Are executives paid too much? Maybe, maybe not!
A student of mine once made a presentation about the appropriateness of executive pay levels. As the ever-Socratic Instructor, probing for the truth, always testing his students’ ability to defend their positions on various topics in the classroom, I asked him for his best view as to why executive pay levels are justifiable? Sweating just a bit, he replied “because that’s the way companies pay them.”
He knew, and I knew, that this wasn’t the “right” answer, but, I thought to myself “touché!”
You see, it could be said that the value of anything is what people (and companies) are willing to pay for it. Are executives paid too much? Many people think so. But that is what companies are willing to pay. Pay surveys confirm these levels.
Confused? It may be time for a football analogy! Do you think that professional football players are overpaid? If so, we agree. But, once again, the market sets the pay level, whether it’s football players or executives. The value is what the employer is willing to pay.
So, what should companies do that are looking for a “rationale” for executive pay levels? Here are some ideas:
- Always check what the market pays for your company’s Executive positions via pay surveys.
- Set your pay levels in relation to other financial measures. These include ideas such as:
As a percentage of overall Compensation costs for your company
As a percentage of all of the costs of your company
Comparing the average of Executive pay rates vs. the average or median of all non-Executive pay rates (note: this is the also focus of a Presidential Committee formed to potentially regulate the levels of Executive pay in general industry)
Control the level of the highest paid worker (CEO) vs. the lowest paid worker. This is called an “egalitarian philosophy.” (In the early days of the Ben & Jerry’s Company, this level was seven!)
Don’t let executive pay-level setting be random for your company. Create a pay philosophy that is reasonable, affordable and that can be explained easily to those who are affected by it, and to your Board of Directors.