Over time, people have often expressed mixed feelings about either the pay or severance arrangements for top executives of companies–sometimes in the millions. That is the focus of this content debate. One way that has been suggested that this might be managed is to set a limit to CEO pay as a multiple of the lowest paid employee in an organization. For example, if the lowest paid person makes 30,000, and the multiple is 10, the CEO could make a maximum of $300,000.
Last Name A-K: CEO pay and benefits should be capped at fifteen times the amount of the lowest paid employee in the organization. Severance packages should be limited to 20% of the annual pay and benefits.
In answering these questions, here are some things to consider that might get you started:
1) What relationship exists between responsibility for the overall strategy of the organization and compensation?
2) What are the consequences of executive pay that ranges 100 times that of the lowest paid employee?
3) What relationship is there between CEO pay and organizational performance?
The discussion below is what you need to do a rebuttal on.
CEO’s lead a company during great (and perhaps not-so-great times), and though they may earn a hefty overall salary over the lowest paid employee, decision-making at the highest level also has hefty implications. Additionally, experience a CEO may have doesn’t necessarily entitle them to a large salary, though they may have earned the position they’re in, therefor a salary would certainly match the position and the industry.
Many CEO’s or top officials are also offered a severance package. For a CEO to earn 20% of salary and benefits in severance, in addition to a salary that’s capped based upon the lowest paid employee’s amount, it helps control inflation of pay and benefits at the top level. If the lowest employee is paid at $37,000, in the event the CEO’s pay is capped at 15 times, their annual salary would be $555,000 annually. In addition, their severance would be limited to 20% of pay and benefits, with pay equaling $111,000.
But why limit CEO’s salaries and severance based upon the lowest paid employee? Part of it could be incentive based upon performance of the leader, their workforce, and the business overall. If the business succeeds and thrives, this brings in more profit, leading to a healthy company, which can lead to bonuses paid back to employees. However, if not capped, or in times of low performance from a company leader, a CEO’s performance may not match what is paid to them in salary or severance.
In the quest for more money, according to a recent Forbes article and Bloomberg report (2013), CEO-to-worker pay has ballooned to 1,000% since 1950. “Today Fortune 500 CEOs make 204 times regular workers on average, Bloomberg found. The ratio is up from 120-to-1 in 2000, 42-to-1 in 1980 and 20-to-1 in 1950” (Forbes, 2013). Even though the Securities and Exchange Commission initiated the Dodd-Frank financial reform law that aims “to make it easier for the public to know how much CEOs are getting paid in comparison to their workers,” it also requires public companies to disclose CEO-to-worker pay ratios (Forbes, 2013). Unfortunately, as of 2013, the law had passed though hasn’t been put in place.
Many consequences stem from inflated CEO pay and severance, including adding to the pay gap between employees and management. Charles O’reilly, Professor of Organizational Behavior at Stanford, found that of 120 large public companies over five years, those with overpaid CEOs had 18% higher turnover among general managers than those that were equitably paid (O’Reilly, 2007). Additionally, costs to shareholders were magnified, performance was lower within the organization overall, group cohesion, quality of work, and productivity lowered. “Wage gaps may also increase the tendency for individuals to perceive more inequity than actually exists, which can amplify the dysfunctional effects” (O’Reilly, 2007).