Are CEOs Paid Too Much?
It’s a sobering thought that some of Britain’s top CEOs by lunch break on the first day of January will have been paid more than their average employee will earn in the whole year.
The growing gulf in renumeration between boardroom and shop floor has widened dramatically. The average UK CEO now earns a staggering 174 times more then their employees. In 1980 the difference in pay between CEO and worker was just 18 times. Should this trend of CEO’s spiralling salaries be addressed or left unchecked for market forces to decide?
The bottom line in business is making money. The CEO makes strategic decisions to navigate a profitable course for their company’s owner or shareholders. The services of a successful CEO with a stellar track record are in high demand and short supply. Just like winning football team managers are wooed by premiership clubs with the goal of victory in cup and league. Companies compete to attract and retain winning CEOs. Offering exorbitant salaries, lucrative share options and generous pension payments in the hope their star CEO will grow their business and profits. According to a Financial Times report the online grocer Ocado paid its chief executive Tim Steiner about 2,600 times its average worker in 2019.
The successful CEO undoubtedly brings value to their business. An excellent example is Jeremy Darroch who has steered Sky from a subscription based satellite TV business to a digital platform which covers broadband, mobiles and TV as well as selling services through its set top boxes. The company was acquired in 2018 by Comcast for an astounding £30 billion. This high valuation was without doubt due to the executive decision to diversify Sky’s range of products.
“If you give the CEO long-term shares – a slice of the pie – then she’ll have incentives to grow the pie.”
© Alex Edmans, Professor of Finance and Academic Director of the CCG
CEO’s performance is most often judged on profit alone, but is this an accurate measure of their skills? After-all it is difficult to pinpoint the exact value the CEO brings to a company. Success can be a combination of many factors and some say it is too simplistic to credit the CEO alone. A great business is often driven by contributions from a great team of employees. The CEO steers the ship, but luck is sometimes the key factor in business success or failure. Many unforeseen events are outside the control of even the most formidable and experienced CEO. Nobody can predict natural forces such as the effects of extreme weather or natural disasters like a pandemic sweeping the globe. Also just as important, are the choices a CEO makes in managing their business and the decisions their competitors make. In today’s society, rarely is value given to integrity or honesty of a CEO in running a business for the greater good of it’s employees and customers or even the greater good of the environment and our planet.
In a Capitalist world of global private enterprise it is easy to see commercial companies paying executives vast amounts of money in wages and bonuses in exchange for the hope of ever growing profits. As the differential between average earnings and CEO pay reaches extreme levels there is much public outcry and scholarly debate. In the past when there were more nationalised businesses in public ownership, the number of managers earning vast sums was much less. Now it is not just private companies , but the spread of the private sector into areas such as utilities and education that is causing concern. Head teachers and University Principals have seen their pay sky rocketing in a field traditionally exempt from market forces. Alice Gast, the vice-chancellor of Imperial College London is one of the highest paid figures in education, earning an extraordinary salary of £554,000 in 2019.
Have we reached a tipping point? Some are now questioning whether it is immoral for CEO’s to earn these exorbitant salaries. Not just disquiet from trade unions or church leaders representing workers rights, but from shareholders themselves now in revolt voting against excessive CEO renumeration. The UK government has intervened with regulation, shareholders are now allowed a non-binding, or advisory vote on the pay of CEOs. The concern is not simply about ethics or morality. Some say the rise of the fat cat CEO is causing simmering resentment that could lead to social instability as workers reject and rise up against such inequality.
In conclusion, I believe the salary level of CEO’s is perhaps best decided as a balance between market forces and regulation. Every CEO should be judged on bringing integrity, leadership and experience to the business. CEOs would then rightfully be considered cornerstones of society. Creating enterprise, industry, employment, profit and paying taxes. Society is dependent on successful business to raise tax revenue to fund the nations public services. There is though a moral responsibility of government to control excessive wealth disparity for the greater good of social harmony and fairness. CEOs in the end are answerable to the business owner or shareholder. Ultimately if the CEO delivers success they will be valued and rewarded. If they fail they will be replaced.
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Adam Portch
