There has been a surge in news regarding CEO compensation. Always a topic of intense interest, CEO pay can become especially contentious during periods of economic slowdown or for companies/industries under unique stress. Sometimes, CEOs attract scrutiny upon themselves: The chief executive of an American media giant, criticizing pay demands by striking writers and actors, drew intense backlash when it was revealed that his annual pay tops $27 million.  

Questions about CEO compensation are not limited to specific companies or industries. A recent report noted that the median pay of CEOs at S&P 500 companies was about $14.5 million in 2022. By comparison, the average U.S. worker earned about $56,000 that same year.

And there lies the heart of the debate: How much is a CEO worth? I certainly don’t have the answer, and there are a multitude of factors to consider, but it is worth noting that CEOs today are paid a lot more than they used to be.

CEO compensation experienced a remarkable surge in the past four decades. In 1978, a typical CEO earned about 31 times their average worker’s pay, according to the Economic Policy Institute. Fast forward to 2020, and CEO earnings soared to 346 times that of the average worker.

As an internal auditor, I recoil from subjective terms like “excessive” or “exorbitant.” But, as a citizen, consumer and even bystander, I scratch my head when I see the widening gap in executive-workforce pay.

In the end, it’s the board of directors who decide how much a CEO is worth. I am sure they are often guided by the CEO’s performance, company goals and market rates for chief executives in their industry. But do they contemplate the risk that pay might be seen as “excessive” by employees, shareholders, regulators, and the public? Even if boards don’t, the rest of us should.

To explore the potential fallout, here are seven CEO pay risks that I believe should be on each organization’s radar:

1. Shareholder Dissatisfaction. Overcompensation can lead to shareholder dissent, especially if the CEO’s performance doesn’t appear to justify the high pay. This can result in a loss of investor confidence.
2. Financial Strain. High CEO compensation can stress a company’s financial resources, affecting its profitability and potential for growth.
3. Negative Public Perception. We know the issue of overpaid CEOs can attract negative publicity. More important, it can seriously damage a company’s reputation and brand.
4. Employee Discontent. When a CEO is making significantly more than an organization’s overall workforce, it can foster discontent and low morale.
5. Short-term Focus. An overpaid CEO might prioritize short-term gains to boost their own compensation, potentially neglecting long-term goals and strategies that are essential for sustainable growth.
6. Diminished Motivation. If a CEO is excessively compensated, they might lose the drive to perform at their best, potentially leading to a decline in productivity and innovation.
7. Lack of Accountability: With excessive pay, a CEO might face less pressure or be less inclined to answer for their decisions and actions, leading to potential mismanagement or risky behavior.

The debate over executive compensation isn’t limited to the CEO. Pay rates for the entire C-suite can be a lightning rod. Shareholders of media giant Netflix recently cast a nonbinding vote rejecting the company’s executive pay proposals.

I share my thoughts on CEO pay not to suggest that internal auditors or risk managers should jump into the debate. It’s not our place to question the compensation levels of our bosses. However, it is our role to consider this issue when assessing our organization’s overall risk portfolio.

What are your thoughts? Please share with me on LinkedIn or Twitter, or drop me an email at blogs@richardchambers.com.