Why Do CEO Get Paid So Much?

Every millionaire that has been listed in Forbes magazine would have already known that they are the forerunner and leader in the industry. With the position of Chief Executive Officer(CEO) or Chairman Executive, their payslip will also be very lucrative following their holding position. Some might consider them as having an overpaid job.

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Based on research conducted by High Pay Center, an independent think tank based in the UK, most executives working for an Index FTSE 100 have an estimated salary of £3.9 million. This figure is by far much higher compared to an average worker earning roughly £31,461. The table below shows the median CEO/median employee ratio.

Image Credit: Highpaycentre

Such executives can make as much as 7 times an average person can make in one day. However, in America, the Economic Policy Institute revealed that 350 CEO of big companies in the US have an average annual income of USD 21.3 million in 2019.

This situation clearly shows that the disparity of income has exponentially increased especially amidst the COVID-19 pandemic. This also means that the poor-income populations are more vulnerable to unemployment, health issues, and poor quality of life.

So, the real question is when did this all happen? Before the 80s, a CEO wage will be based on the whole workers overall. But that year was also the starting point for this neoliberalism craze introduced by the prime minister of Britain at the time, Margaret Thatcher as well as Ronald Reagan in the US.

Both of them have a negative perception of the role of trade unions and their responsibility in reducing their rights to look after the workers.

The situation becomes much worse when the performance appraisal system was shattered by the salary assessor team management which was related to the price of the company's stock and incentives based on assets.

Based on an analysis done by Professor Alexander (Sandy) Pepper, an expert on executive pay, the CEO is given a lucrative salary since they are responsible for the company's financial outcome. Aside from being given a basic salary, they are also given incentives such as a performance bonus and obtaining a huge chunk of the company's ownership through stocks.

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With this concept, the shareholders will be seen as more powerful since they will want to gain profit from their investment. To ensure that the CEO is constantly in his/her good mood, the company is more than willing to give a high paycheck to the CEO.

However, this will also make the calculation of their new salary more complex. Firstly, the company will go evaluate their wage through the compensation committee which includes the board of directors and executives from other companies.

This meeting will be held at least once a year among the members of the committee.

Aside from evaluating based on the experience and performance of the company under the CEO, the committees will also put the performance of other companies as a benchmark for their evaluation. And of course, the CEO will always be given a salary and compensation on the same level as their coworker from other companies with a value of 50%, 70%, or even 90%.

With this percentage in mind, the CEO's salary will either rise or stay the same. However, according to a study from the Journal of Monetary Economics in 2010, it has been found that these typical systems will only increase the income disparity between the CEO and his/her workers.

Not just that but this system will only make the CEO more greedy to ensure that they will get the same treatment as their coworkers from other companies. The system is considered problematic and not transparent. This is because the committees only present the reports to the CEO instead of the company's board of directors or major shareholders.

The CEO can simply force or gives incentives to those that are willing to give reports that will benefit the CEO themselves. In contrast, there are always those that support the amount of salary given to the CEO with the reason being it is suitable to the current market.

Daniel Pryor from the Institute of Adam Smith says people like Elon Musk and Jeff Bezos are the type of people that will bring success to a start-up company.

However, not many agree with the perception of this neoliberal thinker. According to David Blochover, in the book Pay Check: Are Top Earners Really Worth IT, he thinks that this sort of thought is considered nonsense.

This is because a company's success is driven by factors such as oligopoly, the success of an economy with them along or the big contribution of the workers. He is mostly referring to the financial crisis back in 2008 which is mostly focused on banking and financial institution.

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During the financial crisis, many from the management team tried to defend the salary and compensation that was given at the time relative to their expertise and experience. As we see most of the European and American banks being closed down, many have questioned the logic behind the excuse that was given.

As most of the top management can be seen bathing in cash, the workers can be seen to get payouts as well as long working hours or even worst getting a 24-hour leave notice.

This situation has led to the retaliation of the workers demanding their rights. One simple example would be, British Gas. The workers of the company decided to go out on a strike for five days as a sign of disagreement with the company's decision.

According to the media, British Gas was planning on reducing manpower and giving new contracts to the remaining workers with their rights being taken from them.

The dispute between the workers and the management has been going on since 2018. It was during that year that the founder of the company, Centrica announced the increment of the CEO salary to £2.4 million with an increase of 44%.

Later on, this problem managed to be slowed down, all thanks to the pressure coming from the government and investors representing the institution. But things did not stop there as the people want more actions taken to ensure that everyone including the workers will get the benefits.

Certain places like Portland and San Francisco will impose a tax on the companies which give out very high salaries. This will provide an incentive to the economy in order to create this equality among all stakeholders.

Based on Luke Hildyard from High Pay Centre, this inequality will contribute to a high crime rate, poor education, health, prosperity, and social unity. In the end, if this problem is not overcome, the people will be the ones to suffer.

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