The other pay gap: the question of CEO salaries

Economy & Politics | Growth | International

The news this week that smartphone maker Xiaomi’s founder received a £735m bonus has brought the debate surrounding CEOs’ pay back to the fore.

Nine-year old tech company Xiaomi started selling smartphones in the UK in November 2018, along with other products like fitness trackers and electric scooters.

Xiaomi stated that the £735m bonus was a “reward” for Lei Jun’s eight years of devotion to the company. However, critics have noted that the bonus swallows the majority of Xiaomi’s £980m net profit for the year.

The idea that CEOs abuse their positions of power to extract eye-watering salaries is not exactly new. But the issue is not as urgent in the UK as elsewhere – the average pay for a CEO in the UK is a respectable £90,229 per year, though it should be noted that figure includes all CEOs, regardless of company size. It is in the US that stories of obscene CEO pay packets dominate the headlines.

Not all CEOs should be tarred with the same brush. Warren Buffett draws a famously humble salary from Berkshire Hathaway Inc, for example – though of course, Warren Buffett is not exactly hurting for cash. But a 2017 report by the Economic Policy Institute revealed an entrenched culture of parasitic CEO salaries.

The report stated that the average CEO of the largest 350 firms in the US drew an $18.9m salary. That represents a 979% increase between 1978 and 2017.

To put that pay rise in perspective, the S&P 500 Index of the US’s largest companies grew 637% and typical workers’ pay rose just 11.2% in the same period. The growth of CEO salaries far outstripped the markets, and frankly put the growth of typical workers’ pay to shame.

“CEOs are getting more because of their power to set pay, not because they are more productive or have special talents or more education,” the EPI report said. “If CEOs earned less or were taxed more, there would be no adverse impact on output or employment.

“High CEO pay reflects economic rents—concessions CEOs can draw from the economy not by virtue of their contribution to economic output but by virtue of their position.”

Outsized CEO salaries can obviously hurt the business – that is money, after all, that is going into an individual’s pocket rather than back into business growth. And research from Harvard Business School found there is a marked consumer preference for products from companies with lower CEO-worker pay gaps, even when the product costs more.

Not everyone agrees that CEO pay should be capped, however. A 2016 Telegraph editorial argued: “To fulfil the role of CEO requires a constant dedication to the business. There is no quitting time for the head of the company, who must be available every hour of the day by phone and email. To perform the senior executive job well, a CEO must be dedicated to steadily improving skills, learning about new markets, exploring new strategies, and researching the competition.

“Every business needs a leader, and that person needs to have a strong incentive to excel in their job. So a highly paid and highly motivated CEO is ultimately beneficial to every member of the company.”

It’s lonely at the top, and the job of a CEO is a singularly stressful one. The danger of a pay cap for CEOs is that fewer entrepreneurs might be inclined to make such sacrifices when the chance – however slim – of incredible wealth is taken off the table. But there is a balance to strike between the good of the business, the wellbeing of workers, and the incentives for success.

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