Louise Mackey considers the perennial issue of CEO remuneration

An issue which has attracted a considerable amount of controversy as of late is the ever-escalating salaries of the world’s CEOs.  Indeed the perennial issue has resurfaced not once but twice since I have arrived in DC.  Interestingly both parties had opposing views as to whether the lavish pay cheques are justifiable.

The topic first cropped up during a discussion on the role of unions with James Boland, President of AFL-CIO, and Cathy Feingold, Director of International Affairs for the AFL-CIO.  Both were vehemently opposed to the levels of payment which CEOs are now receiving.  This is not surprising as a Union’s raison d’être is to protect the workers. They claim that while CEO pay soars, medium income falls thus it feeds the 1% and starves the 99%.  The Economic Policy Institute have just published data which states that, since 1978, CEO pay at American firms has risen 725 percent, more than 127 times faster than worker pay over the same time period.  Therefore, maybe the Unions “Robin Hood” approach to income, where one must steal from the rich and redistribute to the poor, is both equitable and rational?

It is easy to vilify a multimillionaire CEO who increases his paycheque at a far superior speed than his poor worker’s.  However, it is more challenging to vilify someone who, through their own ingenuity, perseverance and entrepreneurial capabilities, has created hundreds of jobs and is driving growth in an economic period which could only be described as dismal.  Should such a person not be rewarded for their contribution to society?

Enter George Moore, co-founder and current chairman and CEO of TARGUSinfo, whom we had the pleasure of meeting just last week.  As George is a CEO it is unsurprising that he thinks the pay is justified.  George stated “no one starts up a large company”.  All companies start off small, unprofitable and with a high probability of failure.  Therefore, like any other high risk investment, a high return will be expected if the company prospers.  I agree with George that CEOs should be rewarded for hard work, however, Cathy highlighted the stark reality that sometimes CEOs are not being rewarded for hard work at all.  We need only look to our own shores and to Sean Fitzpatrick, former CEO of Anglo Irish Bank, to back this statement.

Therefore do we strike down or uphold CEO pay cheques?  It is not a clear cut question.  I believe that to stunt the pay would be to discourage leadership, growth and entrepreneurial development.  However, we must not underestimate corporate governance issues, corporate greed and immoral conduct in the work place.  Personally I think the key lies in binding a CEO’s remuneration to the performance of the company.  By aligning CEO’s interests with that of the company the likelihood of CEOs acting in a self serving manner should be eradicated whilst the CEO reaps the rewards if his company prospers.

This could be achieved by paying a predetermined percentage, say 25%, of a CEO’s salary in equity shares in the company.  Therefore a considerable proportion of the CEO’s pay will be in the form of a dividend which will fluctuate based on the company’s profitability.  Managers often receive bonuses in equity shares and this has proven to be an effective means of instilling company loyalty and pride.  However, studies have shown that in times of hardship such issuances may make risk taking an attractive option for managers, as a last ploy to augment share price.  The CEO’s personal reliance on the share price should discourage high risk behaviour on the part of a manager as his job will most certainly be on the line if he is responsible for a CEO losing a quarter of his pay cheque.

In the end man serves his own interests.  Cutting CEO pay discourages those who are ambitious to succeed.  If we are discouraging the ambitious who will create employment?  In the current economic climate stimulating our economy must be our primary objective.  Creating incentives to encourage people like George Moore to turn small companies into large companies will facilitate this.