Executive Compensation – Gap between CEO and Workers Pay

When one writes about executive compensation, the thought of jet setting CEO’s who enjoy luxurious lifestyles and live in gardened villas at the company’s expense comes to mind.

While the stereotypical image of a CEO enjoying such extravagance is indeed true to a certain extent, there is more to the topic of executive compensation. For instance, the practice in recent years has been to offer generous packages to executives that include stock options, benefits and variable pay over and above the basic components.

The point to note is that executive compensation is as removed from the compensation packages offered to middle and lower tier employees as they are in the hierarchy of companies. The reason for this has been the trend of CEO’s and executives being vested with more responsibilities as well as an emphasis on holding them responsible for top line and bottom line growth.

Gap between CEO and Worker Pay

Among the many causes attributed to the ongoing global financial crisis was the one about flawed incentives and high compensation packages to the executives which resulted in skewed priorities for the executives who were bent on registering profits at any expense and in the process throwing caution to the winds. It was also pointed out that the gap between the compensation of the CEO’s and the lower most employee was in the ratio of 300: 1 for companies like GE (General Electric) and GM (General Motors) where the CEO’s of these companies raked in Millions of Dollars of compensation when compared to the workers who were barely making five digit salaries. This has spurred a debate over the efficacy of paying executives so much when the end result is not commensurate with the pay.

Perks and Benefits

While salary is one part of executive pay, the associated perquisites and benefits that executives are granted by the board of directors is another important aspect. Things like paid vacations, children’s education, preferred neighborhood housing and access to the best clubs and other benefits make the job of executives an aspirational one for many business graduates.

Further, the humungous bonuses offered to the executives (in the range of 100% to 300%) makes one wonder whether the stratospheric levels of executive pay is something that needs a rethink by the collective conscience of the corporate world.

The point that this article is making is that while executive compensation needs to be commensurate with the level of experience, the ability to articulate vision and imbue the organization with a sense of mission and at the same time the capability to take risks, there needs to be a line drawn somewhere which caps the compensation and packages offered to executives at levels that are more earthly. While the intention is certainly not to begrudge the compensation being offered to executives, the incentive system must be more tied in to current market realities as is the case with compensation at other levels. Hence, the lessons learned from the recent financial crisis about asymmetric risk and reward systems must not be forgotten in a hurry.