How Much More Money Should a Manager Make Than Their Employees?

[one...two...tree 2,762]

Top managers in some business segments who receive an annual compensation of several hundred million dollars earn 10,000 times more than their lowest paid employees. Public perception is that such differences in pay are neither ethical nor economically justified. Supporting such a perception is the fact that such ultra-high compensation levels are fairly recent. In 2010, average big-company CEO pay was 400 times the pay of the average employee, up 10 times from 42-to-1 in 1980. Where opinions diverge is over the cause of such high pay, the appropriate levels of managers' pay and the means of reducing pay to such levels.

Market Factors

Board members who determine the pay of top executives maintain that executive salaries are set in a free market operating on the basis of scarcity of competent managers. They insist that they evaluate manager performance compared to managers at competitors and set compensation as a result. Critics say that this is a failed market, characterized by a lack of transparency that drives up compensation. The arguments of critics gained in popularity during the 2008 recession when executive compensation remained high, even at companies that suffered substantial losses. Criticism of high compensation did not lead to a clear plan for reductions nor to an indication of what constitutes an appropriate level.

Value of Contribution

From an analytical point of view, the compensation of managers should reflect the value of their contribution to the long term well-being of the company. Such a value is difficult to measure but, even if a manager contributes twice as much value as employees reporting directly to him, the top executives would receive a reasonable compensation, depending on the size of the company. For a company with four organizational levels, for example department manager, division manager, vice president and president, the president would receive compensation of 2 x 2 x 2 x 2 = 16 times that of the employees reporting to the department manager.

Ethics

An ethical approach to the question of executive compensation points to a breakdown in ethical behavior. An ethical manager would put himself in the place of his employees and ask himself what compensation he, as one of his employees, would find appropriate. Employees expect managers to be paid more and top executives to be paid several times their own salary but levels of over 100 are unreasonable from an ethical point of view. Unethical behavior leads to a breakdown in morale. An employee might accept reporting to a manager earning twice as much but not more.

Appropriate Compensation Levels

Finding an appropriate level of compensation for managers is influenced by the method proposed for setting such compensation. Many company board members maintain that compensation levels will drop with an imposition of increased transparency. Others doubt whether reasonable levels of compensation will be achieved without government regulation. Companies that emphasize ethics and apply such thinking to compensation have worked with comparatively low limits on executive compensation. Influential management consultant Peter Drucker maintained that CEO pay should be no more than 20 to 25 times average worker salaries. Executive compensation higher than this leads to low worker loyalty and poor motivation. While the exact levels depend on the size and nature of the company, appropriate manager compensation levels seem to be an order of magnitude lower than they were in 2010.

http://smallbusiness.chron.com/much-money-should-manager-make-employees-22082.html

[Obama 2012 1,714]

don't like executive compensation at a company? Then don't work there.

[scandal 951]

Value of Contribution

From an analytical point of view, the compensation of managers should reflect the value of their contribution to the long term well-being of the company. Such a value is difficult to measure but, even if a manager contributes twice as much value as employees reporting directly to him, the top executives would receive a reasonable compensation, depending on the size of the company. For a company with four organizational levels, for example department manager, division manager, vice president and president, the president would receive compensation of 2 x 2 x 2 x 2 = 16 times that of the employees reporting to the department manager.

Not following the logic there at all. "..even if a manager contributes twice as much value as employees reporting directly to him...". Rubbish. There are many executives who demonstrably contribute far more than twice what their subordinates do to the bottom line. Take the very famous case of Steve Jobs . He came back to a floundering and nearly bankrupt Apple in 1997 and turned it around. What was that worth to Apple shareholders? Double the rest of the staff? Quadruple? 8X? 16X? What's your multiple. A lot more than two.

Ethics

An ethical approach to the question of executive compensation points to a breakdown in ethical behavior. An ethical manager would put himself in the place of his employees and ask himself what compensation he, as one of his employees, would find appropriate. Employees expect managers to be paid more and top executives to be paid several times their own salary but levels of over 100 are unreasonable from an ethical point of view. Unethical behavior leads to a breakdown in morale. An employee might accept reporting to a manager earning twice as much but not more.

