions and systemic practices that drive the CEO pay bonanza merit critical scrutiny, especially given their implications for organizational morale, shareholder value, and societal equity.

The disparity between CEO and average worker pay in the United States exemplifies the enigma that fuels ongoing debates. According to recent reports from the Economic Policy Institute, the CEO-to-worker pay ratio has slightly declined from an alarmingly high 286-to-1 in 2015 to 271-to-1 in 2016, still far removed from the 20-to-1 ratio common in 1965 (Mishel & Davis, 2017). This persistent disparity underscores systemic issues rooted in misconceptions about the necessity and justification for high CEO salaries, which are often justified on the basis of market forces and the supposed scarcity of exceptional leadership talent.

Among the myths fueling the pay frenzy, the first is the belief that high compensation incentivizes CEOs to perform at exceptional levels. This assumption, rooted in classical economic theories of motivation, presumes that monetary rewards are primary motivators for high-achieving individuals (Kohn, 1993). However, empirical evidence suggests that once a baseline threshold of compensation is achieved, additional pay has minimal impact on performance (Lazear & Rosen, 1981). High-caliber CEOs tend to be intrinsically motivated and driven by factors beyond monetary gain—such as personal achievement, reputation, and professional challenge (Deci & Ryan, 2000). Consequently, extravagant pay packages often represent a misallocation of resources that could be invested in innovation, employee development, or sustainable growth (Bebchuk & Fried, 2004).

The second myth posits that market forces dictate high CEO salaries due to the perceived scarcity of top talent (Frydman & Jenter, 2010). Proponents argue that executive compensation reflects supply and demand in a competitive market for scarce leadership skills. Yet, this assumption ignores the abundance of qualified candidates with similar credentials and the influence of incumbency advantages, elite networks, and executive search firms in inflating pay (Gabaix & Landier, 2008). Moreover, the contribution of individual CEOs to corporate performance is notoriously difficult to measure, often confounded by macroeconomic conditions, corporate culture, and stakeholder engagement (Bebchuk & Spamann, 2010). The myth of scarcity thus facilitates an inflated compensation culture that benefits a select few at the expense of broader societal interests.

Systemic structures promote and sustain excessive CEO pay through mechanisms such as peer comparison and procedural biases. Board compensation committees tend to benchmark against peer companies, often selecting outliers to justify high pay levels (Baker & Gabaix, 2016). The "above average effect" results in escalating salaries as directors aim to attract or retain top executives in a competitive, yet irrational, market. Additionally, executive search firms and compensation consultants often benefit from a fee structure linked to the size of the CEO’s pay package, creating perverse incentives for upward inflation (Murphy, 2013). These systemic factors, combined with internal governance complexities and limited transparency, exacerbate the problem, leading to a vicious cycle of ever-increasing compensation levels.

Addressing these systemic issues calls for reforms that prioritize transparency, accountability, and long-term value creation. Proposed solutions include mandatory disclosure of executive pay, shareholder voting rights on compensation packages, and clawback provisions to recover excessive or improperly awarded bonuses (Empirical Research on Executive Compensation, 2014). Moreover, regulatory measures, such as higher marginal income tax rates on top earners and increased corporate tax rates for firms with high CEO-to-worker pay ratios, could serve as deterrents to excessive inflation (OECD, 2015). Initiatives like worker representation on boards, exemplified by practices in Germany, provide avenues for balancing stakeholder interests and curbing excesses in executive compensation (Coles, Daniel, & Naveen, 2006). Ultimately, creating a culture of fairness and sustainable pay structures remains essential in restoring social trust and ensuring that executive rewards align with genuine organizational contributions.

The ethical and societal implications of exorbitant CEO pay cannot be overstated. As income disparity widens and social unrest grows, unrestrained capitalism appears to undermine societal cohesion, emphasizing the critical need for leadership committed to equitable and sustainable practices (Piketty, 2014). The future of corporate leadership must embrace creativity in compensation strategies—focusing on performance-based incentives aligned with long-term goals rather than inflated short-term gains. Only through comprehensive reform and a shift in corporate ethos can the myth of the indispensable, uniquely scarce CEO be dispelled, fostering organizational cultures rooted in fairness, accountability, and societal responsibility.

References

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