Do Executives Earn Too Much?

Source: CGMA Magazine 

In this article, Samantha White takes a look at executive pay — specifically, at the excessive incomes many CEOs now earn. Recent research from the High Pay Centre, a UK think tank, found that CEO pay increased 20 percent from 2010 to 2014, from $5.9 million to more than $7 million.

A study from the Rock Center for Corporate Governance at Stanford University indicates the American public is concerned about the excessive pay of CEOs and would support a pay cap.

In addition, White notes there seems to be a lack of correlation between performance and pay. CEOs may be financially rewarded for mediocre performance or even failure, which erodes the trust of customers and damages employee morale.

For an overview of the situation, White refers to Fair or Unfair? Getting to Grips with Executive Pay, a study by Peter Montagnon, associate director of the Institute of Business Ethics. Following are a few highlights.

Existing Flaws

• Wrong incentives
• Not clearly connected to performance
• Encourages short-term decision-making
• Compensation committee makes decisions without clear guidelines and sometimes without clear understanding of what the financial outcomes will be

Recommendations

• Targets should be in line with the company's strategy
• Make a connection between bonuses and positive contributions to firm culture
• Offer incentives with the long term in mind

Suggested questions for compensation committees to consider

• Is the package designed to share success or to produce performance incentives?
• Is the committee clear on why it has decided on a particular compensation amount?
• Is the reward amount too much of a risk for the company?
• Does the committee understand the entire value of the package, especially the share-based portion?

For the complete article, read “3 Tips for Setting Executive Pay.”

From CGMA Magazine, February 16, 2016, www.cgma.org.