CEOsare paid very much just face criticism. But, giving one person more money thanhe can ever spend on anything worthwhile for himself or his family, whilethousands of employees working with him struggle and suffer to earn a livingjust seems to be wrong. Even though CEOs are paid a lot of money, they are paidmuch lesser for more productive work. CEOs are the caretaker of allshareholders, employees and others relating to the company, so their pay isacceptable. The widely held belief is that CEOs are paid a lot because most ofthe time their compensation runs into billions, while the average workerworking with him is paid only a little fraction of that amount. Executives areactually impartially compensated, given the possibilities for expanding theirresponsibilities and the highly competitive talent at the top6. Thereare only few people who have unique talents and the free market that decidestheir worth every year.
Likewise, there are handfuls of people who are capableof leading major multinational companies with more than hundred thousandemployees. But those who are really capable are very short in supply and highin demand. Twentyyears ago, a citizen might not know the name of a fortune 500CEO, but the wide spread belief is the name of the institution—and made anassumption that only the CEOs are responsible towards this reputation . Twothings have changed that: it is much easier than before for people todistinguish between the CEO and institution separately and there has been a hugedecrease in respect for the institutions themselves3. Theseunique talents create more than just value to the institution. CEOs createthousands of jobs for the workers and deliver lifetime worth of money to theinvestors.
In large multinational corporations, usually the budgets arerelatively high. CEOs pay shouldn’t just be judged against any predeterminedbenchmarks. It should be compared with all of the company’s spending on its dayto activities and the rate of return they generate from that expenditure. CEOsare the head of the institution and there is no one above them to weigh orjudge their performances, so they can easily influence their income than anyother workers in the institution. CEOs are like kings.
They aren’t elected to their position;they are selected from the pool of competitive CEOs. It takes usually severalyears of hard work to reach that position. Once in the position, they prettymuch decide their own pay2. On the other hand, just payingCEO more money than he can never spend on anything worthwhile for himself orhis family, while thousands of employees working with him struggle and sufferto earn a living just seems to be wrong. The idea of huge CEO pay is unfair. It indicatesthat CEOs are rewarded relatively too large at the expenses of other workers.CEOs aren’t punished or rewarded less for their poor performance because theirsalary and bonus are fixed even though the institution’s value may fall whichwill eventually result in low payment of workers4. The widely held belief is that it is largelythe result of a positive stock market and also according to a large majority ofshareholders, those who doesn’t wish to lose their money because ofunderperforming executives, accepts on how much ever their companies’ CEOs wishto make5.
A good and capable CEO is worth a lot to a company and itsshareholders and a bad one can destroy a lot of value. So, the CEO must be compensationincrease only according to the criteria of “pay for performance”. This meansthat the CEO is to be paid more only if the company’s value increased or ifthere is an abnormal profit for the shareholder of the company.
To recruit and retain top talents, the compensation must becompetitive. CEOs are the highly paid worker in a company. Generally their payis 300 to 400 times the average pay of the workers. CEOs provide a adequate degree of talent that isneeded to produce the desired product – in this case, a strongly performingcompany. A good CEO must possess the higher degree of skills that is very muchneeded for the development of a company in the long run. Only about 20 percentof a CEO’s pay is base salary; the rest includes that of incentives and bonusesbased on the company’s performance. The widely held belief is that if thecompany is performing well and the shareholders are receiving more than whatthey intended to get, the CEOs should also share this success7.
In somecases, CEO compensation might be an indicator to judge the company’sperformance. So, the compensation paid to CEO should be higher in this case.One of the main reasons for ever increasing CEO pay is the process ofbenchmarking.
Benchmarking is the process of evaluating the performance to apredetermined standard. In other words, every time a CEO gets benchmarked, hesets a higher baseline of compensation for the next time for any leader whocomes to his position8. The top executive of any organization is ultimatelyresponsible for the development of institution as well as in the growth ofshare value on the perspective of its shareholders. Shareholder wants an everincreasing growth in the dividends which is their form of income from theirinvestment. Employees need an encouraging atmosphere from which they candevelop high level of skill which can be helpful for them to be competitiveamong the other workers. From the outside perspective, the CEO is the publicface of the firm on a large scale, representing the institution in all form of mediumsin use in our world9. So, the amount of cash and compensation paid to CEOs might lookvery large when compared to that of average employees; it is actually not whatit seems.
Executive compensation is increased, when there is an abnormal profitin company’s share market when the share price appreciates like never before. Themain reason CEOs are compensate more is that atalented CEO worth a lot to a institution and its shareholders and a bad onecan destroy a lot of value. Only Individual investors can understand thisdynamic.