The average pay package of top CEOs in Britain is now £4.6m a year. Is sky-high executive pay unjustified or does it reflect the need of big companies to attract the brightest talent..?
Yes! Nicola Horlick is co-founder and CEO of Money&Co
There’s a major difference between the CEO of a small entrepreneurial business and someone heading a major corporation. If pay was determined by effort, hours worked and the amount of stress involved, then the CEO of the small firm should get the biggest pay cheque. But small businesses can’t afford to pay their leaders very much and the CEO (invariably the founder) frequently works for nothing.
By contrast, the CEO of the major corporation gets paid millions and probably gets a bonus running into more millions, plus share options potentially worth tens of millions. The big question is whether one person can make enough difference to justify such a payment? Occasionally there have been individuals who have come into large businesses and improved them dramatically, such as Justin King at Sainsbury’s. But the vast majority of those running major businesses do not make a significant difference, often leave within three years, and often with a big pay-off.
Investors are to blame for the culture at the top of our largest businesses; a culture of entitlement which doesn’t generally benefit shareholders who should be taking a tougher stance with the boards of these companies. I’m all in favour of rewarding success, but the balance has swung towards paying people for failure – and this needs to change.
Nicola Horlick is a member of IoD Central London
No! Sam Bowman is executive director of the Adam Smith Institute
If executives really are worth as much or more to their firms as they are being paid, the system is working properly. Executive pay has risen significantly over the past half-century because executives have become more important. The more globalised the economy becomes, the more important the strategic decisions made by people at the top of the firm become.
There are dozens of examples of firms losing huge amounts of value when good CEOs have left (Angela Ahrendts’ resignation knocking half a billion pounds off Burberry’s value, for example) and gaining when unsuccessful ones have (like Steve Ballmer at Microsoft). A review of the unexpected deaths of CEOs has found that the average impact on share prices has risen steadily since the 1950s, confirming that CEOs matter more now than ever before.
The other big reason the pay of CEOs has been on the rise is that efforts to curb CEO salaries have triggered a rise in other, riskier remuneration mechanisms, such as stock options – the effect of which is to drive up average pay packages overall. Shareholders do not need to be activists to punish firms that overpay executives: they merely need to move their cash into firms that are not wasting money. The best explanation is not market failure but market efficiency: CEOs matter a great deal to their firms, and firms are willing to pay to attract the best.
Sam Bowman is executive director of the Adam Smith Institute