Do most CEOs make too much? What’s the best method to determine how much one is worth?
During very good economies, there’s not a lot of grumbling about the size of the paycheck of the head honcho. Take the recent period, up to about, last May. Until then, it was fairly infrequent to see or hear much in the news about the compensation packages of most CEOs - with the exception of, say, the guys heading up the big oil companies. But during tough times, people start to get a lot more interested in how much the big cheese were making while their companies tanked or perhaps even disappeared.
The issue is especially interesting to anyone who’s out of work because of those bosses’ actions or who’ve seen their 401(k) accounts evaporate. This month, in the U.S., a lot of people will become even more interested because the 3rd Quarter fund reports get mailed out now. They will see firsthand what has happened to their savings plans and for the most part, they’re going to see a big drop.
Additionally, it’s maddening to know that an individual is making millions while you’re being told that increases are limited this year due to a difficult business climate. It’s especially tough to find out that a company paid millions to the big boss just prior to a bankruptcy or government bailout.
So how much is fair and how much is too much?
Typically in the US, and to a lesser extent in Canada, the “market” decides what most CEOs get paid. If competitors are paying seven figures and providing long-term incentive plans (LTIPs can often be worth more than the annual salary each year), as well as annual bonuses (typically up to 100% of their salary) stock, stock option plans (stock programs can also be worth more than the salary each year), and other perks like cars and club memberships - it’s likely the board will authorize a similar compensation package for their CEO. Consequently, U.S. leaders are generally the best paid in the world, making, on average, 39 times more than the average factory worker according to the Washington-based Economic Institute.
In other democracies of the world, comp packages are less open to competitive forces and many companies have policies pertaining to how much one can earn in total. In my experience, such organizations often feel they are better or more humane than those driven by what they consider to be a “profit at any cost” mentality that devalues the worth of the average employee. Consequently, we see CEOs in France earning only 23 times that of the average worker. In Spain, it is only 17 to 1 according to the same study. An executive with one of Canada’s largest HR firms told me that they routinely suggest the ratio of 20 to 1 when planning compensation targets for CEOs in that country.
From my perspective, as a good capitalist:
- I believe that the opportunity to increase one’s earnings in return for doing a better job is a very sound motivator.
- I support the proposition that an organization must be competitive in terms of compensation programs when trying to attract and retain the best talent, at all levels
But, as a leadership coach, I counsel client organizations that:
- The culture of an organization can be at least as important as money when someone is considering joining a new employer or leaving it for another. Money usually doesn’t trump a crappy place to work.
- The entire compensation program, that which addresses management and staff at all levels, must have a clear degree of fairness about it so that no one feels they’re being screwed
I believe it’s motivational for all levels of the management team to have visibility into every job’s pay scales. Most people have a tendency to think those above them make less than they really do, and that those below them are getting paid more than they did at that level. Often they believe that people with similar titles in other departments are making more than they are. Having visibility into what everyone can make bonds the team and helps guide one in their career planning.
Not surprisingly, CEOs who are overpaid, when compared to the rest of the leadership team, don’t usually like this approach. However, those who make a fair wage usually think it’s a good, solid program.
Are you surprised?