As Christmas approaches, you may be thinking about bonuses or pay rises for your people. Or, if you’re like me, perhaps you take the “you should be grateful to have a job” route to employee motivation.
Either way, anything you decide to dish out will likely be minuscule in comparison to what the top people in big companies earn (top person = Chief Executive Officer = CEO; managing director in the old days).
We all know they earn a lot, but do you think they are worth it? Does what they are paid have any relationship to what they bring to the party?
In many cases (in fact I would say the majority) the answer must be no.
There are two reasons for this:
- There is no objective measure by which one can determine the value of the CEO’s value to a business; and
- Executive remuneration is set by boards of mainly non-executive directors, many of whom are CEOs themselves, and by compensation consultants who advise the boards and have an interest in pleasing their clients.
Let’s look at measuring value. It’s not unusual for 60-80% of CEO pay to be tied to performance – whether performance is measured by quarterly earnings, stock prices, or something else.
But can improvements in these metrics be categorically linked to the actions of the CEO? Cleverer people than me doubt it.
Lots of research has been done in this area and, to the extent these things can be measured, it appears that the “CEO effect” accounts for between 2% and 22% of the increase in companies’ financial measures. So the CEO is not the primary driver of a firm’s success – external industry factors and the economic environment are more important.
Put another way – most CEO success comes down to luck. Someone has in the big chair during the good times. On the flipside, CEOs are significantly more likely to be dismissed during recessions or when their industry is suffering, despite the fact that these trends have little to do with managerial skill.
It’s safe to say that CEOs are, overall, a relatively talented bunch, but that’s not what separates them from other professionals, nor is it the main reason their firms succeed or fail.
Certainly it doesn’t come close to explaining why they’re so well paid.
So why the massive pay levels?
It’s the system, as I mentioned above. There’s an element of circularity to it that tends to keep salaries up regardless of what’s happening to the performance of the company or the state of the economy.
A self-perpetuating market has developed, whereby the remuneration committee feels it has to offer huge sums to attract the “right” person because that person is already being paid a huge sum where he is she is currently, because that company’s remuneration committee thought the same way, and so on..
Does this person have revolutionary, innovative and exciting ideas to drive the business forward? Unlikely – those people are pretty rare.
What they probably have is a track record of being in the right place at the right time.
Nice work if you can get it.
Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.