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  • Pietro Marchesano

Executive pay: when common sense makes good business sense

The CEO of a large company in the US earns on average 289 times more than the median worker. [1]

Since the Global Financial Crisis, executive pay has been a recurring and divisive topic. The fact that Richard Fuld, the “Gorilla of Wall Street”, CEO and Chairman of Lehman Brothers, walked away with several million dollars after the bank’s collapse, at the height of the subprime mortgage crisis, encapsulates the stereotype of overpaid managers with a short-sighted leadership.

Source: Paul Blow [2]

To contextualise this multifaceted matter and suggest some constructive proposals, it is important to understand why public sensitiveness to executive pay is so high and focus on the policies implemented by governments to placate criticism.

Even among those opposed to high pay, concern is selective. Why are not entrepreneurs, sport and entertainment stars so scrutinised and criticised for the money they make?

One reason could be that top managers executive compensation packages are often so complexly structured that it is difficult to identify a clear, indisputable link between what they get and their contribution to the firm’s success [3]. Such link is easier to grasp for other well-paid figures who possess exceptional talents or create a product or service which did not previously exist.

Most of top managers’ remuneration is indeed opaque. Salaries are based on so-called Long-Term Incentive Plans (LTIPs): a mix of fixed and variable pay, bonuses, shares and stock options. Edmans suggests that cash and shares (with a long holding period) would represent a value-creating way to simplify LTIPs. [3]

Being unable to understand and justify high pay, journalists, social media influencers and activists attack the moral basis of what they perceive “as over-generous rewards from the market economy” [3] – something rather irritating, considering that, in many Western societies, the middle class has not seen its condition improving in the last decade. [4]

The slowdown in wage growth in OECD countries: 2000-2007 vs. 2007-2016. Source: OECD [4]