01 November 2017
Boards will always need to apply judgment and a sense of proportion.
What can a person do that is worth a third of a billion dollars? A retirement announcement from
The sum is all the more stunning in that it is not unusual for someone running a big company (American Express’s market capitalisation is over
The best argument in favour of high pay is that even a small movement in the value of a large company can be very significant. If the head of a
The argument has two problems. First, it is hard to see where the argument stops. Apple’s value is approaching $1tn. Should
Second, it is very hard to isolate the contribution of CEO skill when setting pay. Links to share performance means CEO pay will depend on market cycles. Benchmarking stock performance against peers helps, but only within limits.
Using profit metrics instead of share performance, similarly, exposes CEO pay to the whims of input prices, exchange rates and technological advancements.
A final problem is that - again because at large companies even huge pay packages are small relative to total company value - shareholders have a limited incentive to push back on pay. Board members, too, have little reason make a fuss about a high-pay culture that has also served them well.
None of this is to argue that CEO skill is not important, or that it is completely invisible. Nor is it to argue that pay is totally arbitrary. The components of sensible pay structure are increasingly well understood: pay the boss largely in stock that must be held for many years. De-emphasise options and short term performance incentives. Do all of this transparently. This should increase fairness and improve corporate performance. But it does not ensure that CEO pay fully corresponds to value creation.
The lesson is that while proper incentives and full transparency are important, an element of judgment and a sense of proportion will always be required on the part of boards. There is such a thing as too much. Rules, guidelines and procedures cannot absolve us from recognising it when we see it.
Copyright The Financial Times Limited 2017
(c) 2017 The Financial Times Limited