Essay on compensation

Executive Compensation and Compensation Structures Essay

The average CEO-worker ratio in Germany is about 15:1 while it is less than 10:1 in the U.K. In the U.S., it is about twice Germany or around 30:1 (AFL-CIO). Germany and U.K. are also leading economies in the world though they lag behind America. Given the fact that American companies are world leaders in several industries, a CEO-worker ratio of 20:1 in America, as suggested by J.P. Morgan, may be an appropriate standard. Even the SEC has been forced to take notice that CEO compensation is excessive in America and is expected to propose a rule that puts upper limit on the CEO compensation (Ackerman).

No one at Whole Foods Market Inc. makes more than 19 times the $38,000 average annual income at the company (Ackerman) yet the company has been doing pretty well. Similarly, Costco’s CEO’s annual salary is less than $53,000 even though the company is the second largest retailer in the U.S. In contrast, many companies that paid tens of millions of dollars to their CEOs like Lehman Brothers and Countrywide went bankrupt in the wake of recent financial crisis and many required government bailouts including Citigroup.

There are several benefits to smaller CEO-worker compensation gap. First of all, it inspires workers to work harder because the compensation policies send the signal that the company’s success is due to everyone’s hard work and not only CEO’s skills. It also improves leadership-subordinates relationship due to sense of fairness and when times get tough, employees may be more willing to make sacrifices if they believe they are treated fairly during better times. At the same time, one also cannot underestimate the importance of capable leaders who know how to use the organizations’ human and financial capital effectively.

Smaller gap may make it difficult to attract some of the best executive-level talent if the competition may be willing to pay more. Similarly, it may also discourage the leaders from making bolder and riskier yet necessary decisions if they do not expect to be compensated handsomely for the success of their strategies. Thus, conservative compensation policies may encourage leaders to play it safe.

There are several factors that may explain why the pay of American CEOs can only be dream of in places like Germany, the U.K. and other developed countries. One reason may be that most of the largest global organizations or at least those who lead their respective industries are Americans and, thus, an average American CEO has a tougher job than his compatriots in other nations.

Out of the ten largest corporations in the world, four are in the U.S. alone and all are private as opposed to some others on the list which are government owned (DeCarlo, 2013). In addition, it may also be that attitudes towards risk-taking are bolder in Corporate America as compared to other developed nations and failure carries lower stigma in this country. Thus, huge compensation rewards are designed to encourage American CEOs to adopt liberal attitudes towards risks.

There is also a possibility that American culture ranks higher on individualism scale as compared to German, British, and cultures of other developed countries. If true, the perceived correlation between the success of the organization and the abilities of the CEOs may be higher in America than other countries which also explain the differences in compensation policies.

The differences could also be explained by the design of compensation policies. For CEOs in other countries, fixed salaries and non-stock awards may be a larger component of the overall compensation while in the U.S, it is not uncommon for CEOs to be paid a substantial amount of annual compensation in stock options. As the stock price goes up, so does the total compensation of American CEOs. Thus, there is huge upside potential when stock options comprise a significant proportion of total compensation package.

References

1. Ackerman, A. (n.d.). SEC Is Set to Propose New Rule on CEO Pay. Retrieved September 28, 2013, from http://online.wsj.com/article/SB10001424127887323980604579027132469775534.html
2. AFL-CIO. (n.d.). CEO-to-Worker Pay Ratios Around the World. Retrieved September 28, 2013, from http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-You/CEO-to-Worker-Pay-Gap-in-the-United-States/Pay-Gaps-in-the-World
3. DeCarlo, S. (2013, April 17). The World’s Biggest Companies. Retrieved October 3, 2013, from http://www.forbes.com/sites/scottdecarlo/2013/04/17/the-worlds-biggest-companies-2/
4. Stone, B. (2013, June 6). Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World.
5. Retrieved September 28, 2013, from http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world