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CEO salary: How much is too much?
January 27, 2003 12:08 IST
The global debate over what the right compensation package for CEOs should be acquired an Indian perspective at the World Economic Forum's annual meeting in Davos with the chief mentor of Infosys, N R Narayana Murthy, setting new norms and Michigan University professor C K Prahalad debunking the traditional views on the importance of the CEO.
At a dinner meeting on Friday, Narayana Murthy said the CEO's compensation package should be determined by a combination of criteria, including fairness, transparency and accountability. The CEO's compensation must be disclosed and, if needed, should be voted by shareholders.
Murthy's views, however, ran contrary to those held by most American and European CEOs and experts attending the meeting. It was generally pointed out that the CEO carried a lot of responsibility on his head and should be paid more than others. There was, however, no convincing explanation of why the American CEOs usually are paid more than their European counterparts.
Murthy argued that the manner in which the CEOs were being paid appeared to be perverse incentives and it was time global companies learnt about social legitimacy as well.
Prahalad intervened with his view that the unsustainable increase in the CEO's compensation package had to be viewed as a consequence of market failure. He also noted that the sharp rise in CEO salary could not be delinked from the sharp spurt in the number of mergers and acquisitions that took place in the corporate world.
American executives defended the recent rise in CEO salary on the ground that while an ordinary worker did not lose his job for messing up an assignment, the chief executive had to be sacked if he were responsible for taking a wrong decision. Murthy agreed, but pointed out that as a compensating factor, the CEOs also enjoyed a very attractive severance package.
Prahalad noted that it was wrong to underestimate the importance of an ordinary worker and justify steep increases in the salary of the CEO on the ground that the CEO only added shareholders' value. "General Motors went down the hill because of its inefficient workers and not just because of the CEO", Prahalad said.