Salary: Reasons CEOs are always offered a Good Package

Along with America, the trend has swept in now in India where CEOs get paid highly lucrative sums of money for the job. According to finance investment companies in Delhi, corporate bigwigs have always been handsomely rewarded. But, in the past generation, average pay for CEOs in the largest companies of any given country has leaped nearly six fold.

Experts all over the world have examined years of pay data to offer a new explanation. Boards have been offering CEOs bigger and bigger part of company stocks because they don’t understand how stock options – a key component of CEO pay – work.

The company model that allow corporate executives to buy shares of their employers’ stock at preferential prices, were primarily designed to constrain top executives’ pay, or at least make sure that the pay is tied closely to company performance. It has long been an understandable thing that if a company’s stock rockets ahead, a rich grant of options can lead to a bigger pay scale to a CEO.

However, according to the new system has been based on somewhat different philosophy.  Boards have been offering high packages to CEOs by offering executives the same number of options year in and year out regardless of company’s stock prices. The practice means that each New Year’s grants tend to end up being potentially more valuable than the previous year’s, just because stock prices tend to end up being

The new research shows that something different has been happening: Boards have been offering CEOs very high pay by giving executives the same number of options year in and year out, regardless of company stock prices. The practice means that each New Year’s grants tend to drift higher than the previous year’s. Option grants end up being worth more and more every year—simply because an option on a share with a high nominal value is more potentially lucrative than an option on a share with a low nominal value.

However, there is some good news. In the past several years, it has gotten a lot harder for boards to give away the store. From 2006, large companies have been required to figure out the dollar value of options – and disclose them to investors. The finance investment companies in India concluded that boards appear to have become much more thoughtful about how they make grants to CEOs, and as a result the growth rate of CEO pay has also tapered off.

But that doesn’t exactly mean boards have altogether stopped giving high salary to CEOs. You need to know that by 2014 it had climbed to more than 300 times.