Executive Compensation

CEOs And Executives Are Making Too Much Money

Waseem D. Ezzie
Jul 8 · 3 min read

Income inequality is at historic levels and the inequality only continues to grow, making the wealthy richer, the poor even poorer, and concurrently diminishing the mid-class. The income inequality goes beyond executive compensation; the wealthiest one percent in the world own 45% of the world’s wealth (Global Inequality, 2019). Two-thirds of executives’ compensation account for America’s top one percent of households (Anderson, et al. 2018). Is it proper for CEOs to make 100–1,000 times more than their average employees’ income or is this justified?

In the 1960s, U.S. executive compensation packages were thirty times the average U.S. workforce. Now executive compensation is 300 times the average U.S. workforce pay (Anderson, et al. 2018). As a result of the 2008 financial crisis, in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated executive compensation disclosures (corporate executive’s pay ratio versus their employees’ pay) of publicly traded corporations. However, this hasn’t made much of an impact on the excessive corporate executive compensation; the reform did not translate to rectifying the huge compensation gaps between corporations’ executive compensations and its employees’ compensations. Many corporations lobby against the Dodd-Frank’s executive pay ratio mandate in efforts to repeal its implementation. As Bernie Sanders has been quoted saying “the corporate media ignores the rise of oligarchy. The rest of us shouldn’t”.

The opposing side to this pay ratio argument is that “the disclosure of pay ratios may have unintended consequences that actually end up hurting workers. A CEO wishing to improve the ratio may outsource low-paid jobs, hire more part-time than full-time workers, or invest in automation rather than labor. She may also raise workers’ salaries but slash other benefits; importantly, the pay is only one dimension of what a firm provides. Research shows that, after salary reaches a (relatively low) level, workers value nonpecuniary factors more highly, such as on-the-job training, flexible working conditions, and opportunities for advancement. Indeed, a high pay ratio can indicate promotion opportunities, which motivates rather than demotivates workers. A snapshot measure of a worker’s current pay is a poor substitute for their career pay within the firm” (Edmans, 2017).

The opposing side’s rationale justifying the CEO’s compensation is repulsive and seems out of touch with the common person. It is important to note that the CEO positions, like the board of director positions, are a tribal game, as their job analysis does not reflect the justification of their compensation. The job of a CEO is to look at the financial numbers and make decisions as to how to make and save more money. A simple way to spot a corporation that highly values their employees is to look at the CEO’s number two and the CEO’s right hand; if it is the Chief People Officer is the second in command, this will translate to a corporation’s attributes of putting their employees first.

Reference

Anderson, S. & Pizzigati, S. (2018, March). No CEO should Earn 1,000 times more than a regular employee. The Gaudian. Retrieve from: https://www.theguardian.com/business/2018/ mar/18/america-ceo-worker-pay-gap-new-data-what-can-we-do

Edmans, A. (2017, February). Why We Need to Stop Obsessing Over CEO Pay Ratios. Harvard Business Review. Retrieve from: https://hbr.org/2017/02/why-we-need-to-stop- obsessing-over-ceo-pay-ratios

Georgescu, P. (3019, March). People-First: A Place To Flourish. Forbes. Retrieve from: https://www.forbes.com/sites/petergeorgescu/2019/03/21/people-first-a-place-to- flourish/#4350d7674988

Global Inequality. (2018). Inequality. Retrieve from: https://inequality.org/facts/global- inequality/

Waseem D. Ezzie

Written by

MBA Student @ the University of Houston Downtown with a concentration in Human Resource.

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