Because I’m worth it. Really?

The compensation of corporate executives is one of journalists’ favourite piñatas. Media report after media report claims that CEOs are overpaid and ideally should be tarred and feathered and sent running naked through the streets. Ok, I made the last bit up, but the claims that CEOs are overpaid are widespread. Meanwhile, – and the irony here is almost too obvious – UK executives claim that compensation in the UK is so low compared to the US that it is no surprise so many companies move their listings to the US.

Well, the chart below shows that CEO compensation in the UK is quite a bit lower than in the US. The CEOs of the 100 largest companies in the UK made an average of $5.0 million in 2022. That’s putting them right in line for the soup kitchen compared to the average $21.8 million compensation for the average CEO of the 100 largest US companies. Plus, the cost-of-living crisis has hit UK CEOs much harder than US CEOs. Over the last five years, UK CEO compensation has risen by 4% while in the US compensation has risen by 13.8%.

Average CEO compensation

Source: Bloomberg

But whether UK CEOs are underpaid or not is not just a matter of comparison to their US peers. Maybe their US peers are overpaid?

In this respect, I enjoyed reading a study by Yann Decressin, Steven Kaplan, and Morten Sorensen about CEO characteristics in the US. Based on 4,900 assessments of CEOs and top executives in the US between 2000 and 2019, they tried to find out if top executives have changed over the last two decades.

And indeed they find that in several respects, executive characteristics have changed. First, they found that CEOs have gradually become more execution-oriented and less interpersonal. I guess that is a good thing since CEOs shouldn’t be networking all the time. They have a job to do, and today’s CEOs get on with the job. Similarly, CEOs have become more analytical over time and less charismatic. This may not be a good thing, but I think it is a result of us living in a more complex, data-driven world where analytical skills are just more useful for a CEO than they used to be in the past.

However, what caught my eye was their analysis of the key factor driving success for a CEO: General ability. This general ability is essentially a measure of how good CEOs are relative to the average manager and the chart below shows the trend for US top executives. Note that a reading of 0.0 means the CEO has the same level of ability as the average manager.

General ability of US executives

Source: Decressin et al. (2023).

Notice something?

While executive compensation in the US has increased significantly, the average ability of executives has declined. Maybe those journalists criticizing executive pay have a point?