Is your CEO a fat cat?

Apparently almost half of us now think that our chief executive is getting paid too much...

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Last Updated: 31 Aug 2010

According to a new survey by executive search firm Korn/Ferry, 44% of executives were either ‘absolutely concerned’ or ‘somewhat concerned’ that their CEO’s pay packet was too big, in the light of recent discussions about fair pay. That’s about twice as much as the equivalent figure in last year’s survey, when just 21% felt their boss was over-compensated.

Almost more alarmingly, only 42% agreed that their chief exec’s pay directly reflected the company’s performance – while a quarter of the 1,000 respondents (drawn from an international database) suggested that it definitely didn’t. At a time when many companies around the world are feeling the squeeze from the crisis in the credit markets, it’s not surprising that this issue is rearing its ugly head – and with results likely to dip in the coming months, it’s unlikely to go away any time soon.

It all reminds us of one of our favourite quotes, from American J.K. Galbraith: 'The salary of the chief executive of the large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.'

That said, here at MT we’re normally quite defensive about CEO rewards – after all, these days companies are competing in a global market, so they need to pay the going rate to attract the best talent to lead the business. And in recent years, the huge rewards available to those who join the ranks of private equity have also skewed the market, increasing this rate even further.

However, the problem arises when a big disconnect develops between pay and performance. We’re all for CEOs getting generously rewarded when they boost sales, improve the bottom line and put money in the pockets of shareholders – but when they do the exact opposite, it’s a bit galling to see them rake in the big rewards. Recent events on Wall Street have highlighted this ‘rewards for failure’ issue – Stan O’Neal at Merrill Lynch and Chuck Prince at Citigroup both walked away with huge pay-offs, despite the fact their great institutions suffered eye-watering losses. As Korn/Ferry MD Russell Miller politely puts it: ‘The business community continues to focus on aligning pay and performance, and companies are having mixed success against this objective.’

One possible solution, of course, would be to give shareholders more of a say in deciding CEO remuneration. But curiously, the survey wasn’t as conclusive on this point as you might expect - 59% agreed that shareholders should have a say on pay (19% of whom ticked ‘absolutely’), but the rest were either ambivalent (25%) or even opposed to the idea (16%).

So executives might think the boss is paid too much - but not all of them think they can trust shareholders to come up with a better arrangement...

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