Why a CEO should only earn 5x more than staff

Why a CEO should only earn 5x more than staff

FTSE 100 CEOs received another pay rise this year, this time of ten per cent, a report by the High Pay Centre found, compared to two per cent for the average worker, according to the Office for National Statistics.

Executive pay has dominated the headlines all year: as their pay swells it seems that everyone else’s seems to stagnate.

Hermes Investment Management released a report last month detailing exactly why companies to review, and overhaul, these executive pay structures.

It explains that restructuring remuneration practices helps a business in the long-term, whilst simultaneously allowing them to address the issue of fairness.

The changes which were proposed included publishing the ratio of CEO pay compared to the average workers’ and a written note from a member of the Boardroom explaining why the CEO has been awarded their pay package that year.

In this vein, Michael Norton, Harold M Brierley Professor of Business Administration, and Sorapop Kiatpongsan, a PhD Candidate in Health Policy (Decision Sciences) at Harvard University, asked people what they thought the ideal pay gap was. Hypothetically, this would allow the pair to assess what was perceived as morally acceptable and, maybe, explain public anger towards vast remuneration.

They used data from the International Social Survey Programme, which involves more than 55,000 respondents from 40 countries such as Australia, China, Russia, Turkey, the US, and the UK.

Questions included ‘How much do you think a Chief Executive of a large national company makes in your country?’ and ‘How much do you think an unskilled factory worker makes?’

In the UK the ideal ratio was 5.3:1 and they estimated a current ratio of 13.5:1, compared to the real ration of 84:1; across all 40 countries asked the ideal ratio was 4.6:1.   

Writing in New Scientist, Norton concludes: “While both 20:1 and 30:1 are larger gaps than the ideal of roughly 5:1 that people describe, it is not difficult to understand why this is now a critical issue: the huge gaps of today are far from our universal sense of what’s right.”

What seems to be particularly galling is the fact that, according to a study MSCI titled ‘Are CEOs paid for performance? Evaluating the Effectiveness of Equity Incentives’, highly-paid CEOs don’t return their vast remuneration to the company; for every £76 invested into a firm with a highly-paid CEO would have grown to £202 over ten years. However, when the same amount was invested into a company with a low-paid CEO it returned £379 over the same period.  

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