Fair Pay Fair Play summary

Imagine you’re an account manager on a team of three employees. Even though you all work equally diligently, you find out that your two colleagues are paid a higher salary than you.

Such a situation would be unfair, right?

Unfair pretty much explains the state of executive compensation today. Executives are routinely overcompensated, and compensation plans seldom take into account CEO performance.

Consider that John Chambers, the CEO of Cisco Systems – one of the world’s biggest telecom companies – each year “earned,” in addition to his $300,000 salary, from $5 million to $6 million worth of stock options and a $400,000 bonus.

That’s way too much money – no executive can perform that well! But performance isn’t all a compensation plan should consider to be fair. It also should reflect what other CEOs earn in the same market.

Industry standards vary, and each industry is subject to different external forces. For instance, the energy sector is sensitive to oil prices, while the tech industry reacts to inventory levels in the IT supply chain.

Such external factors are important, as they can affect the overall performance of any executive. That’s why it’s important for CEO pay to reflect the compensation of peers in the same industry.

This way, if an oil crisis drives prices through the roof, the CEO of an energy firm won’t be blamed for the company’s poor returns. Even if the CEO’s performance was above reproach, it wouldn’t make sense to base the executive’s compensation on that of technology CEOs working in a booming market.