Executive pay: how high is too high?

Is the increasingly wide division between the highest earners in corporate life and rest unjust and unsustainable?

by Knowledge@Wharton
Last Updated: 15 Apr 2015

Is it something that will seriously undermine staff morale or lead to an Enron-style scandal and subsequent regulation?

The answers to these questions are not clear. It is true that disparity in pay levels is becoming alarmingly high. Some hedge fund managers earn $500 million per year whilst contributing to about 20% of their fund's annual profits.

CEOs in large companies are typically earning 400 times the average pay, which is up from a 42-1 ratio in 1980. The minimum wage would be $22 an hour in 2006 instead of $5.15 if it had gone up at the same rate. Corporate board members may be responsible for the failure to set fair executive compensation levels.

But now institutional investors are more likely to be activists and try to influence matters. When recruiting for executives, companies should set pay limits and avoid commitments to expensive golden parachute arrangements in the event of the executive's departure.

On the other hand, executive pay is not excessively high if you compare the average rate of $450 per hour for a CEO to what top doctors and lawyers earn. And out of 7,000 firms listed on major stock exchanges, CEO compensation totals $20 billion or 1% of the firms' combined $20 trillion in market capitalisation. Big firms, however, pay much higher rates, sometimes reaching $2,500 per hour - in part because much of the compensation comes from stock options.

Is CEO pay too high? Click here to have your say in our poll.

Current controversies in executive compensation: "Issues of justice and fairness"
Knowledge@Wharton, May 2007
Review by Morice Mendoza

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