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The CEO Trend: Higher Pay Pegged to Performance but you Might get There Younger

by Marek Danyluk

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A 2015 Glassdoor research study found that the average CEO earns around 204 times his worker earns.[1] Just about 50 years ago, the average CEO only made 24 times that of an average employee.[2] The increase in compensation just half a century ago shows the increasing pay gap between top executives and their employees.

This trend is also becoming prevalent in multinational companies where executives in the upper management levels are getting paid more. Whilst executives one step below may be paid generously as a result of their direct connection with these top executives, it appears that this may not translate to better pay for employees working at the lower management levels. A study by the Center for Leadership Development and Research at Stanford Graduate School of Business found that where the CEO was overpaid by 64 percent, executives were overpaid by 26 percent and lower level management such as division general managers were only overcompensated by 12 percent.[3]

The study by the Center for Leadership Development and Research found that wage gaps may cause individuals to view their employment situation more unfairly than it actually is.[4] A study by Harvard University surveyed more than 55,000 workers in 40 countries. Respondents in the survey found that the ideal pay ratio between CEOs and unskilled workers was 4.6 to 1.

The wide pay disparity may also be explained by its industry. The 2015 Glassdoor study showed that, 80 percent of companies with the highest CEO-to-worker pay ratios were either retailers or restaurants. Another possible explanation for wide pay disparities in multinational corporations is the phenomenon of broadbanding which refers to the consolidation of traditional pay structures, turning many narrow pay ranges into few, wider pay ranges.[5] Companies who use broadbanding as a technique may see two employees with similar responsibilities earning thousands of dollars apart.[6]While broadbanding may help to reduce the layers within a company and flatten the hierarchies, it may also mean fewer promotional opportunities for employees in middle management.

Critics have taken the view that, overcompensation increases the cost to shareholders. It is expected that shareholders would have a knee-jerk reaction on discovery of the higher salaries of top executives. However, what some may not realise is the value-add these key executives bring to the table. For instance, shareholders were highly critical when the pay package of BP's chief executive, Bob Dudley, was announced. Mr Dudley received a 20 percent increase in his total pay package mainly due to a rise in his pension savings. BP justified Mr Dudley's pay with his good performance in safety, project management and cost cutting amidst the current volatile environment.[7] BP chairman Carl-Henric Svanberg commented that performance of Mr Dudley was not judged based on the price of oil, or bottom line profit, but on measures which were "clearly within management's control."[8]

Similarly at Google, top performers get incentivised as they get paid a higher salary.[9] Salaries are based on results alone. This may mean that two employees with the same job title can have varying salaries. According to Laszlo Bock, Senior Vice President for People Operations at Google, the company has rarely lost its top performers with this approach.

Other than performance evaluation, companies could also look at educating employees on the pay structures in the organisation in order to improving employee morale on pay disparities. Other companies have also taken steps to reduce the pay gap. Whole Foods capped salaries of their top executives for over 2 years, making the maximum cash compensation to be about $650,000.[10] Companies could also consider compensating employees through other means such as education and professional development. Gravity Payments, a Seattle-based company, went even further by paying everyone equally, no matter what their position was.[11]

In August 2015, the US Securities and Exchange Commission it introduced a mandate which now requires companies to provide more disclosure on their CEO's compensation.[12] Companies will now have to provide investors with a ratio of their CEO's compensation with that of the median pay of their workforce.[13]

Another rising phenomenon to watch out is the younger CEOs on board. This "supergroup" of CEOs are rising faster into top executive positions due to the growth spurt of the technology and internet industry. These "supergroup" CEOs are estimated to have worked in the same number of companies and jobs as their older counterparts despite the fact that they are 10 years younger.[14] In 2011, eight out of 42 technology and internet companies which held initial public offerings were led by CEOs under 40. These include Andre Mason of Groupon Inc and Gary Wei Wang of Chinese video provider Tudou Holdings.[15] Critics have raised alarm bells on the possible immaturity of these younger CEOs. However, these CEOs have recognised and made up for their lack of experience in different ways. For instance, Josh James of Web analytics company Omniure Inc hired a seasoned sales executive and chief financial officer to assist him when the company went public.[16]Facebook CEO Mark Zuckerberg sought introductions to other experienced CEOs such as Intel Corp's Paul Otellini and Microsoft's Bill Gates.[17]

 

[1] Andrew Chamberlain, CEO to Worker Pay Ratios: Average CEO Earns 204 Times Median Worer Pay (25 August 2015), accessed at <https://www.glassdoor.com/research/ceo-pay-ratio>.

