Stop This Madness: It's Time To End Ridiculous CEO pay!

Pim
Written by

The Chief Executive Officer is the company's top dog—the position doesn't just come with high expectations and huge responsibility. It also comes (in many cases) with ridiculous pay. 

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CEOs of the world's biggest companies continue to earn more and more. Not just in absolute figures, but also in relative terms. It's one of the most embarrassing symbols of corporate greed. 

In this blog post we address the why, how and what-the-hell of outrageous CEO salaries. 

The problem

Recently, the Economic Policy Institute - a US based think tank - published a  showing the painful inequality between CEOs and employees. Here are some of the mind-boggling findings: 

  • The average compensation for CEOs of the 350 largest U.S. firms was $17.2 million in 2018. 
  • CEOs make 278 (!) times more than typical workers. To put this in perspective: this means that on the 2nd of January, CEOs had already earned more than workers will earn during the entire year.
  • CEO pay has grown 940% over the past 40 years. At the same time, worker pay has risen only 12%. Let's put that in a graph to show how fucked-up that situation is. (Tip: grab your magnifying glass to spot the worker's compensation growth): 
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This growing inequality is immense. The graph below (with data from the Economic Policy Institute) shows how the ratio of CEO-to-worker compensation has grown over the last 50 years. The dot-com bubble and the financial crisis brought it back down slightly, but soon after each dip it quickly regained momentum.

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All of these insane amounts of CEO compensation is money that can't be spent on raising wages for workers, improving working conditions, making new investments, putting purpose more at the forefront, et cetera. 

Do we really believe CEOs bring so much value that they should earn 278 times as much as the typical worker? Are their skills really so unique we should pay them ridiculous amounts? Is it really true that, if companies don't offer these sky-high paychecks, that they won't be able to attract talented people to lead their organization? 

Of course not.

In fact, if you attract CEOs with such packages, apparently one of the selection criteria is greed. If these people only want to work for your company if they earn these crazy amounts, are they truly the people you would want to be in charge? 

Still, many might wonder: "Aren't they just paid for their performance? If the company is doing well, shouldn't the CEO earn a lot of money as well?" There's a lot to be discussed here. Is it just the CEO and the top leaders who should be rewarded with huge sums? How about the people that are doing the actual work? You know, the people who CEOs love to call "their most important asset"? 

And what about the tough times? Should CEOs suffer from under-performance of the company? Well, it doesn't seem to work like that. Facebook's CEO Mark Zuckerberg's pay increased 147.8% in 2018, while the stock fell 25%. Similarly, interim CEO Joe Ianniello received a decent $27.4 million even as the stock dropped 25.9%. 

A bit of history

A prime question comes to mind when diving into this topic: how have these wacky compensation packages actually come to exist? How come we so desperately continue to increase income inequality? Here's a bit of history from Steven Clifford - a man who helped craft some of these CEO compensation packages. 

In The Atlantic he states: "Through the 1970s—when the ratio of CEOs’ pay to that of the average worker was much lower, at somewhere between 20:1 and 30:1—the lodestar was “internal equity,” or how an executive’s pay compared with that of other employees in the company. A nascent industry, executive-compensation consulting, changed this." Consultants advised a switch to "external equity" - pay based on what other CEOs earned.  

It happened. Steven: "Corporations adopted the standard of external equity, and CEOs got a lot richer." 

Setting CEO compensation

So what does the process of setting CEO compensation look like in practice?

1. Setting up the compensation committee

First, a compensation committee is set up consisting mostly of a few members of the board and a few executives from other firms. The role of the committee is to recommend compensation packages for the CEO and a handful of senior leaders. Steven Clifford: "The company's board virtually always accepts the committee's recommendations." 

2. Creating a peer group

The committee gets to work. First, they establish a peer group. This group of peers is recommended by compensation consultants. Peer groups can consist of a wide variety of peers that need not be in the same market. Steven: "For example, a health insurer might include in its peer group banks, food producers, engineering firms, and a number of other unrelated companies." 

Obviously, this doesn't make any sense. The value of a CEO in one field can be highly limited in another. And many other factors are wildly different in unrelated sectors. Steven: "What does tend to unite peer groups, though, is that the companies in them usually have highly paid CEOs." Academic studies confirm this finding. Surprise, surprise. 

3. Comparing compensation packages

Next on the agenda, the committee compares compensation packages with the CEOs in the peer group. Steven: "Every board I have ever sat on, or researched, benchmarked itself at the 50th, 75th, or 90th percentile, therefore targeting CEO pay at similarly exalted levels. 

