Why CEOs Earn Extremely High Salaries (And it’s not Talent!)

According to the Watchdog, Uganda’s top 43 CEOs and Managing Directors earned a gross monthly salary average of 61 million Ugandan shillings. The highest paid was Barclays Bank (now ABSA) Managing Director, Rakesh Jha earning 148.6 million shillings monthly, this is enough to pay off 291 primary school teachers earning 509,671 shillings each!On a global scale, this looks like peanuts. The top 500 CEOs earn an average of 11.5 million dollars per year (43 billion Ugandan Shillings). The salaries or compensations are often times hundreds or thousands fold of the companies’ median salary. So why pay these individual human beings so much!

Rakesh Jha
Rakesh Jha

Many experts, economists and young dreamers believe that the extraordinary high and yearly increasing salaries for CEOs are the obvious fruits of their well polished talents. To back this up, they cite their great irreplaceable vision, oratory skills, charisma and presentation skills, et cetera. According to Host of University of Zurich, elaborate theories and models such as an increasing demand by a simultaneous shortage of talented people, which is driven by external factors like globalization, technological progress, demographic change, or a general shift from firm-specific to transferable skills confirm the myths behind a CEO talent.

In effect, the CEOs gain a super star complexion and salaries are thus driven up by the fear of “imperfect substitution”, in other words, “if we lose this guy, we are doomed.”

The main problem of this theory is that it excludes micro dynamics that drive certain decisions in a company or a board. It assumes the utopian view that workers through merit, talents and tournaments strive for the top most positions which is simply untrue.

Performance is difficult to accurately track especially in projects that require team tasks. First, in such a context, “talent” is multidimensional accounting for mobilization, marketing or analytical skills. Each dimension is valuable, and it is not clear how to weigh these dimensions against each other. Second, many aspects are hidden to the observer, for example, because they can only be obtained in the long run or by chance like detecting corruption. Third, performance evaluations in organizations are simply biased. 

Difficulties in capturing employee performance increase even more as people climb the career ladder, since the job becomes more complex and team oriented and the difficulties are particularly high for the best 25 % of workers because, while most people agree on who is a low or medium performer, only few can agree on who is among the top 5 % or even top 1 % of performers.

It shows that selection processes within firms and, in particular, for top performers at high career levels are imperfect and biased. The bias could stem from systemic stereotypes such as racism, sexism, tribalism or any other form of favoritism.

In addition, information, data and intelligence is often ignored during promotions: many people are promoted amidst scandal and contradicting signal. It is therefore a superstition to believe that superstar effects in CEO salaries can be explained by talent or “imperfect substitution.” 

In conclusion, true talent and performance is easier to scale in smaller units and local settings. There is a high chance that the biggest frog will be selected within a small pond. However in large, complex and global markets, luck and conformity produce a pecking order. So yes, the CEOs are extraordinarily rewarded because they won a lottery that thousands of people participated.

The writer is a legal scholar at a Makerere University and National Coordinator of World Leaders of Today, Uganda.