What Makes Up Ceo Compensation


02 Nov 2017

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CEO Compensation


One of the greatest questions arising in companies today is how to reward their top employees’ management and especially the CEO. CEOs are the company’s top executive and thus deserve large perks to reward them in for the proper organization and running of the company. When hiring a top class management, the executive compensation will be one of the considerations of much importance, both to attract the executive as well as be in line with the salary system of the company. The duty of finding and hiring the right executive who will prove to be an asset to the company is a tough task. The executive compensation is offered by the company in order attract and retain the best suited candidates for all top executive levels.

What Makes up CEO Compensation?

Executive compensation is an inclusive term for every component that makes up the pay package of top level managers and chief executive officers of a business corporation. Their pay package will include salary, bonuses, long-term and short-term incentives stock options, and deferred compensation. In larger companies this may come along with use of the organization’s jet to fly to and a limo to drive the CEO to an expense account lunch or dinner. In the extreme some CEO will even require the company to pay their own income taxes. In 1970, CEO remuneration and bonus packages were on average about $700,000 – about 25 times salary of the average production worker while in 2000, CEO salaries had risen to almost $2.2 million on average, i.e. 90 times salary of the average worker, yet they are doing more or less than they were back then. The salaries offered to a CEO are determined on the basis of their educational qualifications, working experience and other skills (Hengartner 56). Salary increments/performance appraisals will arise depending on the executive's performance and significant contributions towards the growth and development of the company. Other benefits that accrue to the executive compensation are life insurance and health insurance, retirement plans, car allowances, health-club membership, paid holidays and vacations, travel reimbursements etc.

What Currently Decides a CEO’s Compensation?

CEOs of these corporations get paid according on the recommendations made by the board of directors and then approved by a corporate board which usually includes a subset of the board known as the compensation committee. The predicament is that most of the corporate directors report to the CEO making their judgment not exactly impartial. There is therefore a presumed justification of the CEOs getting lavish pay is that their very presence of the raises the value of the company and the company’s stock thus the top executives should get a proportion of that gain. Another argument is that they create jobs in the organizations; they increase the tax base for the nation at large which America can grow on. They create and help maintain a competitive edge in the international markets. Lastly it can be argued that they work under a lot of pressure on them.

What Rules are in Place in Regards to CEO Compensation?

In 2006, the U.S. Securities and Exchange Commission (SEC) restructured the rules for the disclosure of CEO salaries, and those for executive salaries. The new rules call for disclosures of CEO salaries and executive salaries, hand in hand with explanations in terms that any layperson can understand. This is an effort by the Securities & Exchange Commission to put in place rules that would make it easier for stakeholders to be in the know of just how much of their company’s profits are being diverted to remunerate top executives. Companies are now required to provide one number for sum total annual compensation for every executive, and reports should be inclusive of detailed information on pension proposals and estimates for severance packages. The SEC has also posted these compensation amounts on their website to make it an easy task for investors to compare and analyze the compensation amounts paid by different companies.

In 1970, CEO remuneration and bonus packages were on average about $700,000 – about 25 times salary of the average production worker while in 2000, CEO salaries had risen to almost $2.2 million on average, i.e. 90 times salary of the average worker, yet they are doing more or less than they were back then (Hengartner 91). The levels of payment in all countries have been growing severely over the last decades, both in absolute terms, and relative terms. In 2007, the world's highest paid chief financial officers and chief executive officers were both American. They made an estimated 400 times over and above average workers; this is a gap 20 times larger than it was in 1965.

Even after the credit crisis of 2008 most CEOs got raises in and, in many cases, the increases were quiet substantial. These pay hikes came even though the economy’s revival remains fragile, unemployment rate is still high and corporate profits in the last years were roughly flat, if any. The big raises in executive’s compensation are a difficult pill for employees to swallow, given that a lot of Americans are just struggling to find a job or attempting to make ends meet. Though it is quite rare, each year there is a report of a CEOs or other company top management who reap sizeable salaries while their company workers are being overworked and underpaid and others even being laid off. This can bring in irreversible damage to the workers morale and attitude towards the company. When there are a thousand people who are feeling unhappy and unfairly compensated for their efforts, everyone is going to be less efficient, which will eventually start impacting the bottom line and the end results of it is low productivity.

Mostly because CEO salaries comprise the image and capabilities of most companies, they always tend to attract a lot of media attention while the significant salary gap between the CEO’s remuneration and that of both employees and lower-level executive salaries is less widely reported. This leaves the plight of such employees hidden and due to lack of proper channel to air such grievances. It is evident that the salary gap separating the CEO salaries, those of lower-level executives, and the average worker salaries will never go to be as little as most people would like it to be. In most companies CEOs’ pay is rising whereas profitability levels and stock prices underscore which beats logic. It creates a huge disconnect between payment terms and the companies’ true underlying performance. The shareholders have not much say concerning the CEOs pay and sometimes the directors waward huge amounts whereas the company may be running losses. If a company is losing its market share but the pay packet of a CEO continues to swell along with bonuses, feelings of frustration and discontent are inevitable among the workforce.


CEOs have constantly earned huge sums of money in terms of remuneration, while the average worker earns little while they do most of the work. They sure deserve handsome payment but the current trend of extremely high figure is a worry and given the gap it creates.

There is little in the proposed rules that will eventually empower shareholders to take action when they deem a CEO is overpaid, this allows the directors and executives reward themselves heftily, sometimes even when the company is not making profits.

Employees desire to understand how companies come to a decision on CEO salaries and executive salaries; the disclosure of hefty pay, by itself, will do little to make stronger the link between CEO pay and overall performance of the organization.

There are signs stakeholders are geared up to get more vocal about the companies’ concerns over the direction of CEO pay, largely because they can when there are clear rules.

The government can employ a number of strategies that could be used as a reaction to the growth of executive compensation which include progressive taxation, or setting maximum pay. On the other hand in the companies, measures that can be put include indexing operating performance where rewards are incidental on profitability and growth. They can also adopt the appointment of non-executive directors setting compensation.

Since companies exist in a competitive field shareholders want their companies to hire the right people especially for top jobs who will make profits and the stock prices go up.

Work Cited

Hengartner, Lukas. Explaining Executive Pay: The roles of managerial power and complexity. Illinois: Springer, 2006


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