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Why has executive pay increased so drastically?

Executive pay has rocketed since the early 1980s as a result of changes in policy, culture and the globalisation effect on the economy.

By Francesca Franco . 25 November 2011

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Francesca Franco, assistant professor of accounting at London Business School comments on the Guardian http://bit.ly/rM8u5V


Executive pay has rocketed since the early 1980s as a result of changes in policy, culture and the globalisation effect on the economy. In the 1980s the government introduced tax breaks for share options to encourage entrepreneurship and risk-taking, marking the beginnings of a cultural shift.


In the 1990s there was another shift towards performance related pay which piled rewards on top of basic salaries. But the evidence does not suggest that performance related pay is always actually linked to performance. Now, executives are increasingly being paid bonuses not on the basis of the success they have had, but as a retainer to outweigh the risks they face in an increasingly competitive market. This is particularly true since the financial crisis. Symbolic of this is the fact that the pay is now referred to as "compensation" in the executive recruitment market.


Remuneration committees often consist of people who have an interest in maintaining high pay, while executive recruiters are accused of devising increasingly complex packages to justify their fees.

Some business leaders argue that pay has increased in line with responsibilities as globalisation changed the business climate they operated in. They argue they have to pay top whack to compete for the best in the business, but there is no evidence to back up the analogy most commonly made that the best executives are as rare as the best footballers.


Transparency in pay has been a double edged sword: companies can be held to account but recruiters want to match their competitors to prove their status, which creates a cycle of increasing wages.

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