There is a school of thought that believes that paying extremely high salaries to senior executives attracts better talent at the critical senior positions and that it also motivates these executives to work harder, better, more efficiently and contribute to the company’s progress.

However there are many who feel differently. Academicians Philippe Jacquart, assistant professor of leadership at French business school EMLyon, and Scott Armstrong, professor of marketing at the Wharton School at the University of Pennsylvania, say that not only is there no concrete evidence of high salaries attracting the brightest and the best, excessive financial benefits for the top few, imposes spiraling costs on business which pushes down profits considerably. In addition, they say that “Financial incentives fill up your entire thinking space, preventing you from focusing on other things or being open to ideas,” which has a negative impact on efficiency, performance and productivity.

Bad for business and bad for the economy

Excessive pay is bad for business and bad for the economy; if money is the only thing that is used to incentivize senior management, it does not reflect too well on the company and its style of management. What also needs to be realized is that while senior executive salaries go through the roof, there is no corresponding increase in the salaries of those lower down the hierarchy – this disproportionate inequality creates a tremendous amount of unhappiness, demotivation and even hostility.

Employees feel that the success of a company is an outcome of the contribution of every single employee, not just senior managers. It is not sensible to think that only the top-people achieve good results – it is always a team effort. But by rewarding senior executives alone, in terms of higher pay increases, bonus or profit sharing, the company diminishes the contribution and the rights of those lower down the chain.

Increasing exponentially over-time

The pay gap between top executives and average worker has been increasing exponentially over-time. In many companies today, it stands at a ratio of 400:1!

With neither recognition nor equivalent financial benefits for their performance, the middle- and lower-level employees feel ignored and unappreciated. Their morale and enthusiasm for the job and the company hit new lows – they are discouraged and demotivated and lose interest in their jobs. This can and does very often lead to unrest, strikes, non-co-operation from this group. When this happens, it affects the functioning of the organization and if matters keep deteriorating can lead to a total shutdown of the company.

Detrimental to the interests of shareholders

Furthermore high top executive salaries are detrimental to the interests of shareholders who see a fall in their dividends while senior managers take home an ever growing compensation package. It makes sense to link senior executive salaries to the company’s share price since this would be in the interests of both sides – but this rarely happens in reality. Because executive pay is an expense, excessive pay means that shareholders are losing money.

Excessive executive salaries come at a cost. It means that the company is pouring out money to its top executives, thus draining its financial resources, instead of using that money for other purposes such as distributing higher dividends to shareholders, increasing salaries for others in the company or more importantly, reinvesting in the business. These measures would contribute to the growth of the company; in their absence, companies could very well collapse under the pressure of exorbitant payouts to their overpaid, senior executives.