"Benchmarking below the 50th percentile says, We are a lousy company and don’t even aspire to be better. So in this sense all CEOs are above average: To be benchmarked at or above the 50th percentile, they need not do anything other than report to a board that considers its own company exceptional. 

This sets in motion a vicious cycle of ever-increasing compensation. The CEO that's benchmarked above the median influences the peer group. Other CEOs in the peer group benefit from this as the pay in the peer group increases. In turn, their pay rise creates once again a higher baseline. 

4. Pay for performance

As if this isn't enough, we've only talked about setting base compensation, so far. Mostly, the better the CEO performs the more he/she gets paid. It's up to the compensation committee to find a way to measure performance. 

Steven: "This process usually involves negotiating with the CEO, much to his advantage: The board wants to keep the CEO happy since they are the captain of the team and since they holds the implicit threat of moving to another company for better pay. Enhancing these negotiations from the CEO’s standpoint, they pocket what they get, while the directors are paying not with their own money but the shareholders’." 

What makes the pay-for-performance even more shady is the fact that it's often based on malleable metrics. For example, some companies use earnings per share as a metric for determining CEO performance compensation. Steven: "Using a few accounting tricks, CEOs can make EPS do their bidding. The stock may be down, the competition dominating the market, but the CEOs still get their bonus if they hit the EPS target."

Break with tradition

All in all, it's easy to spot the silliness of this process. At the same time it gives a good indication of why CEO pay has - over decades - gone through the roof.

Obviously, this begs important questions: What are other ways of going about this? Is there a way to influence this foolish practice? How can companies break with these absurd compensation packages? 

Any suggestions? Share your thoughts in the comments below.

Pim
Written by Pim
4 weeks ago

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Replies (24)

MariaLM

MariaLM

Painful to see this. Time to break with this sad, sad reality. Would love to hear about pioneers who break with this tradition.

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Gilles Serpry

Gilles Serpry

It would be good to get back to fundamentals for CEO pay. Employees are paid based upon their skills set. CEO's and other C level should be paid accordingly. This could be managed in the way some shared governance companies do : a proposal from the CEO about his pay level to a compensation committee elected by all company employees. The proposal would include a personal justification and could be based on a prior personnal assessment reviewed by a selected number of people from the company. The idea is that this process should enable to pay based on the true value for the organization.

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Anon

Anon

Ridiculous according to who and what standards?

Corporates pay this with the money they make anyway. If you have one person making $50 a day and another making $5000 a day, is the one making $5000 ridiculously compensated? Depends. Maybe yes. Maybe no. Don’t generalize. The market is the market is the market.

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Mick

Mick

The problem is not only with CEO pay but rather with the whole C-suite (CEO, CFO, CRO) and shareholder value. The idea of shareholder value came up in the 80s under the reigns of Thatcher and Reagan. Ever since then the three Cs were paid to get (suck) all out of their companies for their shareholders. They got the dividend and the Cs got their bonuses. As we are now working in a time of employee empowerment and customer delight, this type of governance should change

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Grahame Sturges

Grahame Sturges

Economic performance is not the only mark of a high performing company. There are apparently some interesting ideas out of Norway pegging senior pay to a multiple of other people’s pay in the organisation. You’re right to raise this Corporate Rebels - corporate pay is driven within a cosy club and is sucking the life out of companies, diminishing the efforts of hard working work forces.

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Simone

Simone

Thanks, rebels, for this insightful article. It gets me wondering about companies that have a CEO with 278x pay and want to move to self-organisation/self-management. Do these exist? fi so, how did they deal with this fact? I can imagine it has a consequence in the workplace. For instance, how would this effect the required level of trust to begin with? And is the CEO capable of changing from controlling to being in-control? Would teams to take real ownership and get out of their way to perform at top level? And so on...
It may be a long expedition for them to get there, if they make it...

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Natalie M

Natalie M

Yes! More voices are needed to challenge this harmful practice - and pioneers to lead the way. It has led to the largest gap between the highest paid and the rest. We need to reconstruct our need for growth at all costs, whether personal or corporate. It’s a value in our culture that has led us astray. Thank-you!

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U

U

Anon, you say "The market is the market is the market.", but there's still a difference between capitalism and greedy capitalism. Existing market ideology is outdated and leads to the C-Suite guzzling at the trough. There are more progressive ways of running businesses (and making a profit) that dont rely on obscene differences in remuneration and where metrics like staff engagement and wellbeing sit equally alongside other corporate KPIs.

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Renzo

Renzo

CEO pay has gone out of hand completely, and you summarise a very credible story on how it happened. Certainly it is one more indication that the free market itself won't find a way to fix the social issues it generated.

