Why is the CEO’s salary so high?

According to media reports, the salaries of successful CEO seem to be rising forever. But why can they make so much money? Have CEOs always paid such high salaries?

At around 5:30 pm on Wednesday, January 6, people just finished the first 34 hours of work in 2021. With only 34 hours of work, the CEOs of top British companies are paid equivalent to the annual income of an ordinary British worker.

According to research by the High Pay Centre, an independent think tank in London, the median annual salary of CEOs of FTSE 100 index companies is 3.6 million pounds (approximately US$4.9 million), which is more than 100 times the annual salary of 31,461 pounds for full-time employees . The highest paid CEO is Tim Steiner, the CEO of Ocado, an online store. In 2019, his annual salary was 58.7 million pounds, 2605 times the average salary of the company’s employees. His one day’s salary is worth seven times the employee’s one year’s salary.

In the United States across the ocean, the situation is even more extreme. The Economic Policy Institute, a think tank in Washington, DC, did an analysis. The results of the analysis show that the average income of the CEOs of the 350 largest companies in the United States in 2019 was US$21.3 million (approximately £16.9 million). This data allows the CEO to employee salary ratio to reach 320:1. This ratio is more than five times that of 1989.

At the same time, the epidemic has exacerbated global inequality, and low-income people face higher health risks, unemployment, and decreased happiness. As all sectors of society become more aware of the importance of “basic workers”, these gaps have also received unprecedented attention. Compared with other employed persons, basic workers often have fewer employment rights and lower wages.

However, the top bosses continue to make a lot of money. This fact makes people more confused and more dissatisfied with their super high salaries. When these deep-seated inequalities were revealed one by one, many people couldn’t help but ask, how did these high-paying jobs come about? Who gave them such power and how did they obtain such power? There is a more important question: after the epidemic, will this situation continue?

Some people think that it is understandable that talents like Elon Musk get high salaries, but other ordinary CEOs, whose talents are mediocre, but also have high salaries, are very puzzling. Some people think that it is understandable that talents like Elon Musk get high salaries, but other ordinary CEOs, whose talents are mediocre, but also have high salaries, are very puzzling.
The root of “price-oriented salary”

The root cause of the executive pay gap lies in the policies proposed by the Reagan administration in the United States and the Thatcher administration in the United Kingdom in the 1980s. Their political ideas brought about deregulation, privatization of the public sector, and free market capitalism. The Reagan and Thatcher administrations are also not very optimistic about trade unions, which ultimately led to these organizations losing the ability to fight for their employees.

Sandy Pepp, an executive compensation expert at the London School of Economics, said: “If you go back to the early days of that era, you will naturally find that the company’s overall performance evaluation system also includes the job performance evaluation of executives. This is common. The system evaluates the salary of everyone in the company.” This month, Peppe published a paper to discuss why there is such an income gap between CEOs and ordinary employees.

But Peppe also said that when executive compensation was linked to stock prices, the original system “disintegrated”, and under the gradually prevailing neoliberal system, “asset-based compensation” began to emerge. Pep analyzed data on FTSE 100 index companies since 2000. The results showed that the salary of all employees increased by an average of 3% per year, while the salary of the CEO increased by about 10% per year.

Pep said that the logic behind this is that the CEO’s salary is linked to the company’s financial performance, because they are the most important factor in the company’s success. Therefore, in addition to basic salary, CEOs can also get performance-related bonuses and stock options (stock options allow them to buy company shares at a given price). Ocado CEO Steiner’s 2019 salary package includes a bonus of £54 million for the realization of a five-year “growth incentive plan”, which measures the company’s share price growth based on the FTSE 100 index.

At the same time, in the UK, the proportion of individual businesses is rapidly declining. Shareholders have become more and more powerful. Their demand for stock price growth has brought high compensation to CEOs. The board of directors has no objection to such compensation because they are more anxious to please investors.

Robin Faraconi, CEO of Farient Advisors, an international executive compensation consulting company, also agrees with this “price-oriented” salary. She said: “If you have a good CEO, the multiplier effect will be huge. Therefore, in principle, the performance is mediocre, the salary is average, the performance is outstanding, and the salary is outstanding. This structure is reasonable.”

Walking on thin ice

However, in fact, the calculation system of CEO compensation is more complicated. The company relies mainly on the compensation committee, which is composed of board members and other company executives, who meet once a year.

Steven Clifford, the former CEO and author of the book “The CEO Pay Machine”, said that in addition to the traditional evaluation of past experience and performance, the committee has a key step in evaluating compensation—benchmark comparison. That is to determine how the CEO’s salary compares with the CEO’s of other similar companies. Clifford writes that usually, this sum will be in the top 50%, top 25% or top 10%, so the salary level will continue to maintain or increase.

A study published in the journal Financial Economics in 2010 concluded that the salary committee system is accelerating salary inflation, “because these companies of the same level provide a reasonable explanation for the high level of CEO compensation.”

Then comes bonuses. Everyone agrees to use bonuses as a way to measure performance, either to increase bonuses based on financial indicators or to give a large bonus once a specific goal is reached.

After the increase in shareholder power, their demand for high stock prices has also prompted CEO pay to rise. After the increase in shareholder power, their demand for high stock prices has also prompted CEO pay to rise.
But from the perspective of the worker representatives, there are problems with the calculation process of basic wages and bonuses, because the board of directors cannot risk angering a company leader who can leave at any time, so they will repeatedly raise the CEO’s salary.

Janet Williams, the senior policy officer of the British Trade Union Confederation, believes that the compensation committee usually reports directly to the CEO, so the system lacks justice and needs reform. She said: “We need to get rid of the performance-linked salary system. It is this kind of salary system that has led to rising salary levels.”

