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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"CEOs should be compensated 15 times more than the
lowest-paid salary of an employee in a company. I am against mandating a ratio,
but it can be anything from 15 to 25 times the lowest salary."
- Infosys' Narayana Murthy at CII's leadership conference on
the issue of high CEO compensation.
"The excessive flab on CEO emoluments should be cut."
- Anu Aga, Chairman, Thermax.
"CEOs 25 years ago never got a million dollars; their
compensation was based on common sense. Back then, CEOs were seen as diligent
managers who had skill motivating people and just got promoted up through the
ranks."
- Robert Stobaugh, Professor Emeritus, Harvard Business
School.
The Best Paid CEOs
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Larry Ellison (Larry), CEO of the US based Oracle Corporation was ranked first
in a Forbes1 survey of highest paid CEOs
in 2001 with an annual compensation of $706 million2.
He was followed by Michael Dell (Michael), Jozef Straus, Howard Solomon and
Richard Fairbank as the top five "Best Paid CEOs" in 2001. (Refer Table I).
Larry's high compensation came as a surprise for several market observers since
it constituted almost 31.7% of Oracle's net income of $2,224.1 million in the
financial year 2001-02. Larry earned $500 million more or almost 3.5 times
the compensation of the second best paid CEO in the world, Michael.
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Analysts felt that with the fall in Oracle's net income from $2,561 million
in 2000-01 to $2224.1 million in 2001-02, the high compensation paid to
Larry was not at all justified.
The high compensation to CEOs had been a debatable issue over the years
among corporates as well as the investors all over the world. Market
analysts and stakeholders had criticized companies for paying exorbitant
compensations to CEOs and argued that this would widen the gap between the
top level and other levels of management.
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By early 2001, paying high compensation to CEOs
became a very controversial issue due to the global economic slump
and poor performance of corporates. The issue was strongly debated
not only in the US, but also in countries including UK, South Korea
and India (Refer Exhibit I).
The shareholders were not happy with the fact that CEOs' salaries
continued to rise in spite of the poor performance of the stocks.
They argued that, though the compensation of the CEO was linked to
the company's performance, there were instances where, in spite of
the poor performance of the company, the CEO concerned got a decent
hike in compensation package. |
The CEO Compensation Controversy
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