High Paid CEOs - Essay Example

Running Head: High Paid CEOs High Paid CEOs [Institute’s High Paid CEOs Introduction For the past decade or so, one can observe a heated debate on the compensation that CEOs receive for their work. However, this debate (The Economist, 2010) has become even more ignited by the current recession. More than 13 percent of the people in the United States are unemployed. Many millions are working with lesser wages or benefits than what they used to receive previously (Robbins, Judge & Judge, pp. 278, 2008). In addition, after the collapse of Lehman Brothers and two bailout packages by government to ensure no further collapses a common person has become watchful about the society’s scare resources and believes that these resources should not be wasted if they are not worth it. Most of common people who sit back at their homes and criticize the high pay of these Chief Executive Officers have no idea of what it takes to become a CEO of any large company and what stress and responsibility it entails. Most of these people fail to put on the shoes of these CEOs and look the world from their eyes and try to understand the significance and weight of their job description (The Economist, 2010). This paper would attempt to prove that most CEOs are worth what they are paid for, by putting forward some examples statistics and some thoughts. Discussion A study reveals that on an average a CEO of any large corporation used to earn almost 42 times more than average hourly workers pay in the era of 80’s. In the decades of 1990, this figure rose up by almost 85 times (Kolb, pp. 77-79, 2006). Besides, in 2000, a CEO now makes money more than 531 times of an average hourly workers. Most of the critics of CEO pay quote this study to attract the attention of people. However, it is important to note that since 2000, the CEO pay has declined substantially. In fact, due to this current recession the pay of an average CEO has declined almost by 20-30 percent than what it used to be in the start of this decade (The Economist, 2010). People who criticize high CEO salaries often end up presenting figures without complete information of the same. Most of the CEOs get their pay with many components. These may include monthly salary, bonuses, stock options, and others. Quite often, when we look at the data regarding the compensation of CEOs, that data includes in itself the expected value of stock options, which is usually much higher than the current value and is set up the board of directors anticipating the performance of the company (Kay & Putten, pp. 59- 61, 2007). In addition, many CEOs have a considerable amount of their compensation in form of stock options and that is not liquid neither does the CEO walks away any morning with his stock options. Therefore, the liquid cash or variable salary that the CEOs receive is often much less than what we see and hear through various sources (The Economist, 2010). Most critics of the CEO pay often forget that like any other employee of the company, the pay of the CEO is decided by looking at his job description, the sensitivity of his job, the authority, task significance and the risk associated of it. Quite understandably, the job of a CEO is tricky and a risky one because history has witnessed revolutions in companies due to great CEOs and destruction of many companies as well due to incompetent. Besides, if we look this issue from the lens of a free market economist then this issue would cease to exist. These high salaries of CEOs are something, which the free market has come upon through market mechanisms and market driven forces (Beauchamp, Bowie & Arnold, pp. 158-159, 2008). Since this pay is not something that has come through any distortion or interference from the outside, therefore the free market should be given a chance to operate with its own wages. If these wages were flawed then the board of directors would have stop paying these sky rocketing salaries to their CEOs way back. Quite clearly, these boards of directors do find some incentive, rational and reason to pay heavy salaries to their CEOs. Moreover, it is not that these CEOs keep on getting this compensation for a lifetime. Many critics argue that CEOs should also face a pay for performance system like many of their employees (The Economist, 2010). However, they do not realise that CEOs face an even stricter pay for performance system. If they perform only then they survive, if not they are handed termination letter in BOD meeting. Recently AIG and RBS both hired new CEOs with new compensation plans. Furthermore, it is an observation that the job of a CEO justifies their pay and their worth. Leadership is crucial to any company. Consider the example of Jack Welch. When took the charge of GE in 1980s as the CEO of the company, the net worth of the company in stocks was not more than 14 billion (The Economist, 2010). Today, the same figure of GE is more than 500 billion US dollars. Everyone agrees that the credit goes to the brains and wits of Jack Welch and even if we pay him half of the percent of what he has added to the net worth of the company, the figure reaches to around 2.5 billion US Dollars (The Economist, 2010) compared to the only few million dollars that he received. Jim kilts, Steve Jobs, and many others have changed their companies with their leadership skills and honest and transformational leadership is priceless. Let us looks at this issue in a different way. If a Board of director gets the option of buy a technology worth 500 billion dollars for its blue chip company that has the potential to change the fate of the company, the chances are that one would but that technology without considering the debt incurred (Bok, pp. 46-47, 2002). Any good CEO promises the same so why not invest heavily in a CEO. Moreover, if you have a good CEO then it ultimately means that other companies would also try to attract and get hold of him therefore, it is better to provide him with a handsome package to avoid the cost and mishap of replacing him. Conclusion Despite the fact that salaries of many CEOs are many times higher then their average workers but we can comfortably say that they are worth it. One basic principle of finance tells us that “higher the risk, higher the return”. A CEO position is crucial and any mishap at this position could be very risky that is the CEOs are offered high returns for their highly risky jobs. References Beauchamp, Tom L., Bowie, Norman E., & Arnold, Denis G. (2008). Ethical Theory and Business. Prentice Hall. Bok, Derek. (2002). The Cost of Talent: How Executives and Professionals Are Paid and How It Affects America. Simon & Schuster. Kay, Ira T. (1998). CEO pay and shareholder value: helping the U.S. win the global economic war. CRC Press. Kay, Ira T., & Putten, Steven Van (2007). Myths and realities of executive pay. Cambridge University Press. Kolb, Robert W. (2006). The ethics of executive compensation. Wiley-Blackwell. Robbins, Stephen P., Judge, Tim., & Judge, Timothy A. (2008). Organizational Behavior. Pearson Prentice Hall. The Economist. (2010). A Special Report on America’s Economy. Retrieved on August 01, 2010: http://www.economist.com/node/15793128 The Economist. (2010). Economist Debates: Executive Pay. Retrieved on August 01, 2010: http://www.economist.com/debate/overview/156 The Economist. (2010). Food Politics. Retrieved on August 01, 2010: http://www.economist.com/node/8380592 The Economist. (2010). Idea: the Glass Ceiling. Retrieved on August 01, 2010: http://www.economist.com/node/13604240 Read More