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Why are CEOs paid so much?
CEO remuneration packages are undoubtedly attractive and commensurate with the great symbolic importance attached to the role. They have, however, increasingly drawn the ire of many in recent years as they have continued to rise, sometimes with little in the way of justification from financial results. These packages have evolved over time and, contrary to popular belief, have not continued to rise unabated, although at several of the world’s largest companies the disparity between CEO pay and that of the average worker now exceeds a ratio of 1000:1.
As the face of the company, the CEO is often seen as the single most important factor behind its performance and, just as is the case with share price, this widely-held belief creates a disproportionate effect on top executive pay.
The most obvious example of this phenomenon is the case of Jamie Dimon, Chief Executive of JPMorgan. The perception of him as a charismatic performance driver has led to a discrepancy between his compensation package and the reality of his company’s financial results.
In 2012, the bank suffered a $6.2bn loss on trading activities carried out by a trader known as ‘The London Whale.’ However, the $6bn hole blown in the balance sheet, coupled with public outrage and the fact that this had happened on Dimon’s watch, meant that his total compensation for the year was slashed by almost half to $11.5m. Even though Dimon was in no way directly responsible for the London Whale episode, as CEO, the buck stopped with him.
It was in 2013 however that the legal costs associated with it were incurred. JPMorgan was forced to pay fines totaling $920m to US and UK regulators and the total legal costs incurred by the bank in 2013 are estimated by SNL Financial at $18.6 billion.
All of this translated into a deteriorated financial performance. Net income for the year fell 16%, earnings per share were down 16.3% to $4.35 and revenue was flat at $99.8bn. None of this suggests that a pay rise for Dimon should be imminent, much less justified but, in January 2014, that is exactly what the bank announced.
Dimon’s total compensation package, which was $11.5m in 2012, was increased by 74% to $20m. While his base salary of $1.5m remained unchanged, his bonus entitlement increased from $10m to $18.5m worth of restricted stock. Given the company’s financial performance during 2013, how can such a raise be justified?
In an SEC filing, the bank alluded to “several key factors”, which included JPMorgan’s “sustained long-term performance” and its efforts to put its legal problems behind it. However, the decision to retain and indeed increase the compensation of a man who has presided over one of the costliest legal debacles in corporate history speaks volumes about Dimon and the salaries of CEOs who are deemed to possess intangible qualities.
For a more in depth look at CEO remuneration, as well as an analysis of the CEO role, see our Case Study Cult of the CEO: More than a job title?