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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"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

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.

Human Resource and Organization Behavior | Case Study in Management, Operations, Strategies, Human Resource and Organization Behavior, Case Studies

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.

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 - Next Page>>


1] In an article dated April 23, 2002.

2] The major portion of the compensation included the profits earned by exercising stock options.

 

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