How much is too much?

The subject of remuneration continues to vex all levels of business. Pay peanuts and get monkeys? Or should there be a cap on CEO payments?

 

 

These questions have resurfaced following news that Google CEO, Sundar Pichai, received US$199.7 million (AU$265.3 million) in wages and shares in 2016. The share component is to be mature in 2019 on the condition he remains with the company.

Regardless, that figure is a staggering 4,000 times the average wage of Americans. The US Social Security Administration states the average wage for 2015 (last data available) was $48,098.63.

 

 

According to the Economic Policy Institute, in 1978 the average CEO pay was 20 times the average wage. This peaked in 2001 at a ratio of 376:1 CEO wage inflation from 1978 – 2013 was 997%.

So, is the this change the result of a competitive market on a global scale, or simply because there are no checks and balances to place limits the perceived value of what one person can achieve in a working day?

 

 

Certainly, great CEOs can change the culture of a company and implement the requirements of the board to dramatically improve the fortunes of a company.

Volumes have been written about Henry Ford, Steve Jobs, and Richard Branson over the decades due to their capacity to change not only the success of their business, but to change the very nature of business itself. However, the main difference is that those guys (largely) owned their business.

 

 

From the point of view of Google’s revenues, this is money well spent. Pichai has strived to improve Google’s place in cloud-based services – often seen as the future of computing – and lifted advertising revenues by over $3 billion for the financial year.

 

 

That’s significant expansive for parent company Alphabet who is fighting battles on multiple fronts from Facebook, Apple and Uber. The reality is that advertising makes up the overwhelming majority of Alphabet’s revenue, therefore providing a warchest with which to stake its claim in other emerging fields.

 

Alphabet's self-driving car project is now called Waymo

 

The real question for companies paying super-wages to their CEOs is whether the strategy is in keeping with the social licence to operate that is granted by their shareholders and customers. For the tech-world, perhaps that is not so much of a concern, but in banking, pharmaceutical, and health care need to be more circumspect.

 

Ahmed Fahour

 

A great example is former Australia Post CEO, Ahmed Fahour, who resigned partly because of his (comparatively meagre) AU$5.6 million salary. Largely funded by the Australian tax-payer, this was perceived as too much despite the fact Mr Fahour had successfully restructured a company with a workforce of 10,000 that was previously on the brink of collapse.

Aristotle believed that the richest person should have only five times as much money as the poorest person. If you don’t believe me, just Google it.