The press has reported that Marissa Meyer, CEO of Yahoo Inc. is due to receive $187 million (about ₹1,198 crore) when the sale of the company to Verizon is concluded in a few months. This is from her shareholdings. In the five years she would have been CEO, the total compensation she would have received which includes salary, bonuses, shareholding and stock options would amount to about $228 million (about ₹1,462 crore). Not bad for what most people would consider a terrible job as a CEO.

What are CEO’s worth? This is a difficult question to deal with. The market fundamentalists will fall back on the argument that this is largely a market phenomenon. A CEO does a tough job, there are other alternatives which can attract them and there is high risk, they would say. They would also bring in arguments of comparable worth and point to lawyers, even actors, and others. ‘Pay for performance’ was another fig leaf that was used for a while. This enabled companies to devise a package linking compensation to stock performance, thus providing an incentive to meet the needs of stockholders. A trigger price for stock options would be set to achieve this.

Annual reports of major corporations go into elaborate discussions of how they set the compensation of their CEO and board of directors. There is always a so-called compensation consultant to provide the justification. I wonder if the consultant’s compensation is fixed as a percentage of what the CEO receives.

From this year, publicly traded US companies have to report the multiple of their CEO’s compensation compared to the median employee pay, but this rule is likely to be revised with President Trump seeking a review of the rule. In 2014, it was found that the CEOs of top US companies were paid 373 times the median pay of their employees; a comparable figure for 1983 was 46 times.

The analogy that best explains the situation is looking at what Robert Clive did in India. Why Clive? Because he was a senior employee of the East India Company, an early joint stock enterprise, who was criticised for his compensation. As a history refresher: In 1757, at the Battle of Plassey, Clive overthrew Siraj-ud-Daula and put the traitor Mir Jaffer on the throne as Nawab of Bengal. When he went home after his stint in India, Clive took £234,000 (estimated to be worth £23 million or about ₹190 crore in today’s money, according to Sashi Tharoor in his book Era of Darkness ). At a British Parliamentary inquest on how he accumulated his fortune in India, Clive is quoted as saying, “I walked through vaults which were thrown open to me alone”.

This event from history helps introduce the ‘Clive Effect’ to the literature on top management compensation. Clive Effect is the ability of a senior corporate executive to draw as much compensation as he or she wants to simply because it can be done. In the modern corporation, the CEO strongly influences who are appointed as members of the Board, and the Board decides what compensation the CEO would receive. You get the picture, now? Research shows high CEO compensation is positively correlated with high director compensation and with low company performance. A proposition that can be tested is that the Clive Effect is at its strongest when the CEO is also the chairman of the board.

From the perspective of the Clive Effect, we should be amazed that Meyer and other CEOs do not take even more.

The writer is a professor at Suffolk University, Boston

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