To answer this question without fear of making a mistake it is necessary (even before thinking about answering this question) to begin with the establishment of guidelines which would determine and appraise what is and what is not exorbitant regarding executive salaries. In my opinion, there is no doubt that the first measuring stick to evaluate an executive in this regard should be the value that he or she provides to the company. The equation is clear: as long as the value provided by the executive is higher than the salary perceived, the retributions received by these directors are justified by the company, even if they seem exorbitant to public opinion.
Following this train of though, I cannot stop asking myself why people continue to be surprised and annoyed by the fact that great company heads, such as Alfredo Sáenz, Banco Santander’s CEO, for example, earn 9,2 million Euros a year; yet accept with pride that sportsmen, such as Cristiano Ronaldo, receive almost the same amount per year. After all, Sáenz, the highest paid executive in Spain, was also responsible for Banco Santander’s 2010 result of 8,943 million Euros, the highest of all Spanish banks, and one of the top on an international level. Isn’t this enough justification? Back to the subject of the proposed guidelines: On the basis of what should the value of Cristiano Ronaldo be perceived? Advertising income? Goals scored? I am sure that, unlike the opinion of many Real Madrid fans (and, as a matter of fact, I am a fan of this team), these achievements are not more justified than those reached by the afore mentioned banking executive. I even think the opposite. And I maintain this opinion, despite all the condemning voices which continue to rise against the high retributions earned by these investment bankers, who have featured cases such as “Madoff” or “Lehman Brothers” as if these salaries were the only sources of all the damage produced in these cases. I only wish for an easier explanation.
In general terms, I believe that the fairest executive compensation policy (please note that because of my professional specialization I always write with the financial sector in mind) should include a fixed salary in accordance with the current market conditions, aligned with the amount received by homologous professionals, and a variable salary, related to the achievement of the company goals. Depending on the performance of each professional within the company, this added value would equate to: fringe benefits, international growth, team development, expense reductions, etc. Anyhow, beyond these variables, the most important fact is that a significant part of an executive’s total compensation should be linked to objectives agreed by the company.
In this sense, a regulation of the variable salary has developed over the last years in the financial sector, to some extent due to the following of the established European norm. The bonus received each fiscal year by an executive of the finance sector is normally divided in: one third in cash, another third in company shares paid over three years, and a final third which would be paid in five years. Due to the preservation of this way of payment, the real value of these bonuses is currently lower than in previous years. The other trend in the sector has been to increase the fixed salary in order to decrease the gap; that is, the difference, between the total compensations received previously and at the present time. What is the common reaction of these executives given the evidence of this salary stagnancy or decrease which is inherent in these times of economical crisis? That question deserves to be answered in the extent of an entire post, specifically, the next one.