Everyone agrees that something must be done about executive pay. One of the major contentious issues emerging out of the financial crisis is the way that senior executives and manager, especially in the financial industries, are remunerated. These days, executive pay often seems to be unrelated to the company’s performance, and in many industries it seems out of proportion to the value the company adds to society.

A century ago, executives earned anywhere between 3 and 20 times what the average worker in their factories earned. According to research by global human capital and risk management firm, Towers Perrin (now Towers Watson), in 1965, CEO pay was 26 times that of their average worker. This is looking at the total packages, rather than base salary. By 1980, this had risen to 40 times. In 1989, it was 72 times. In 1999 it had risen to 310 times, and by 2004 CEO pay had reached 500 times that of the average worker in their firm. In some companies by 2010, this had jumped to over 1,000 times. (In pure salary terms, in 2008, US executives took home 319 times more than the average worker, according to a report linked to the Guardian’s salary survey).

For example, the most highly paid chief executive in the UK last year was Bart Becht of Reckitt Benckiser who received £36.8m in pay, bonuses, perks and share incentive schemes (all well deserved, as his company showed strong growth during the downturn). But, that’s 1,374 times more than that of the average lowest paid full-time employee in the company that he leads.

Despite the current recession which has led to FTSE 100 companies losing almost a third of their value, executives at Britain’s top companies saw their basic salaries rise by 10% in 2009. The UK Guardian’s annual survey of boardroom pay reveals that the average chief executive of a FTSE 100 company in 2009, earns a pay package of about £ 2 million. Nearly a quarter of FTSE chief executives received total pay packages in excess of £5m. To put it another way, by 2000 a CEO earned more in one workday (there are 260 in a year) than what the average worker earned in 52 weeks. By 2010, they were doing this in one morning’s work.

So, here is the radical proposal. (I curse those that think my original thoughts before me. In doing research for this article, I discovered that none other than Peter Drucker had suggested this many years ago):

CEO salaries should be capped at 20 times that of the lowest paid workers in their companies.

There are many benefits to this approach, including the likely rising of the wages of the lowest workers, and an increase in motivation and engagement within most companies. Executive pay is out of control at the moment, and the arguments in favour of these excessive payments don’t actually ring true.

For more reading on this emotive issue, see:

An excellent PDF article is available from the Institute for Policy Studies – it deals with eight myths around CEO and executive pay. A great read!

A similar article is available from the CEO.com website – read it here.