This has become quite the topic du jour recently with a lot of people resenting the high compensation received by CEOs of public companies, with some asking for more rules and restrictions to be implemented.
The question becomes: how much should we pay a CEO?
Goldilocks Formula
It has been known that if a company pays its CEO too little, the CEO won’t be motivated enough to do a good job. If they are paid too much, they would think they are entitled and do a poor job. There is that “just right” amount that keeps them motivated to add shareholder value to the company.
CEO compensations come in many forms, mostly fixed as in salary (just “enough” to live) and flexible which could be a bonus, stock options, transportation, per diem etc. The flexible part is usually associated with that year company’s performance.
I personally think there should be a link between the revenue of the company and the fixed salary of the CEO.
Ratio = Salary / Revenue (not Bonus)
In the USA for example, Tim Cook, CEO of Apple, got paid around $98.7 million when the company made 356 billion in 2020. Jamie Dimon, CEO of JPMorgan, took home 31.5 million when the company made 122 billion. That is a ratio of 0.026% for both.
Let us look at the top 10 companies in the Amman Stock Exchange :
In the ASE10, the average ratio seems to be 0.14% with some going as high as 0.347%
When compared to the S&P500, only Orange and the Phosphate mines seem to be in range. Are the other CEOs overpaid?
(transportation has not been accounted for as most CEOs get a car on the company’s expense. This only accounts for declared revenue, kickbacks and bribes are not included as we all know all public CEOs are well behaved 😉)
Other factors
This could be an interesting topic for university students. They could do a more detailed study on this topic, looking at the relationship of company performance in terms of revenue growth, profit growth, and salary and bonus compensation during the last decade (as 2020 was an unusual year due to COVID). It would be also interesting to look at the CEO salary compared to total employee compensation. It would be interesting to also look at share options, difference in the ratio between different sectors of the ASE.
Another factor could also be related to ESG: in the S&P 500, 6% of all CEOs are women. When in the above table, it is 10%. Adding the newly appointed CEO for Arab Bank, the ratio becomes 20% which is quite impressive.
I personally do not believe that there should be caps put in place legally as it create even more hurdles. This decision is up to the shareholders and if they are satisfied with the CEO’s performance.
Conclusion
In conclusion, a CEO should be paid the right amount enough to cover the burden of responsibility in front of customers, employees and shareholders. The task demands true leadership, unlike some CEOs who resign over the phone while in another country when the company is facing its toughest year.