Is CEO pay too high?
The Wall Street Journal reported that Larry Ellison is the world’s highest paid CEO having earned over $1.8 billion in the previous decade. This example and of other high paid CEOs has led to a barrage of criticism and comparisons between what a CEO earns and that of an average employee. These comparisons however miss the point.
The key question is ‘is the high pay of a CEO worth it?’
I would argue that the answer is YES. The CEO is accountable for the 3 most important value creating activities within an organisation, namely:
- Setting the strategy and focus for the organisation
- Selecting and managing the ‘Top Team’
- Focusing the Top Team and organisation on the execution of the strategy
What’s the impact of a successful CEO?
Getting these three activities right is at the heart of the difference between successful and unsuccessful organisations and ultimately driving customer and shareholder value creation in the best companies. To take the example of Larry Ellison, under his stewardship company the company nearly has tripled in value (from $36 billion to $98 billion in the 10 years to 31 May 2009 (with realised gains on options accounted for 97% of Mr. Ellison’s total compensation).
Is every CEO worth the money?
Clearly there are examples of CEOs who have taken large rewards personally and disappointed their shareholders with losses. However according to Prof. Stephen Kaplan at the University of Chicago’s Booth School of Business, in general, “the guys who got the big payoffs deliver”
So to paraphase L’Oreal’s famous slogan, the simple reason why CEOs are paid so well is ‘because you are worth it’