Should CEO pay have greater variable and less fixed component?

The last few years have witnessed unprecedented volatility across industries and stock markets. No wonder that organisations are not immune from it either.

The last few years have witnessed unprecedented volatility across industries and stock markets. No wonder that organisations are not immune from it either. A common thread to this downfall has been stakeholders’ growing impatience with the CEO and the question of the high fixed pay component. The focus is shifting towards a pay structure where the element of higher variable pay is gaining acceptance. The logic alluded is that when CEOs act as a catalyst to drive shareholders’ value they can also claim a larger part of the pie. However, if things don’t work as expected, they are also expected to lower their share of the earning. The element of variable pay will drive more responsible behaviour from the CEO when doing business as this would have a direct implication on their personal wealth.

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(VD Wadhwa, MD &CEO, Timex Group India

Much has been spoken about CEO compensation in recent times, and two issues have been at the forefront — the appropriate level of CEO compensation and its structure. Linking pay to performance is generally a positive step since it creates the right incentives for individuals. While there are many ways to do this — bonus, ESOPs, stock grants to name a few — it is important to balance long-term orientation with short-term rewards.

An example would be CEO compensation disproportionately linked with stock price or stock options, which are driven by analyst expectations, which can negatively impact a company’s growth in the long term. Furthermore, very high bonuses can lead to distortions, as seen in the banking sector.