Should Government Introduce Cap on Ceo Salaries and Bonuses

According to an Associate Press Analysis, the median cash payout of salaries and bonuses for CEO is 2,4 million (2008). As this is 48 times greater than an average wage. Should government introduce pay caps?

The limiting of executive salaries using capping systems has emerged as one of the latest global governance initiatives (Garner & Kim, 2010); therefore, academic studies about this topic have increased considerably (Murphy, 1990 cited in Frydman, 2008). This increase is mainly due to international scandals, such as: One. Tel in Australia, Parmalat and Vicendi in Europe, Enron, WorldCom and the recent financial crisis in U.S. Hill (2006) points out that these scandals were associated with the large performance–based salaries and bonuses, paid to top executives. Furthermore, the last global financial crisis of 2009, caused by the US banks, which affected the economies around the world, created many frustrations for North American taxpayers; they saw their money being used by the government to save financial institutions from bankruptcy, as well as to pay high wages to CEOs. In addition, some researchers state that wages are irrationally high because there may be a coactive relationship between the CEO and the board of directors (Kessler, Mohan, Muth, Pastor D Oliveira, & Ross, 2008). Nevertheless, this essay will argue that there are three mayor reasons why government should not introduce caps on the salaries and bonuses of CEOs: CEOs salaries are determined by market forces, CEOs salaries are not the cause of unequal income distribution, and there are no reliable mechanisms to control salary caps.

Firstly, evidence suggests that typical CEO salaries are largely driven by market forces. Jensen & Murphy (2010) argue that the level of pay determines the quality of managers that a company can hire because more highly talented individuals normally command higher wages. CEOs have different levels of managerial talent and firms compete to attract the best (Gabaix & Landier, 2008), thus the increase in CEO salaries is an equilibrium reaction to the rise in the market value of these firms. Increased payments to CEOs are due to the large growth of companies over time, where for example, in the typical American public company, market value rose by a factor of four to seven times, between 1980 to 2003 (Kaplan & Rauh, 2009).

Recent research argues that higher-powered incentives are needed when markets are more competitive. In periods of globalization, technological innovation, and deregulation, the complexity of the responsibilities of top management increases, thereby increasing the skills and experience needed to succeed in senior roles, and the value top personnel can deliver. Therefore, higher performance pay is required to attract and provide incentives to these higher value managers, and if non-cash incentives (e.g. options) are offered instead of cash, then packages must be increased even