In fact, Pep believes that empirical evidence shows that the most significant link between compensation and company financial indicators is not financial performance, but the size of the company-the larger the company, the more money. Pep said: “The bigger the company, the higher the CEO’s salary.”

“CEOs are the key to success”

Whether the CEO’s high salary is reasonable remains to be heatedly discussed. On the one hand, free market economists believe that if executive compensation is consistent with the interests of executives and shareholders, then it is reasonable. They believe that if companies are willing to pay these salaries, then this is the market’s recognition of the value of executives.

Daniel Player, project director at the Adam Smith Institute, a liberal think tank, said: “CEOs are the key to success. Obviously, only a few people have the skills, personality and temperament required to become CEOs of top companies. These limited talents are certainly favored.”

Pryor’s examples include Apple’s Steve Jobs, Amazon’s Jeff Bezos, Tesla and SpaceX’s Elon Musk. These are rare talents who have bred revolutionary technology from scratch. However, many researchers emphasize that the contribution of ordinary CEOs is exaggerated. Such managers neither start a business, nor have a special vision. On the contrary, the fate of a company depends on other more important factors.

Compensation management expert David Bolchefer said: “There are many reasons why companies perform well. Maybe the economy or the field they are in is thriving, and these have nothing to do with the CEO, maybe the company is a monopoly. Maybe, the company’s Achievement is the employee’s credit. The CEO’s impact on a company’s performance is usually difficult to measure, and that’s the crux of the problem. They may be able to justify themselves with “brilliant”. But is their talent really so scarce? I don’t think so. ”

Bolchefer said that the 2008 global financial crisis is a typical example of how performance and compensation are not always consistent. He said: “In the financial world, people always like to use extraordinary ability and talent as an excuse for their high salaries. But during the financial crisis, many banks closed overnight and were in a mess. At this time, people began to ask: Why Their wages are so high, why are they still so high after the financial crisis?”

Bolchefer believes that the “self-interested vortex” between shareholders, board members and executives is the reason why CEO pay will not fall. He also believes that this is also the reason for the increasing public dissatisfaction.

“A huge improvement”

Although the salaries of top CEOs have been rising, employee rights seem to be the opposite. Especially for workers who took risks on the front line during the epidemic, their rights have been declining. For many ordinary workers, the sky-high salary of CEOs makes them increasingly unacceptable.

Earlier this month, thousands of British Gas employees staged a five-day strike to protest the company’s layoff plan and the practice of giving employees less rights in new contracts. Immediately afterwards, the working class’s dissatisfaction with this pay gap spread rapidly. In fact, contradictions have already erupted in 2018. At that time, the chief executive of Centrica, the parent company of British Gas, raised his salary by 44% and was paid 2.4 million pounds.

John (a pseudonym), a 32-year-old employee of the British Gas Company, said: “This is greed, it’s arrogance. The prime minister’s salary is not comparable to him! How do they explain? You get such a high salary, not because you have this ability, but It’s because of your background.” (A Centrica spokesperson stated in an email that the company’s current CEO’s basic salary is 19% lower than the previous CEO’s, and in 2020, neither the CEO nor the executive director received year-end bonuses or annual salary increases. )

However, there are signs that CEO pay growth is at least slowing. Paul Lee, who has been an investment consultant for 20 years, said that in recent years, in the UK, the CEO’s salary level has “stabilized”, but “the CEO’s salary level has remained between 4 million and 5 million pounds in recent years. ”

Paul Lee believes that the reason why CEO salary growth has stagnated in the recent past is the change in perceptions of institutional investors and sovereign wealth funds. They invested in these companies, but their money still comes from the public-pension funds and investment funds. They are also becoming more aware of this growing dissatisfaction. He said: “Are these wages reasonable? Objectively speaking, this question is difficult to answer. However, accountability is getting higher and higher. On the one hand, it is due to public opinion, on the other hand, it is pressure from the government.”

For example, in the United States, the draft “Responsible Capitalism Act” submitted by Senator Elizabeth Warren recommends a time limit for the sale of company stocks, thereby attempting to shift the company’s focus from short-term shareholder returns to all stakeholders. Long-term goals. In addition, cities such as San Francisco and Portland have gradually introduced some measures. When the company’s salary ratio is too high, the company will be taxed, so as to promote higher social equality with clear economic incentives.

During the epidemic, some top company executives, including Boeing, Marriott International, and PricewaterhouseCoopers, took the initiative to sacrifice part of their salaries to avoid company layoffs in 2020, although many people criticized this as just a gesture.

Luke Hildyard, director of the British think tank High Salary Center, said that companies can take more meaningful measures to reduce the pay gap, such as increasing employee representatives in the board room, and improving the company’s salary data report to increase a sense of responsibility. Then, the company’s revenue can be more evenly distributed to all employees.

Hildeyard said: “Improving the lives of ordinary people with a relatively small increase in income may be revolutionary. This will be a huge improvement.”

Hildeyard believes that the unimaginably high CEO pay is “astonishing” evidence of the widening social gap. “Among the developed countries, the UK is one of the most unequal countries, and income inequality is getting worse with the increase in executive compensation.” He thinks this is important because research shows that an inequality Of countries tend to underperform in terms of social cohesion, public health and well-being, crime levels and education. The greater the inequality, the more chaotic the society.

Under the haze of the epidemic, the global economy is about to fall into recession. Hildeyard believes that people’s “supervision of inequality” will rise to new heights. He said that in recent decades, the status of the financial industry has become more important, the outsourcing of basic salary work, and the reduction of labor unions have led to the continuous expansion of the inequality gap. He added: “At the same time, the wealthy people at the top of the pyramid have not only not lost their wealth, but have accelerated their growth. If this trend continues, society will be more divided and workers’ lives will be even more difficult.”

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