Why Do CEOs Make So Much Money?

Sandy Pepper, an expert in executive pay at the London School of Economics, analysed FTSE 100 data since 2000. It showed that while all-employee pay increased by about 3% a year on average, CEO’s pay increased by about 10% per year. Pepper says the underlying logic was to pay the CEO according to a company's financial performance, since they were the most important factor of success. And on top of basic salaries, CEOs were given performance-related bonuses and stock options allowing them to buy company shares for a set price (BBC, 27 Jan 2021).

At the same time, the proportion of UK businesses owned by individuals dropped precipitously. Shareholders grew in power, and their demand for booming stock prices led to booming pay packets for CEOs – in turn signed off by boards of directors’ eager to please their investors.

Robin Ferracone, CEO of Farient Advisors, an international executive-pay consultancy, agrees with these "price-driven" salaries. "If you have a good CEO, the multiplier effect can be huge," she says. "So, in principle, median pay for median performance and high pay for high performance makes sense."

In fact, Pepper argues that the empirical evidence shows the strongest correlation between pay and company financial measures is not financial performance, but rather the size of companies – there is simply more money to spend. "The bigger the company, the more CEOs are paid," he says.

However, David Bolchover, a management-pay expert says the 2008 global financial crisis is a prime example of how performance and pay don't always align. "The financial sector always defended their high pay on the basis of their rare abilities and their talent," he says. "But a lot of these banks went bust during the crisis, and people started to ask questions – why were they paid so much and why did they continue to be paid so much even after the crisis?"

According to the Securities Commission’s (SC, Malaysia) inaugural Corporate Governance (CG) Monitor 2019, the remuneration of the top-20 highest paid CEOs in Malaysia ranged from RM8mil to RM168mil. The five GLCs with the highest-paid CEOs were healthcare firm IHH Healthcare Bhd; financial services companies Malayan Banking Bhd, CIMB Group Holdings Bhd and BIMB Holdings Bhd; and telco giant Telekom Malaysia Bhd.

If we break down remuneration of IHH Healthcare Bhd’s CEO, it will work out to RM2.82 million per month or RM92,849 per day. And according to Salary Explorer (www.salaryexplorer.com), a cleaner in Malaysia typically earns around RM1,960 per month. This will take them around four years to get the CEO’s ‘one day remuneration’. What about those who only receive monthly minimum wage of RM1,200? More than six years.

https://twitter.com/AmnestyMy/status/1304279612424253440?s=20

If you remember, a short clip was posted online in 2019 documenting the lives and struggles of hospital cleaners. The scene was taken during a post-mortem meeting by the National Union of Workers in Hospital Support and Allied Services (NUHWAS) after their employers shot down their request to increase their basic salary. The request was for increments to RM1,300 or RM1,500 depending on their experience. With or without Covid, the rich-poor gap is real. And it only widened with Covid!

Why is it so hard to raise the minimum wage when CEOs are getting multimillion-ringgit packages with bonuses and shares thrown in?

 

Reference:

1.     Why CEOs make so much money, 27 Jan 2021, BBC

2.     Five GLCs among 20 listed firms with highest-paid CEOs, 7 May 2019, The Star