Ideal CEO's pay: A perspective

Wed, 18 Dec Pre-Open

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An efficient management is a prerequisite for good performance of the business. That is why companies in an industry are often at war with each other to hire the best talent for the top posts. In an era when capitalist economy rules, overtime, the trend has also led to ridiculously high compensation for the Chief Executive Officers (CEOs). So much so that the person or CEO has become a bigger brand than the company he or she works for.

While some may rationalize this with the strong business performance, few ever ponder over the huge disparity between the compensation to CEO and an average worker that often leads to morale erosion of the latter. It is worth giving a thought that unless an average employee is motivated, no CEO, how smart he or she is can run a business successfully for long. However, such aspects are hardly ever considered while designing pay structures.

But as investor, one must be watchful whether the high compensation a CEO is justified.

Keeping track of whether the compensation is in line with earnings of the company does give an indication. A huge divergence, more often than not, is an indication that the interests of shareholders are being overlooked.

But even if things look fine on that account, a flaw with the approach is that CEO's hardly stick to a single firm for too long. In the absence of long term accountability, linking compensation with company's earnings could be a motive to manipulate earnings or focus on short term gains at the cost of losing significant opportunities in the long term. While this has been addressed to some extent by the use of stock options, even excluding the same, the compensation in a lot of cases is irrational and ridiculously high.

Is there a way to address such issues? Is it a good idea to come up with a standard benchmark for salaries and ignore cases when one person has made all the difference to a company's fortunes? For e.g. Mr. Murthy in the case of Infosys and Steve Jobs in case of Apple Inc. But then, such examples are rare while exorbitant remuneration for CEOs has almost become a norm. Hence, there is no doubt about the fact that the issue cannot be ignored and there has to be some way to ensure responsible remuneration. An article in the Economic Times raises interesting insights on the matter.

A good point to start could be to give investors/shareholders some idea about the gap between the salary of CEO and an average employee. That is expected to bring in some sense of responsibility and accountability. Perhaps, it is with this intention that SEC wants the ratio of CEO salary to median pay of all employees to be reported in a company's results. While there can be no standard formula or definition of an ideal or rational compensation for a CEO, this simple detail can actually provide insights about the management. This will work in favor of responsible remuneration. Also, once investors are aware, they being the key stakeholders are expected to do something in the best interests of the company.