There is no doubt that executive pay is out of control. Even the CEOs and Chairmen of major corporations believe this to be the case in private, yet executive remuneration structures remain as they are.
The difficulty arises from the fact that major companies are once again completely reliant on short-term results. If they do not meet their quarterly returns, their corporation may not be around, and meeting those targets remains the number one priority. In order to be successful, businesses require highly competent CEOs who can drive change and discipline throughout the organisation, as well as keeping shareholders happy and content in the belief that the company is worthy of investment. Individuals capable of such tasks are few and far between. The need to motivate them means they are paid over the odds to safeguard the short-term gains of the company and placate shareholders.
General political opinion seems to be changing. Vince Cable’s recent proposals to curb executive pay are a brave move, but I fear they will make little difference, largely because they involve tampering with the cycle of investment and short term quarterly reporting that will not be easily modified. He will not succeed if existing structures that link a company’s performance to executive pay remain intact.
Until compensation packages are still structured around sustainability and long-term investment, nothing will change. This solution is most certainly in people’s minds, but is yet to be put into practice.
Source of graphic: www.telegraph.co.uk
The GINI Index is an interesting measure of the dangerous discrepancies between the wealth of normal folk versus CEOs. The lower the score, the more equally distributed is wealth. Official figures for the US and UK show a score that is hovering dangerously close to 0.5, which the CIA consider as on the brink of social revolution. There can be no doubt therefore that we are on the edge of a highly flammable situation.