Question

Many argue that CEOs of major public corporations receive exorbitant salaries. For example, Mr. Robert Iger, ex-CEO of Disney World received remuneration in excess of $ 35 million per year. Many others receive annual salaries and performance based bonuses that also include stock options. Drawing on agency theory, what is your opinion on this trend? Is it justifiable? Why or why not? What would an ideal formula be in terms of executive compensation for public firm CEOs?

Answer 1

CEO or Chief Executive Officer is not only associated with the executive task but has a more vital and wider role to play in any organization. They have to perform multi dimensional work ranging from making major corporate decisions, managing the overall operations and resources of a company, acting as the main point of communication between the board of directors and corporate operations and being the public face of the company.

It is also noted that the remuneration or the pay scale is more than 300 times of what a normal worker in the organization gets. The typical CEO of a top American corporation—from the 350 largest such companies—now makes about $18.9 million a year.

Now a days merely knowing how to run a company isn't the task of a CEO, he needs to take risk, understand the market, promote research and development, have a good knowledge of share market and its structure. He also needs to make proper strategies to deal with rival firms and launch of new products and services. He is the one who is held accountable for the downfall of any firm. He acts as the backbone to keep the business running smoothly.

Talking about Mr. Robert Iger, ex-CEO of Disney World who received remuneration in excess of $ 35 million per year, it can be clearly noted that his work isn't only related to choose the proper scripts for the movies, but also have a proper investment in the vfx and animation work. A story or script can be easy to get but portray the same via animation becomes difficult. It becomes a very difficult task to make an animation that would be widely appreciated by the audience. Moreover the movie requires heavy investment and a lot of cost is incurred, so a loss may be very difficult to digest. And for taking such risks, CEO deserves such remuneration. After all being CEO is not something easy. Other work includes motivating employees, serving as an internal role model, helping to define and extend a corporate culture, understanding the internal accounting, and presenting budgets and business plans to the board.

As a general rule, base salary accounts for just 20 percent of a CEO's pay. The other 80 percent comes from performance-based pay. Deciding the pay lies in the hands of board of directors which have better links with the CEO.

The firms paying exceptionally high to the CEO earns exceptionally well. So it's all about the money game in the end.

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