The pay disparity between CEOs and senior managers is seen to have a negative impact on the Firm value, according to Professor K.C. John Wei from the HKUST School of Business. Professor Wei noted that in the United States, if CEO pay is much higher relative to the other senior managers, the firm value will be substantially lower. He cited a number of reasons why such disparities existed including entrenchment of the existing CEO and a lack of suitable talent to run the company. Such factors mean companies often need to pay the incumbent CEO a higher wage, relative to other CEOs.
High pay disparities also mean that a company’s cost of capital will be higher. Professor Wei warned, “Companies without a good succession plan will see a higher pay disparity, and less turnover of upper management, as the incumbent CEOs may obstruct effective succession planning.” He recommended that companies should be aware of the status of the CEO and always have proper succession planning, to increase firm value, and decrease potential pay disparities.
Paul Arkwright
Publisher
