Question

J.P. Morgan, the iconic financier, is reputed to have estimated the proper compensation for an organization's chief executive officer to be 20 times the salary of its lowest paid employee. Today, however, the average CEO is compensated at 200 times the rate of the lowest paid employee. In your estimation, what should the distance between highest- and lowest-paid actually be? Explain your reasoning for either a larger or smaller gap between employee and board member compensation and highlight potential benefits and drawbacks to your chosen compensation structure.

Answer 1

It should somewhere lie between 20 to 200 times, most probably 100 times as CEO no doubt can energise and show the right path and leadership this at least this much he deserves. However, it still depends on various factors like industry standards, intellectual level required from CEO, qualification level etc so no single figure can be given what is said above is just to give a general idea.

As per my reasoning there should be smaller gap between employee and board member compensation.

Some of the potential benefits of the reasoning given by me are :-

1) lower level motivates employees that a top position is quite achievable to them and thus they will strive forward to take more opportunities.

2) It creates an atmosphere of trust among employees and board members, employees will feel that board members cares for each and every employee.

3) It will also increase trust of stockholders on board members as they will feel that their money is not wasted in giving exaggerated salaries to board members

4) It will increase the level of profile with the company so that they can plan for future growth and expansion with that saved money which will lead to social good as a whole.

5) It will keep the company away from regulators as the regulators will be ensured that thencompany have good governance practices.

Drawbacks of keeping the gap between the salary of employee and board members low are :-

1) It may lead to dissatisfaction among the board members and they may not put their heart and soul for the company.

2) It may develop a careless attitude of employee towards board member as they may think that board members are near to their colleague position only.

3) This may decrease the thrive of employees to do some bigger as they may think that even after doing something big their pay will not be increased to a higher level.