Executive Compensation and Compensation Structures
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.
Respond by Day 5 to two or more of your colleagues’ postings in one or more of the following ways:
• Ask a probing question.
• Share an insight from having read your colleagues’ postings.
• Offer and support an opinion.
• Validate an idea with your own experience.
• Make a suggestion.
• Expand on your colleagues’ postings
Classmate 1 (BreAnna):
The term Compensation refers to financial returns and tangible benefits that employees receive as a part of an employment relationship. Employee Compensation often plays a significant role in different areas of the workplace. Every job requires different skills and requirements. Working for a small community bank, I see a lot of different people come and go; this has a lot to do with pay. I personally don’t believe the CEO of the bank should be making millions of dollars.
The distance between the highest paid and lowest paid employees should be at least 50 to1. For example, the first bank I worked for was Bank of American. The current CEO is making millions a year while managers are making 45,000 a year, personal bankers 33,627 and tellers 12.00 an hour. Many CEOs receive stock, grants, and perks as part of their compensation and the employees only receive incentives when they hit a target or goal. The employees are the human capital of the company, and the CEOs are the leaders, without the human capital you cannot run a successful company. A smaller gap is necessary if you want to keep employees around and motivate your organization. When money is less of a concern, workers can more fully focus on their work. They will have fewer worries about staying financially afloat at home or about being unfairly compensated. That can make them more present in the office, leading a better quality of work.
Benefits and Drawbacks
Employees drive your business forward, so if their income impacts their stability in some way, that is going to change their productivity. That means their salary is directly linked to the company’s success. Higher wages or pay for employees means a better company environment. The only drawback I can see from this compensation structure is CEOs stepping down or leaving the company. If a person is all about money, then sometimes its best they leave. There is no “I” in team. A CEO should want their employees succeeding in life not struggling. “
Classmate 2 (Erin):
“J.P. Morgan’s estimation of salary between an organizations chief executive officer (CEO) and its lowest paid employee is accurate. Assuming salary includes just base pay, I would recommend that CEO’s have additional long-term incentive plans. This not only helps retain key employees but will also act as incentive for them to continue to add value to the business.
The issue with many businesses is that they view the people at the top as indispensable while the people at the bottom, who tend to do most of the work, are viewed as replaceable, and the companies tend to compensate accordingly. Having CEO’s salary be 20 times the salary of its lowest paid employee not only keeps the CEO’s pay within industry range so that they’ll stay with the company but will also make the other employees feel valued. Assuming the lowest paid employee is paid minimum wage, they would make around $23k a year. Thus, a CEO would make around $460k if making 20 times the salary of its lowest paid employee. Looking at a company like Laureate Education, the industry range is between $200k and $700k (Bloomberg, 2019).
There is always the risk of CEO’s shopping around and, perhaps, finding a company that over-compensates their higher-level executives. However, this compensation philosophy should account for both market pricing and internal equity to ensure employees at all levels feel they are compensated fairly for the work they do.”