The question of whether CEOs are overpaid is recurrent as the work carried out by a CEO is hardly tangible — they do not manufacture anything, and, therefore, their contributions are difficult to estimate. Hence the endless debate between those who are convinced that their salaries are enormous and those who are convinced that they are legitimate.
CEOs of particular companies have been overpaid since the millennium turn because they have not allowed any real value creation. CEOs are not paid for performance, as they claim to be. “Growth in CEO pay does not reflect correspondingly higher output or better firm performance, nor can the difference between CEO pay and that of the top 0.1 percent earners be explained by greater productivity or more talent” (Maker 1). CEO’s remuneration appears irrational and inappropriate if we consider that this is a transfer of wealth from investors towards the top, as the board of directors has the function of representing investors. The criteria used today to determine the remuneration of a CEO are obsolete.
More and more CEOs are being paid based on criteria that are not generally accepted accounting principles. There are different ways of justifying from an accounting point of view a remuneration that no longer matches the real performance of the company they manage. It appears that a CEO’s success does not result from the exercise of their talents but luck. Luck has an impact on the compensation of CEOs of large companies, knowing that they are paid a priori according to the performance recorded by their company. In this case, luck is the tangible benefit from positive changes that are beyond the control of the CEO. For an oil producer, it could be a worldwide rise in oil prices or even a favorable fluctuation in currencies’ exchange rate.
Many significant factors that have nothing to do with the business strategy, and a CEO’s talent, play a principal role in their success and wealth. Hitt and Haynes claim that “another potential reason for which CEOs may be overcompensated for their level of performance is executive greed” (5). There are cases when executives act hubristic and set their companies’ goals too high because of their exaggerated self-confidence. Regardless of their factual capabilities, CEOs may “take highly risky actions because they erroneously believe that they can achieve their goal effectively” (Hitt & Haynes 5). This inadequate business behavior can result in insufficient standards for performance and salaries.
It is clear that changes are necessary for this situation, and the suggestions are endless. In my opinion, first and foremost, experts need to take a serious look at compensation based primarily on return on investment which is a valid indicator of how much profit a business has created. Another solution relies more on innovation, market share gains, or the adoption and implementation of long-term business strategies. These are all criteria that, nowadays, are dismissed out of hand by plenty of directors concerning the CEO’s remuneration.
There are concerns that, if we rely on the return on invested capital, CEOs could face their compensation stagnation since the millennium turn. Consequently, they would leave their post quickly, which would deprive companies of invaluable talent. However, the talents in question are doubtful and have no impact on the company’s real performance. Theoretically, if these people chose to work elsewhere, that would not make any noticeable difference. As mentioned before, luck and high salaries are the two most important matters for CEOs, which leads us to believe the work of CEOs is overpaid and overrated.
Maker, Shomaila L. Are CEOs Overpaid? A Brief Look at CEO Incentive Pay and Compensation in the US. Part III of Series of Short Working Papers on Corporate Governance, 2018.
Hitt, Michael & Haynes, Katalin Takacs. CEO Overpayment and Underpayment: Executives, Governance and Institutions. Management Research: Journal of the Iberoamerican Academy of Management, 2018.