The CEO Compensation Controversy

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Case Details:

Case Code : HROB020
Case Length : 12 Pages
Period : 1998 - 2001
Pub Date : 2003
Teaching Note : Available
Organization : Varied
Industry : Varied
Countries : India, USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

High CEO Compensation - Justified or Not?

According to a study conducted in the US in 1960, the average compensation package of a CEO of a middle-sized company was double the salary ($100,000) of the then President, Kennedy. In 1970, the CEO's salary rose to three times the salary of President Nixon and by 2001, the average CEO compensation was 31 times more than the salary of President Bush ($400,000).

According to media reports, by 2001, the average salary of a CEO in the US had increased by an incredible 1,996% since the 1980s, while the average salary of a factory worker had increased only by 66%.

During the years 1990 to 2001, CEOs' average compensation had increased by 463%, as compared to an average worker's salary which went up only by 42% (Refer Table II). The reports revealed that the gap between the salaries of a CEO and an ordinary factory worker was very wide, and was expected to widen further in the coming years...

The Debate Intensifies

The global economic slump during the beginning of the 21st century further intensified the debate on high CEO compensation. Analysts felt that while corporate revenues and net profits were declining, and share prices falling, there was no reason why CEOs should get a raise in their compensation. According to a study conducted by Forbes in 2002 for non-US based companies, seventeen specific instances were reported where a CEO got a raise in compensation in spite of falling stock prices and lower net incomes (Refer Table IV).

Analysts thought that paying high compensation to CEOs especially during a boom in the economy was not a right decision. They argued that the high profits and good performance of the stocks of a company during the boom resulted from the environmental and other macro-economic variables, over which a CEO had no control...

Exhibits

Exhibit I: Top Five Best Paid Indian Executives (2001)
Exhibit II: Corporates where CEO Compensation was Hiked in Spite of Downsizing of Employees (1997)