How much should your ceo earn?

Management guru Peter Drucker had suggested that if the pay disparity between an average ceo and an average employee increases 20:1 ratio, there is bound to be employee resentment and decreased morale in the organization. But it is seen that in USA, the average ratio of salaries between the ceo and an unskilled worker is around 300:1.

In the era of Say on Pay where shareholders can vote on salary decisions of board members, it might seem that the shareholders are real stakeholders in their ceo’s salary. But the truth is that it will take some more time before say on pay and stake holder interests become completely visible on such decisions. For now, let us try to dissect the salary figure. When we say a chief earns 300 times more, are we trying to tell that he makes 300 times more profit or puts in 300 times more effort , or is it more about adding value, or is it a motivational figure so that all employees work harder and try to get into the top rung of the ladder? Whatever it is, wouldn’t such a huge disparity create a lot of inequity both within the organization and the society in general? Various studies have shown that increase in ceo salaries needn’t necessarily translate to increase in the performance. This is unlike an average employee for whom salary is seen as a major motivator.

So,what are the feasible solutions to this state of confusion ? Firstly, on a scale, there should be some sync between top level salaries of peer companies. Such peer benchmarking is hugely employed in the US where shareholders get to use such reviews which aids in deciding the votes on salary decisions. Second, the ratio of the salary of the ceo and the one who is directly below the top position in the pyramid shouldn’t be as more than three. The comparison should be made with other executive managers rather than the least paid worker and there should be a committee which splits up the salary into the performance part and a fixed part just like other employees and reviewing it on a periodic basis through internal and external benchmarking.