The consensus on CEO compensation

Written by YRK Reddy | Updated: Jun 9 2007, 05:30am hrs
Of the Ten Point Social Charter that the Prime Minister commended to India Inc recently, a debate was mustered on one-half of a point, crowding out the rest. Point four in his speech was to resist excessive remuneration to promoters and senior executives and discourage conspicuous consumption. Many took up the first part forthwith for debate. Typical arguments have been that CEO salaries last year fell short of the growth in profits or shareholder value; it is vital to attract and retain such high talent to lead companies in highly competitive environments; and lately, how Indian CEOs undergo greater stress than their counterparts in other countries.

Excessive compensation to private enterprise CEOs has been noted around the world as an undesirable result of the misuse of power and trust in the name of free market. No wonder US SEC commissioner Roel Campos addressed this issue at the 2007 Summit on Executive Compensation. CEOs are expected to be analytical, thoughtful and even fairthe essential components of leadership. Yet, they seem to fail these qualities where compensation is concerned. Charlie Munger, vice-chairman of Berkshire Hathaway, has been cited as saying, Envy-driven compensation mania, has developed to a place where it brings out the absolute worst in good people.

Academic research and objective reflection will show that CEO compensation now has little to do with the performance of the individual, or shareholder value, or competitiveness of the firm. There is even some evidence of inverse correlations in longitudinal studies. Comparing the rate of increase in CEO compensation with growth in profits or share prices begs several questions. Does the compensation ever turn negative when the company goes under How far is such growth related to individual performance as isolated from market conditions and dynamics More importantly, would the board be prepared to recommend similar wage growth for workers in lieu of their efforts Several CEOs are instrumental in achieving success, especially if an excellent or daring strategy is implemented to good effect, and risk must be rewarded. But most pyramidal organisations are ratchet systems, where aggregate worker contributions progressively reach the top, with the CEO representing this to shareholders and the public at large. Very few seem to acknowledge this fact.

The justification of high compensation on grounds of retention and motivation is also flawed. Most CEOs do not have a market at that level at allas those who have left would indeed show. This is especially so in the case of promoter directors who not only get to guard their investments closely by being in the management, but also get to compensate themselves highly. Such CEOs may have little inclination for accepting alternative employment. Regarding motivating CEOs through high compensation, behavioural scientists should be appalled that they are pleading for low-order needs. Leadership includes the ability to defer short-term lower order needs, wants, and desires in favour of higher order goals and values (Cuilla JB). By such behaviour, CEOs may be setting a greedy example and corporate culture in place.

Until the 1980s, wages had to be explained on the basis of principles. These have been given up. And yet, many people often cannot answer simple questions likewhy do people join the army
Boards and third-party studies have heightened such low-order needs of top management. They would, of course, in the same breath advise managements to negotiate hard to keep wages low, lest the Chinese gobble up the market! In the US, the average CEO to worker ratio was reportedly 42:1 in 1982, which by 2004 increased to over 400:1 (in one case in India, this happens to be 800:1). As Campos wondered, has the performance of CEOs vaulted 10 times during this period over the average employees Until the 1980s, when fairness and equity were still regarded highly, wages had to be explained on the basis of principles. These have been given up. And yet, people who make these arguments often cannot answer simple questions likewhy do people join the army Why do highly-qualified people take on low-paid public roles