Are CEOs Worth Their Sky-High Salary?

L'Oreal's legendary marketing slogan Because I am worth it seems not only timeless in the beauty industry but also when it comes to CEO compensation. In one of the latest studies by the Handelsblatt, the German business journal analyzed the 2016 earnings of CEOs of major German companies in ratio to the average incomes of their employees. The study found that the company leaders earned up to 190 times more than their employees. Moreover, in 2015, CEOs in the U.S. and the UK earned respectively up to 335 and 129 times more than the average pay of their employees.

In his article about the disclosure of pay ratios Alex Edmans, a Professor at London Business School outlines several arguments that aim to both explain and support these observed contrasts in income disparity, the first of which proposes that CEOs’ actions are scalable in the sense that any CEO’s improvements of his/her organization’s corporate culture have significant beneficial effects at a firm wide level. The second argument is that high pay ratios could be considered as a significant motivating tool for employees as they indicate great career and promotion opportunities. And lastly, there is the argument that top talents are worth paying top dollars.

Fact is stranger than fiction

It is not the purpose of this short paper to contest these arguments and assumptions – it would otherwise not be a short paper. Instead, I believe it is important to draw attention to three key facts when considering the magnitude of these ratios.

The first of these is that numerous CEOs continue to receive significant payments and financial rewards while at the same time their organizations lay off thousands of employees and staff. This confirms a trend already highlighted in the 2010s, when a report by the Institute for Policy Studies concluded that CEO salaries increase with employee layoffs. While I do not criticize the fact that employees are laid off, it is important to question how much of a top talent one needs to be when applying such business-as-usual practices.

The second key factor, as the Volkswagen emission scandal in 2015 and the latest Yahoo news have shown, is that CEOs who fail, have made decisions which have severe financial and non-financial implications for their organization, or cannot turn around a company, can often leave their companies with relatively large financial compensation packages and so called golden parachutes. In the case of Volkswagen, the emission scandal cost the company at least USD14.7 billion in settlements and for 30,000 Volkswagen employees – their jobs by 2020. Former CEO Martin Winterkorn exited the company in 2016 and since then receives a pension of €3,100 a day. In the case of Yahoo, outgoing CEO Marissa Mayer is likely to leave the company with a severance package worth 186 million dollars despite a series of ill-timed purchasing decisions and serious security breaches leaving Yahoo to be sold to Venizon for a tenth of what Microsoft offered in 2008.

And thirdly, recent research has confirmed that the belief that top performers are the most capable is flawed because exceptional success usually occurs in exceptional circumstances. Studies have shown how top performers are often lucky for having benefitted from rich-get-richer dynamics that increased their initial fortunes. These studies also suggest that results and outcomes are somewhat over-credited to the personality, competencies and skills of a person, rather than to the situational context and to the happenstance of ‘being in the right place at the right time’.

For those who fly high: take a little perspective

In times characterized by great socio-economic inequality, and scandals of greed and insatiability by key decision makers and company leaders in many parts of the word and across the private, political and sport sectors, it might be time to shift the focus from self-indulgence to greater self-analysis.

Decision makers and company leaders are more likely to be self-reflective when things go wrong and when performance goals are not met. They analyze what led to non-success and most notably what they did not do correctly to reach positive results. It might also be worthwhile to introduce such a reflective mechanism at times when things go very well for company leaders. The latter would most likely realize that much of their success is not only due to their own skills and greatness, but equally the performance of their employees and many other situational factors for which they cannot control. With this in mind, pay ratios as high as 335 times might be reconsidered by the very company leaders and decision-makers who asked for them in the first place.