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Why CEOs need to stop earning outrageous sums of cash

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The public is getting more and more disgusted with CEOs, who are increasingly pocketing fat pay cheques despite underperforming.

Just last April, Hong Kongners handed MTR CEO Jay Walder HK$15.7 million for leaving behind a delayed and over-budgeted high speed railway project.

The latest high profile CEO being questioned what he is really worth, is HSBC’s Stuart Gulliver.

Shareholders questioned ahead of the bank’s annual general meeting about the CEO’s variable pay that exceeded 200% of his salary after he got the bank into huge fines for regulatory breaches.

While it is common sense that CEO pay should be structured based on how well the firm does, it turns out salary packages of these bosses and the performance of the companies they run have little in common.

A report by Hay Group- “Hong Kong CEOs and How They are Paid” in 2014, covering the annual reports from 233 listed companies,  highlighted the vast disparity in pay between CEOs and the public.

It found local CEOs pocketed on average  HK$16.78 million in 2014 or roughly 60 times that of a regular household.

“Changes in total CEO remuneration value is not always obviously linked to performance. Results are mixed when we examine the relationship between company profit increases and CEO total remuneration increases,” said Thomas Higgins, general manager of Hay Group Hong Kong, publisher of the report.

To make things worst, CEOs are getting richer as the general public gets poorer.

ALSO READ: The 25 most overpaid CEOs

Analysis by the independent High Pay Centre shows FTSE 100 CEOs are paid an average of almost £5m a year, 183 times the average UK employee, up from 160 times just six years ago.

Why has CEO pay risen in such an astounding fashion?

The Guardian reports that system for setting CEO pay is far from competitive.  Jobs are not advertised. Board pay is negotiated behind closed doors by a handful of board members.  There is nobody in the room no employees and shareholders, representing those with an interest in pay restraint.  As a result, pay continues to sky-rocket.

Greed in the boardroom means gross unfairness for the rest of the workforce and is bad for business.  CEO remuneration is heavily skewed towards short-term share options, which encourages CEOs to push up the short-term share price by inflating profits in the short run, dampening long-term investment and growth.

The consequences?  Time and again, scandals of corporations avoiding tax and misleading consumers broke out.

In both the US and the UK, there has been significant reform of corporate governance like getting companies to disclose the pay ratio of the CEO and their median worker; putting employee representatives on remuneration committees to ensure there is at least someone in the room with an interest in pay restraint.

These are steps in the right direction and since the global financial crisis, shareholders and regulators want to see clear links between organisation performance and executive reward but with no changes to the board culture, nothing much can be done.

Image: Shutterstock

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