Human resource management practice I also available by michael armstrong

Executive pay levels

Executive  pay  is  out  of  control.  The  High  Pay 

Commission (2011) recorded that in 1999 the aver-

age  annual  pay  of  chief  executives  in  FTSE  100 

companies  was  £1,234,983  compared  with  the  

average annual employee pay of £17,803 – a multiple 

of  69. Ten  years  later  in  2009  the  average  pay  of 

chief executives was £3,747,000 compared with the 

average pay for employees of £25,816 – a multiple 

of 145. It is even worse in the United States where 

in  1965  CEOs  earned  on  average  about  twenty 

times as much as their typical employee. They now 

earn about two hundred and seventy times as much 

(Surowiecki, 2013).

The High Pay Commission found evidence that 

excessive high pay damages companies, is bad for 

our economy and has negative impacts on society as 

a whole. At its worst, excessive high pay bears little 

relation to company success and is rewarding fail-

ure. The commission established that between 1998 

and 2009 chief executive remuneration quadrupled 

while share prices have declined. The remuneration 

of chief executives of FTSE 100 companies rose by 

6.7 per cent per year, while earnings per share fell 

by 1 per cent per year over the same period.

It has been established by research (Conyon and 

Leech, 1994; Gomez-Mejia and Balkin, 1992; Gregg 

et al 1993) that there is no evidence that the huge 

increases in pay have resulted in improved company 

performance.

Why has executive pay grown so much?

The reasons for the growth in executive rewards 

as explained by Dymond and Murlis (2009) are:

 

●

Agency theory: shareholders must structure 

the CEO’s pay arrangements to reward 

behaviours that increase shareholder wealth 

– this is the most important reason. Agency 

theory indicates that it is desirable to operate 

a system of incentives for the agents 

(directors or managers) of the principles 

(owners) to motivate and reward acceptable 

behaviour.

 

●

Tournament theory: the high rewards 

received by CEOs have little to do with  

what they deserve. Rather, the main purpose 

of such rewards is to send signals to senior 

managers to motivate them to compete for 

the number one spot. Tournament theory 

states that the highest prizes (pay) of all are 

given to the person who wins the tournament 

by getting the top job.

 

●

The changing nature of companies and the 

increasing demands made on chief executives.

 

●

Star culture: the creation of the celebrity CEO.

 

●

The talent shortage.

 

●

Pay disclosure in annual reports leading to 

demands from CEOs to achieve parity.

 

●

Peer group analysis – as Elson and Ferrere 

(2012: 108) observed: ‘Boards typically 

gravitate in fixing compensation to a set of 

arbitrary targets – ie, the 50th, 75th, and 

90th percentiles of peer group pay. A blind 

reliance on these pay targets has resulted in  

a mathematically based upward pay spiral. 

This dynamic is popularly referred to as the 

‘Lake Wobegon’ effect. [A phrase from the 

Garrison Keeler book Lake Wobegon Days 

referring to a situation in which all or nearly 

all of a group claim to be above average].