CEO Pay Flashcards
(18 cards)
What are some stats that show how much CEOs are paid?
Jan 6, 2025, 1pm is the time at which CEOs earnt more than median UK full time pay.
Median FTSE 100 pay £4.22m, 113 times median wage of £37k.
It is argued that CEO pay increases contribute to rising in equality, which is making structural damage to the company,
US CEOs were 399 times average salary in 2021.
Pay structures are more generous for less performance in some instances a larger share of ‘assured’ pay is offered or pay structure creates perverse incentives e.g. profit diluting.
What is the executive pay trend?
CEO compensation in US has grown 1085% since 1978, typical worker compensation has rise by 24%, since 1978. CEOs of large firms earned 10 times that of the average top 0.1 earner in 2022, up from 4.4 times in 2007.
What are UK Corporate governance remuneration principles?
remuneration policies and practices should be designed to support strategy and promote long term sustainable success. Executive remuneration should be aligned to company purpose and value and be clearly linked to the successful delivery of the company’s long term strategy.
Why should a formal transparent procedure be established for developing policy?
developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome.
Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance of wider circumstances.
What is arm’s length contracting?
traditional view based on the agency problem - how can CEOs interests align with those of the shareholder. Pay is structured to provide CEOs with incentives that enhance wealth of shareholders.
What does the remuneration committee do in arm’s length contracting?
remuneration committee corporate board act as the arbiter of CEO pay.
Directors tasked with devising a pay strucutee that advances the interests of shareholders.
What is pay set at in arm’s length?
at a arm’s length from the CEO. Arms length contracting is also known as optimal and efficient contracting. View that CEO pay setting process permeates much research and practice on CEO pay.
What are the issues of arms length contracting?
board of directors do not necessarily act in the interest of shareholders.
Directors behaviours also subjected to agency issues.
Frank Dodd Act- a requirement for firm to disclose the total CEO compensation to the mean pay of employees.
Study showed that total compensation increase by 24% indicating the act did not restrain payment.
A remuneration consultant can unduly ratchet up pay.
What happens if the board is independent?
it increases arm’s length contracting so CEO pay should decrease. Yet board independence has increased and CEO pay has increased since 1990.
CEO power of the board can result in higher pay for the CEO - Managerial contracting takes place - human relations and instinct sometimes gets in the way of independence.
What are the pro’s of remuneration consultants?
Pay consultant to save the company time and money - consultants provide independent expertise - consultants provide bench market reports and understand how the tight but managerial labour market is.
What are the con’s of remuneration consultants?
Rent extraction theory suggest that consultant motives may be manipulated.
CEO hires the consultant so loyalty conflict.
Fear of termination of contracts if recommendation insufficiently generous.
Benchmarking data used to promote above, average pay as ‘competitive’.
Is the problem the consultants, the CEO or the topic on which they consult?
Benchmarking data used to promote above average pay as ‘competitive’
What does managerialism involve (the real story of CEO pay)?
- Arms length view that prevails in theory does not prevail in practice.
- Remuneration committee outcomes mitigated by personal interests.
- interpersonal relationships result in CEO influence over pay
- turkeys DO vote for christmas
- CEOs still have discretion to pursue goals that are odds with the interests of shareholders,
- dispersed share ownerships results in information a-symmetry.
- information a-symmetry gives CEO power.
- targets set for bonus payments can be manipulated.
What are unintended consequences?
How shareholders interests are side-lined within the best of intentions:
- CEOs pay often a function of size
- Focus exclusively on short term sales at the expense of long term profitability,
- increase gain from share options.
What is a example of unintended consequences?
‘Fake account created to meet sales targets, Wells Fargo made million of dollar fraudulently, CEO went before the Senate to defend their actions’
What is a example of excessive CEO pay?
Home Depot, $210 million dollars severance package drew criticism yesterday as an ‘outrage’ and threatened to escalate the debate over whether U.S. executive pay is excessive. Shares dropped 7.9% and company lost market shares to Lowes.
What are the ways to foster transparency?
- Say on pay legislation 2002 - shareholders get to vote on whether they feel proposed CEO pay packet was sensible. In principle a valued governance mechanism, in reality very few vote against CEO pay, consequently suggesting that legislation had limited impact.
What have remuneration reports become over time?
become very lengthy and hard to decipher unless your an accountant and crucially lacking in clear explanations of the link between CEO pay and performance.
Only in companies where shareholders were really angry did it impact on the link between pay and performance. Initially shareholders vote on pay was not binding once it become binding in 2013 it had an impact on the level of excess pay, leading to scholars to conclude that the legislation had been successful in curbing excessive CEO pay.
Resulted in more emphasis on cashed based pay and less pay tied to future performance.
What should boards do about CEO pay to make it fair?
- be clear about which elements of the CEO pay incur additional tax and who must pay the tax.
- treat CEO payments in a way that makes the full cost visible in the financial accounts.
- clearly state what links is between pay and performance.
- tie pay to long term performance.
- make the pay more about performance and less about industry performance - performance beyond just profit.
- succinctly and clearly state when CEOs cash is on their options and how much they made from them.
- make the pay more about performance and less about industry performance - performance beyond just profit.
- re-consider whether M&A actively should form part of the pay deal.
- stop generous pay packaged to CEO who are fired.
- Give CEOs the same pension plan as executives and make them bear the risk of poor investment performances.
