Critics have charged that compensation to top managers in the United States is s

Question

Critics have charged that compensation to top managers in the United States is simply too high and should be cut back. For example, focusing on large corporations, Robert Kotick, CEO of Activision Blizzard, earned about $64.9 million in 2013. Are such amounts excessive? In answering, it might be helpful to recognize that superstar athletes such as LeBron James, top entertainers such as Tom Hanks and Oprah Winfrey, and many others at the top of their respective fields earn at least as much, if not a great deal more

Explanation / Answer

“The current levels of compensation for CEOs in corporateAmerica are, in a word, outrageous,” Jack Bogle, founder ofThe Vanguard Group. CEO compensation practices at U.S. companies have been in the spotlight for a very long time. Back in 1977, Peter Drucker wrote that CEO pay should be no more than 25 times average worker pay. In a 1984 essay, he updated that to say that no more than 20 times average worker pay was appropriate. Looking at it another way, if the average worker at a company earned $100,000, a board concerned with the same moral and social issues that concerned Drucker would limit the CEO’s pay to $2 million or less. While executive pay has been a hot button management topic for years, it has only recently been in the sights of public policy makers. That’s partly because a growing body of research has demonstrated the influence of compensation on CEO and worker behavior, a fact that many policy makers and members of the public woke up to in the aftermath of the financial crisis.

Yet despite all the gnashing of teeth over the last four decades, executive compensation issues have largely gone unsolved. Companies with a tilt toward providing long-term pay incentives would have a longer average term of pay than those who pay most of their incentives up front with no deferrals. The average term of pay metric would provide a simple way to compare companies’ pay plans that would be useful to boards, shareholders and employees. This would also provide a reference point related to appropriate risk management and investment at the firm.Recalling the adage that “what gets measured gets managed,” these metrics may be exactly what is needed to help boards and companies rethink the seemingly intractable compensation and related management issues that have dogged companies for decades. These metrics will also give potential investors and employees (who seem to be itching to move anyway) the information to make wiser decisions about where to invest and work next.

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