The Relationship between the Salary of CEOs and Firm performance

1.0.        Introduction

The debate of the Chief Executive Officers (CEOs) being exorbitantly paid is not new in corporate settings. Stockholders expect the CEOs with high payment packages to perform higher and prove their worth. According to Tariq (2010), the average CEO payment package is approximately 209 times higher than that of a typical United States factory employee. Despite certain nations like Japan and Germany bridging the gap with an approximated difference of about 20 and 25 times respectively, there is still significant disparity differences between the two employee groups. Usually, the salary of the chief executive officer is linked to individual performance and it is argued that their high compensation is justified with their expertise. However, recent developments in corporate settings have shown an exponential increase in the CEO compensation at all pay levels regardless of their performance (Satyavelu, 2012).

The available literature suggests that the high CEO compensation packages are largely based on accounting performance measures (Aduda, 2011). Aduda (2011) further explains that there are some relationships between stock-based compensations and accounting performance measures in various organisations since the available stock awards each year are often based on the organisation s annual accounting performance measures. Furthermore, Steyn (2015) notes that shareholders pay the CEOs higher compensation packages to attract and retain outstanding executives and also to motivate them towards improved organisational performance. Based on literature research, this should increase the stockholder value and in turn contribute to a nation s economy through increased job creation and taxes (Steyn, 2015). However, this justification of the high CEO salaries only diverts public attention from the real issue (Jensen & Murphy, 2010).