CEOs should be compensated 15 times more than the lowest-paid salary of an employee in a company. I am against mandating a ratio, but it can be anything from 15 to 25 times the lowest salary.
The
owners and managers of a company shared a
principal-agent relationship. In the beginning, there
was a conflict between the two as to who should own the
corporate resources of the company. To solve this issue,
the owners devised a `compensation package' for the
managers. This package was thought to be a way of
achieving harmony between the managers and the owners of
a company. CEO compensation was the compensation package
given to the CEO, to manage the company's corporate
resources effectively. The primary components of a
compensation package included the salary, bonus and
stock options4. In some cases, it also
included retirement benefits5, incentive
plans6 and gains from stock grants7.
The
CEO compensation structure evolved over the years as a
result of committees set up to legitimize CEO
compensation packages. Till the early 1980s, CEO
compensation was not linked to the company's
performance. It was viewed only as an administrative
function. The CEO's salary was fixed, depending on the
company's economic state during that time and the CEO's
professional experience in terms of the number of years.
Salaries were standardized, and very few top executives
and CEOs received major incentives for outstanding
performance.
The
high inflation rates in the mid-1980s forced the
compensation committees to raise the salaries of top
executives and CEOs. During this period, the
compensation package was linked to the economic
performance of the company in terms of profits, revenues
and growth. It was thought that linking compensation to
the performance of the company would enable CEOs to
focus more on maximizing shareholders' wealth. |