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Peter Drucker said no executive should make more than 20 times as much as a company worker.

He was speaking in 1982. He was spot on then and his point stands today.

I’d phrase things differently:

No executive is worth 20 times the pay of ordinary workers.

So why are companies willing to pay some executives many hundreds of times the pay of ordinary workers?

It isn’t because they deliver shareholder value, there’s almost no link between company performance and executive pay.

John Mackey at the Harvard Business Review says:

If CEO compensation is primarily driven by competitive markets, then how come the ratio was only 24 to 1 back in 1965 and is about 300 to 1 today? Surely the market demand for good CEOs is no greater today than it was 45 years ago or 25 years ago. Are CEOs today really worth that much more than their comparable peers were worth just a few decades ago?

4 thoughts on “No link between performance and executive pay

  1. Coincidentally I’ve just started reading behavioural economist Dan Ariely’s new book, The Upside of Irrationality and while there’s no apparent upside to paying CEOs crazy salaries, he proves quickly and simply in an experimental setting how paying people huge salaries and bonuses actually acts to reduce their performance. See http://danariely.com/books/

    So it’s not only unjustified, it actually achieves the opposite of the original intent. Bad, very bad.

    • I also saw something recently – although sadly I don’t remember the source – which says senior management have wrested control of large companies away from shareholders. The higher the executive pay, the worse the deal for shareholders.

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