Levels of over 100 are unreasonable? Why? What's magical about 100? Why not 40? Or 400? Or 3.1415?

The fact is, we live in a free enterprise marketplace where goods and services, including the labor of executives, should be negotiated at prices the market will bear. Supply and demand. There is no "ethics" to it.

What IS lacking in executive compensation is a level playing field. There are far too many cases of cozy boards of directors who give sweet compensation packages and bonuses and golden parachutes and golden handcuffs to incompetent and useless managers. THAT should stop. But setting some "ethical" ceiling of compensation? No way, that's not the American way.

[luckytxn 2,264]

Well in the coming Socialist paradise that some want very badly compensation for work will cease. We will get what the higher ups determine we need so stop worrying now.

[Rebecca Jo 1,962]

Well in the coming Socialist paradise that some want very badly compensation for work will cease. We will get what the higher ups determine we need so stop worrying now.

You can't demonize every social issue with that mindset. I know you think you can, but it really makes you look silly.

[Rebecca Jo 1,962]

Not following the logic there at all. "..even if a manager contributes twice as much value as employees reporting directly to him...". Rubbish. There are many executives who demonstrably contribute far more than twice what their subordinates do to the bottom line. Take the very famous case of Steve Jobs . He came back to a floundering and nearly bankrupt Apple in 1997 and turned it around. What was that worth to Apple shareholders? Double the rest of the staff? Quadruple? 8X? 16X? What's your multiple. A lot more than two.

Levels of over 100 are unreasonable? Why? What's magical about 100? Why not 40? Or 400? Or 3.1415?

The fact is, we live in a free enterprise marketplace where goods and services, including the labor of executives, should be negotiated at prices the market will bear. Supply and demand. There is no "ethics" to it.

What IS lacking in executive compensation is a level playing field. There are far too many cases of cozy boards of directors who give sweet compensation packages and bonuses and golden parachutes and golden handcuffs to incompetent and useless managers. THAT should stop. But setting some "ethical" ceiling of compensation? No way, that's not the American way.

Jobs was one in a million.

IMO the problem with over-compensation at the top is it bleeds the bottom dry of more workers.

I hardly every hear any more of companies where the worker bees aren't doing the job of at least 1.5 people. Personally, I can only keep my head above water where I work if I put in about 50 hours a week. Trust me, that means just above water. But they frown on overtime, so I'm always behind.

It costs a lot of money to get a good executive. But where is the point that the compensation is hurting productivity at the bottom? I'm pretty sure a lot of companies don't look at it that way.

[Danno 1,228]

As with most things, if you let the Gov. have control over such areas of private business....

in the end it will bet the "little guys"will be getting hurt the most.

Which of course will be cause for -more control.

[Gary and Alla 3,694]

As much as their performance demands, the stock holders approve and the market will bear.

One thing is for sure, the government should not decide.

[mawilson 2,133]

Jobs was one in a million.

That you know of. How many CEOs can you name?

Who's the current CEO of Verizon? Target Corporation? Walgreens?

[SMR 368]

As much as their performance demands, the stock holders approve and the market will bear.

One thing is for sure, the government should not decide.

I agree that the government should not decide. And I don't think that the ratio of a C-level salary to a entry level salary is really relevant. However, when dealing with issues of compensation of C-level executives in large corporations, I think it's naive to say that these things are determined by market forces and supply and demand. The compensation packages for high level employees are determined by the board of directors which is typically populated by high level employees from other large corporations. That is, (as a hypothetical example) the compensation package for the CEO of target is influenced by the CEO of GE because he is on the board of directors at Target. The compensation package of the CEO of GE is influenced by the CEO of Citibank, whose compensation package is, in turn, written by the CEO of Target.

Of course, the loops are not typically that small or obvious. But the top level employees of large corporations are in a sort of good old boys club which pushes compensation up. (For a real world example, look at ####### Grasso and Ken Langone). Even in the case where a compensation committee or consulting firm is used, those firms a) base their answers on compensation benchmarks in other companies that are equally inflated and b) are incentivized to give high answers since the same people who pick the firm also have their salaries determined by those firms. The whole thing is a gigantic conflict of interest or, in other words, corrupt.