It's the result of the single minded focus on shareholder value, that recently even the very CEO's of the most successful US companies criticised in the position statement from the Business Roundtable (notably, a position statement with no action steps recommended).

Things being as they are, who can fix the issue? Regulators? The boards? The CEO themselves (ahah)? Employees committees? Consumers? I'll admit I don't have an answer. Some do?

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Michael

Michael

Thanks for this article, Rebels, and high time this issue gets properly addressed. Very interesting explanation of how the gap has grown out of proportion. Back in 1965, the late management expert Peter Drucker stated that a CEO-worker page ratio higher than 20 was obscene. While it may be that times have changed, some CEO pay justificatioin myths (like "market-conform pay package") needed to be debunked. Insead Leadership professor Manfred Kets de Vries did that in a 2018 article in Forbes magazine (
https://www.forbes.com/sites/shelliekarabell/2018/02/14/executive-compensation-is-out-of-control-what-now/#6dba5bf2431f). It also contains some suggestions on tackling it.
It would be inspiring to hear about successful companies/CEOs who go against this unhealthy "custom" and their rationale for doing so.
Keep up the great work!

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John Sanford

John Sanford

Don't forget that most of these boards and their compensation committee's are made up of - wait for it - CEO's of other companies, or other c-suite folks. They can't see beyond the bubble they have created.

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Pim

Pim

Painful to see this. Time to break with this sad, sad reality. Would love to hear about pioneers who break with this tradition.

MariaLM

I'm writing a blog post on some pioneers who are challenging this outrageous practice.

So, if anyone has some more examples/practices, I would love to use them for it.

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Pim

Pim

It would be good to get back to fundamentals for CEO pay. Employees are paid based upon their skills set. CEO's and other C level should be paid accordingly. This could be managed in the way some shared governance companies do : a proposal from the CEO about his pay level to a compensation committee elected by all company employees. The proposal would include a personal justification and could be based on a prior personnal assessment reviewed by a selected number of people from the company. The idea is that this process should enable to pay based on the true value for the organization.

Gilles Serpry

I like your idea. Especially the part about internal reference, it makes much more sense than these weird external references they do as described in the blog post.

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Emilie Esposito

Emilie Esposito

Greedy shareholders are happy with greedy CEO, because greedy CEO will ensure better shareholders retribution, rather than "raising wages for workers, improving working conditions, making new investments, putting purpose more at the forefront, et cetera"

Maybe we have to reinvent company structures.

For exemple, in France, we have a company type named SCOP which stands for "Société Coopérative de Production" = Cooperative company of production". In this type of business :
- no majority share holder
- employees own at least half of the capital, the target is that every employee becomes a partner
- employees actively participate in the board, and they weigh more than half in decision making
- CEO is elected by employees for a 4 or 6 years mandate
- Profit is shared among employees, partner employees and company reserve

This type of company is rare for now, but in a reinventing workplace, it may have a role to play.

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Freek_Revolt

Freek_Revolt

Former CEO Paul Polman of Unilever was paid millions as well, where he has said that he was “embarrassed” by the amount he got paid and would be happy to work for free. However his fellow board members and shareholders didn't like his statement at all...

Definitely gonna read this new book "Het Grote Gevecht" about his journey to do business for a better world, and not (only) for the shareholders.

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PeterBrn

PeterBrn

Ridiculous according to who and what standards?

Corporates pay this with the money they make anyway. If you have one person making $50 a day and another making $5000 a day, is the one making $5000 ridiculously compensated? Depends. Maybe yes. Maybe no. Don’t generalize. The market is the market is the market.

Anon

Well, the aim of this post was to show what ridiculous pay inequality and greed this CEO-pay market can lead to. We created this market and we can also change it. It would be stupid to say "well, it's just what it is, whatever the outcome" about something we've created ourselves.

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Daniel

Daniel

Hi Rebels and Self-Management Activits, here is one example coming from the Spanish Basque Country on how this problem can be dealt with: I am certainly talking about the Mondragon Corporation, the biggest group of cooperative companies worldwide: 90+ cooperative companies, 200+ companies, 67.000+ employees only in Spain, from which 80%+ are cooperativists -owners- (https://www.mondragon-corporation.com/en/about-us/economic-and-financial-indicators/). In this respect, the "Corporación Mondragón" policy is very simple: salaries range from 1 to 6, that's all. This means that if the lowest gross monthly salary is 2.000 EUR (not far from reality), the highest one in the Corporation will be 12.000 EUR, which means that GMs of the biggest and most successful cooperatives, as well as the CEO of the Corporation, won't be earning a yearly salary of more than 144.000 EUR. For sure this policy is not perfect as it is not exempt from problems with talent leaks and talent attraction, but it's a real life example on how a big corporation deals with this issue: just by defining an adequate, reasonable, and market aligned ratio from lowest to highest. Does it sound fair and efficient to you?