[2] Heather Huhman,3 Ways to Address the Salary Chasm Between CEOs and Employees (12 October 2015), accessed at <https://www.entrepreneur.com/article/251494>.

[3] Stanford Graduate School of Business, A Wage Imbalance Between the CEO and Workers Sends a Bad Message (1 April 2007), accessed at <https://www.gsb.stanford.edu/insights/wage-imbalance-between-ceo-workers-sends-bad-message>.

[4] Stanford Graduate School of Business, A Wage Imbalance Between the CEO and Workers Sends a Bad Message (1 April 2007), accessed at <https://www.gsb.stanford.edu/insights/wage-imbalance-between-ceo-workers-sends-bad-message>.

[5] Stern & Associates, Broadbanded Salary Structures, accessed at  <http://www.hrconsultant.com/articles-white-papers/broadbanded.html>.

[6] Payscale Human Capital, The Advantages of Broadbanding, accessed at <http://www.payscale.com/compensation-today/2011/04/advantages-of-broadbanding>.

[7] Kiran Stacey, BP chief Bob Dudley's pay increases 20% to $19.6m (4 March 2016), accessed at , <http://www.ft.com/cms/s/0/3e1b5302-e200-11e5-8d9b-e88a2a889797.html#axzz46eXJEHlO>.

[8] Jillian Ambrose, Bloody nose for BP's Bob Dudley at 59pc vote against his £14m pay at AGM (14 April 2016), accessed at < http://www.telegraph.co.uk/business/2016/04/11/bp-faces-fresh-attack-on-bob-dudleys-20m-pay-packet/>.

[9] Cord Himelstein, Fixing income inequality in the workplace (5 May 2015), accessed at <http://smartblogs.com/leadership/2015/05/05/fixing-income-inequality-in-the-workplace>.

[10] Heather Huhman,3 Ways to Address the Salary Chasm Between CEOs and Employees (12 October 2015), accessed at <https://www.entrepreneur.com/article/251494>.

[11] Cord Himelstein, Fixing income inequality in the workplace (5 May 2015), accessed at <http://smartblogs.com/leadership/2015/05/05/fixing-income-inequality-in-the-workplace>.

[12] Laurie Kulikowski, 10 Companies With the Highest Income Inequality Between CEOs and Workers (27 August 2015), accessed at < http://www.thestreet.com/story/13267933/1/10-companies-with-the-highest-income-inequality-between-ceos-and-workers.html>.

[13] Sarah Lynch, Companies must disclose pay gap between CEOs and Workers (5 August 2015), accessed at < http://time.com/money/3986122/ceo-pay-ratio-disclosure-sec-rule/>.

[14] Roger Trapp, Rise and rise of the thrusting young executive (8 August 1996), accessed at < http://www.independent.co.uk/student/career-planning/rise-and-rise-of-the-thrusting-young-executive-1308746.html>.

[15] Spencer Ante and Joann Lublin, Young CEOs: Are they up to the job? (7 February 2012), accessed at < http://www.wsj.com/articles/SB10001424052970203315804577207131063501196>.

[16] Spencer Ante and Joann Lublin, Young CEOs: Are they up to the job? (7 February 2012), accessed at < http://www.wsj.com/articles/SB10001424052970203315804577207131063501196>.

[17] Spencer Ante and Joann Lublin, Young CEOs: Are they up to the job? (7 February 2012), accessed at < http://www.wsj.com/articles/SB10001424052970203315804577207131063501196>