While the market does many things well, there are certain situations where the market just breaks down. The top executives of large corporations don't have crystal balls. And this is one area where past success doesn't necessarily indicate future success. It doesn't make good market sense to pay someone $100 million to do a job when you are unsure of his success if someone else with marginally similar qualifications will do it for $500k. And that's the reality. The top executives at big corporations have impressive credentials but not to the extent that places them in an exclusive group. There are people with similar credentials making much less that just don't have the connections to the Good old boys club.

[slim 1,530]

Private business is nobody else's business. So you don't like what someone gets paid? Big freakin deal. Go start your own company and make something happen.

[SMR 368]

Private business is nobody else's business. So you don't like what someone gets paid? Big freakin deal. Go start your own company and make something happen.

I agree. But publicly traded businesses aren't exactly private businesses. That's the problem, in my opinion. If we were talking about the salary that the top manager of a sole proprietorship or partnership that is paid by the proprietor or partners, I would have no problem.

But when talking about a publicly traded company, we're talking about the allocation of funds that belong to a large group of people, many of whom are not particularly sophisticated and most of whom have little knowledge of the inner workings and dealings of the company that they are invested in. When company executives and members of a board of directors use their influence to pay out to friends or in virtual quid pro quo schemes, that is tantamount of fraud.

The problem is that in order for free market logic to work the agent acting on behalf of the company has to be incentivized to act to the benefit of the company and that often simply isn't the case under the current structure of corporate governance.

[scandal 951]

I agree. But publicly traded businesses aren't exactly private businesses. That's the problem, in my opinion. If we were talking about the salary that the top manager of a sole proprietorship or partnership that is paid by the proprietor or partners, I would have no problem.

But when talking about a publicly traded company, we're talking about the allocation of funds that belong to a large group of people, many of whom are not particularly sophisticated and most of whom have little knowledge of the inner workings and dealings of the company that they are invested in. When company executives and members of a board of directors use their influence to pay out to friends or in virtual quid pro quo schemes, that is tantamount of fraud.

The problem is that in order for free market logic to work the agent acting on behalf of the company has to be incentivized to act to the benefit of the company and that often simply isn't the case under the current structure of corporate governance.

Right on. +1.

The most prominent person highlighting these issues in recent years has been Nell Minow, Editor of the Corporate Library. She's championed the cause of responsible corporate governance and pointed out the incestuousness between Boards and Executives.

Nell Minow biography

Nell Minow

Editor of The Corporate Library

Nell Minow is Editor of The Corporate Library, an independent research firm that rates boards of directors of public companies and compiles research, study and critical thinking about corporate governance. Its board effectiveness rating allows investors and analysts to evaluate governance as an element of investment risk. Special reports and studies include reports on CEO employment contracts, related transactions, and CEO compensation. The Corporate Library has an extensive database of over 3000 public companies and over 90,000 directors and provides data and board ratings to search firms, D&O liability insurers, law firms, accounting firms, journalists, academics, investors, and corporations.

[Rebecca Jo 1,962]

That you know of. How many CEOs can you name?

Who's the current CEO of Verizon? Target Corporation? Walgreens?

Jobs was an inventor as well as an executive. Plus he started the company he was getting rich off of. Not many high-paid executives can say that. Some but not many.

Edited October 10, 2011 by Rebecca Jo

[Captain Oates 911]

Executives build a pyramid where the person under them is earning as much as possible - because that way, it justifies the guy at the top (them), getting more.

When I was a Director, I paid my chief accountants as much as I could for just that reason and it worked just fine

Of course they were only a small number of the total workforce, the rest of whom are subject to 'the going rate'

This is the mechanism by which the top people get more and more and this is the mechanism by which stork's nests get to be 8 feet high - pack more and more underneath you so you get higher and higher

Every executive who hands out pay raises knows this mechanism instinctively and doesn't need to be told

Its nice

Edited October 11, 2011 by Austin Devon