| | 0 | Flag
Daniel

Daniel

Hi Rebels and Self-Management Activits, here is one example coming from the Spanish Basque Country on how this problem can be dealt with: I am certainly talking about the Mondragon Corporation, the biggest group of cooperative companies worldwide: 90+ cooperative companies, 200+ companies, 67.000+ employees only in Spain, from which 80%+ are cooperativists -owners- (https://www.mondragon-corporation.com/en/about-us/economic-and-financial-indicators/). In this respect, the "Corporación Mondragón" policy is very simple: salaries range from 1 to 6, that's all. This means that if the lowest gross monthly salary is 2.000 EUR (not far from reality), the highest one in the Corporation will be 12.000 EUR, which means that GMs of the biggest and most successful cooperatives, as well as the CEO of the Corporation, won't be earning a yearly salary of more than 144.000 EUR. For sure this policy is not perfect as it is not exempt from problems with talent leaks and talent attraction, but it's a real life example on how a big corporation deals with this issue: just by defining an adequate, reasonable, and market aligned ratio from lowest to highest. Does it sound fair and efficient to you?

| | 0 | Flag
Pim

Pim

Hi Rebels and Self-Management Activits, here is one example coming from the Spanish Basque Country on how this problem can be dealt with: I am certainly talking about the Mondragon Corporation, the biggest group of cooperative companies worldwide: 90+ cooperative companies, 200+ companies, 67.000+ employees only in Spain, from which 80%+ are cooperativists -owners- (https://www.mondragon-corporation.com/en/about-us/economic-and-financial-indicators/). In this respect, the "Corporación Mondragón" policy is very simple: salaries range from 1 to 6, that's all. This means that if the lowest gross monthly salary is 2.000 EUR (not far from reality), the highest one in the Corporation will be 12.000 EUR, which means that GMs of the biggest and most successful cooperatives, as well as the CEO of the Corporation, won't be earning a yearly salary of more than 144.000 EUR. For sure this policy is not perfect as it is not exempt from problems with talent leaks and talent attraction, but it's a real life example on how a big corporation deals with this issue: just by defining an adequate, reasonable, and market aligned ratio from lowest to highest. Does it sound fair and efficient to you?

Daniel

Thanks a lot, Daniel. Insightful to hear about this practice by Mondragon. I like it a lot. The transparency and clarity are in my opinion super powerful. Of course not perfect (as probably with any solution), it's great way to end the outrageous salaries that are totally unrelated to internal company salaries.

Anybody familiar with more of these ideas?

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Jenny

Jenny

According to Tournament Theory this is the right way to pay VPs and other executives because it's not work, but some sort of game, ....check:
Schneider, D. J. (2011). Tournament Theory and its Relevance to Executive Pay. GRIN Verlag.

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Pim

Pim

According to Tournament Theory this is the right way to pay VPs and other executives because it's not work, but some sort of game, ....check:
Schneider, D. J. (2011). Tournament Theory and its Relevance to Executive Pay. GRIN Verlag.

Jenny

You mean the one described in Daniel's comment? Or the one in the blog post :)?

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Pim

Pim

Former CEO Paul Polman of Unilever was paid millions as well, where he has said that he was “embarrassed” by the amount he got paid and would be happy to work for free. However his fellow board members and shareholders didn't like his statement at all...

Definitely gonna read this new book "Het Grote Gevecht" about his journey to do business for a better world, and not (only) for the shareholders.

Freek_Revolt

Added to my reading list, very curious to learn more about his work at Unilever.

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Mick

Mick

Thank you for sharing this, unfortunately there are still too many shareholder value and bonus minded managers in this world. But there is hope. I just read an article in this weeks economist on a letter written to one of the most prominent business schools in the US where worries were expressed about the decrease of pupils. This is not only because of the extreme fees these schools demand and the lack of online education possibilities but also about the fact that would-be students want to see a change in the content of their business education; they dislike traditional teaching on the primace of shareholder value (focus on shareholders and the C-suite) and instead would like to see that stakeholder value (focus on employees and customers) is emphasized. I am interested to see how this phenomena will progress. If you are interested to read pls see the article with the title: The MBA, disrupted.

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Pim

Pim

Sounds good, thanks for the tip. Makes a lot of sense and good to see the change in perspective comes from the new students demanding a different curriculum 🤙

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