In the News

Executive pay: how much is too much?

Penny Brooks

3rd November 2017

How can you value the contribution that the Chief Executive makes to a business? And should the amount that she or he is paid be directly related to that contribution? And if so, how?

As Kenneth Chenault announces his retirement from American Express next year, it is reported that his pay in the 17 years that he has been in charge amounts to $370m in shares and cash, an average of $22m a year.

This is a huge amount, but as the FT reports, the average S&P 500 CEO earned more than $10m in 2016, and American Express's market value is over $800bn, so perhaps he is worth it. If the shareholders are happy, then perhaps he is worth the money to them.

On the other hand, while American Express shares have outperformed the financial sector as a whole over the last 17 years, they have badly underperformed those of the credit card networks MasterCard and Visa.

The outcome of the FT's consideration of the issue is that incentives are important, and should be based on long-run value creation for a business, not short-term profit targets. But that they should retain a sense of proportion and fairness - and perhaps there is such a thing as 'too much'.

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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