Yet, there is a good argument for paying CEOs more, not less, to turn a company’s fortunes around. Starbucks shares have declined 20% over the past five years while the S&P 500 has climbed 80%. Niccol has the opportunity to earn $27 mn in stock and cash bonus each year. But he would have to deliver market cap gains in the range of $20 bn a year to Starbucks shareholders for the company to catch up with the index. The managerial incentive to satisfy shareholders should have a bearing on the profits they hope to make. If managers make too little in relation to a company’s profits, it creates bureaucracies instead of encouraging entrepreneurship. Even at Niccol’s level, CEO remuneration is insignificant in terms of corporate turnover for rewards and penalties to filter through – he would need to add roughly a thousand times to Starbucks’ market capitalisation to claim each bonus dollar. That tends to cloud judgement over whether a business risk is worth taking.
The debate over the level of CEO pay misses the point that managers and shareholders operate on different financial metrics that need to be brought closer into alignment. Shareholders are attempting this by rewarding managerial outperformance. They are entirely in the right. It’s their money after all.