econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 21 February 2016

Pay Ratios Could Curb Excessive CEO Pay And Counter Inequality

from The Conversation

-- this post authored by Tobore Okah-Avae, Lancaster University

Google CEO Sundar Pichai has earned an eye-popping pay rise. He was awarded US$199m in shares, according to a recent filing with the US Securities and Exchange Commission. It makes him the highest-paid chief executive in the US and though he sits at the top of the pile, news of his or any CEO's big pay rise will come as little to surprise to many.

CEO compensation has grown at an alarming rate over the last three decades. In 1980 most CEOs at major British companies earned around 15 times the average salary. By 1998 the ratio of CEO to average worker pay was 47:1. In 2014 it had ballooned to roughly 183:1.

In the US, the ratio is even higher. According to the AFL-CIO, a federation of labour organisations, the salary of a typical S&P 500 company CEO in 2014 was 373 times the salary of an average rank-and-file worker - that's US$13.5m compared to US$36,000.

How did we get here?

Some commentators aim to justify high pay on the grounds of company performance and that the efforts of these highly-skilled individuals is pivotal for a company's success. These claims, however, are not supported by the research. CEO skill has been found to have more influence over captive corporate boards, not-so-independent remuneration committees and beholden compensation consultants in the ratcheting up of CEO pay. And the runaway train that is excessive compensation, shows no sign of slowing down.

CEO pay began to increase following calls for pay to be more closely pegged to a company's performance. But if the intent was for growth in pay to keep pace with growth in firm performance, this hasn't been achieved. The reality is that growth in CEO pay has continuously outpaced company performance - as measured by revenues and profits - even outpacing the FTSE 100 index itself.

These days the typical CEO's pay packet comprises a salary, an annual bonus, and an equity-based component - usually in the form of long-term incentive plans and other short-term awards in the shape of company stocks and shares, as Pichai received. In this regard, the 1980s were a watershed period, largely due to the introduction of share-based schemes, which are partly responsible for the explosion in CEO pay levels. The same has not happened for average wages, yet the benefits of increasing them extend beyond the employee, and have the potential to benefit businesses, as well as individuals.

Pay ratios are the way forward

Making it mandatory for companies to publish their pay ratios is one way to curb excessive growth of executive pay and income inequality. This is a solution Jeremy Corbyn, leader of the Labour Party in the UK, put forward in a recent speech and - perhaps more powerfully than a suggestion made by a left-leaning leader of an opposition party - is being introduced in the US.

The Securities and Exchange Commission, the main Wall Street regulator, voted in favour of the rule last year and it will become mandatory for most public companies to regularly reveal the ratio of CEO pay to that of employees as of 2017.

Although UK companies are currently required to disclose CEO compensation as it compares with their employees, they are not required to disclose long-term pay incentives, such as shares, which are a large component of current executive pay packets. And they are only required to compare the amount of CEO compensation with the pay of a select group of employees, not that of every worker.

The publication of pay ratios will likely help to reduce pay inequality as a result of the outrage that ratios would produce. In their book on executive pay, Harvard and Berkeley academics Lucien Bechuk and Jesse Fried, outline some of the problems with how pay is determined. They emphasise the importance of "outrage" when it comes to reversing the trend of CEOs setting their own, inflated compensation packages.

Flaws in the way that companies are governed mean that CEOs are largely constrained by the reaction of outsiders when it comes to setting their compensation arrangements. This reaction could range from mere criticism of pay arrangements to fully-fledged outrage in the vein of the Occupy Wall Street movement. Only when outrage is high enough does it function as an effective deterrent.

A mandatory rule requiring the publication of top-to-bottom pay ratios could therefore have two potential effects. It may force corporate boards to rethink excessive CEO pay and would hopefully force an increase in the pay offered to lower-level employees as well.

The ConversationTobore Okah-Avae, PhD Candidate in Corporate Law, Lancaster University

This article was originally published on The Conversation. Read the original article.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Slow Economic Growth Will Be Around For A Long Time
The Job Guarantee, Wage-Price Inflation And Alternative Solutions: Part 2
News Blog
Early Headlines: Asia Stocks And Dollar Up, Oil, Gold Steady, Obama Climate Policies Gone, US Oil Glut, Euro Surges, Shorts Remain, Trump Into Yemen?, Iran-Russia Deals, Cat 4 Cyclone Hits Oz, And More
March 27, 2017 Weather and Climate Report - Will the MJO Deliver a Nino?
The Most Reputable Companies Worldwide
Gut Bacteria Play A Role In Long-term Weight Gain
What We Read Today 27 March 2017 - Special Public Edition
Is Less More In The Smartphone Market
Average Gasoline Prices for Week Ending 27 March 2017 Statistically Unchanged - Again
What We Read Today 27 March 2017
Why New Jets Could Destroy Airlines
March 2017 Texas Manufacturing Survey Continues to Expand
Wage Growth After The Great Recession
Is OPEC Losing Its Ability To Influence Oil Prices?
Many Worry That The Great Recession And Mounting Student Debt Have Stunted Millennials' Financial Development
Investing Blog
The Dollar's Coming Impact On Markets
The Real 401k Plan Manager 27 March 2017
Opinion Blog
Macron May Lead But Le Pen Remains The Big Story
Is The 20th Century Still The 'Hayek Century'?
Precious Metals Blog
These Gold Stocks Will Produce Much Bigger Gains Than Gold Itself
Live Markets
27Mar2017 Market Close: US Dollar Falls Into The 98 Range, WTI Crude Slips Into The 47 Handle, Wall Street Generally Sour And Down
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government































 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved