CEO Pay: Easy Target
When comparing worker compensation and benefits, outlets over the years very often juxtapose this to the compensation of the CEO. Criticizing the compensation for CEO pay has jumped up dramatically over the years. According to the Economic Policy Institute, CEO pay has jumped 940% since 1978. The question is: what would be the outcome if the CEO pay reduced by that much in last 40 years? Would the market produce bad CEOs that drove companies into the ground. Would the high CEO pay be allocated into the form of employee benefits? People blame companies when bad things happen. Many times because it is displaced anger surrounding a company’s policy or feelings of inequality. Deep down, many in the public view capital negatively, especially when deployed as a form of leverage because it appears unfair. It seems to result in large amounts of money that is not shared or allocated correctly. However, capital is a powerful form of leverage. It can be converted to labor. Labor in turns funnels continued growth and ensures a viability to a company.
What should be kept in mind isn’t how much the CEO is paid, however instead how much does this CEO returns to the company and shareholders.
(I almost hesitated using the term “shareholders” because many seem to think shareholder benefit always comes at the expense of worker’s pay and benefits. Not true). When the company and shareholder’s benefit, so do the employees. Back in the 1980s’ TWA was facing more headwinds. Famed activist investor Carl Icahn (back then he was known as a “corporate raider” to which the latter term became a euphemism) took controlling interest of the company and laid off several staff. Many were outraged and even organized a protest at his personal residence. He addressed the crowd and answered questions. One thing he mentioned was it was either this tough decision or the whole company is over and everyone loses.
The average person likes to think they know what a CEO does. Comes in late, bosses everyone around, helps himself to a truckload of stock, and then jets off to some retreat with executives to be pampered (yes this does happen but its not as often as you would think). Although this could be possible with smaller companies whose founder is the CEO and their corporate governance restricts a real board of directors. Likely this maybe where others believe this, so I guess some things are rooted in truth.
The average life of a CEO is short. There was an article about Softbank’s earninging in the NYT a couple years ago. The write up was around the CEO’s newly high compensation he received for 2021. Many online were outraged as seen in the comment section. What many failed to understand was a simple bit of research into Softbank’s earnings look back since 2019. The growth was incredible. So incredible that the previous compensation and the board requested bump is priced in accordingly as a weighted component of revenue and predictive future earnings. The CEO created tremendous value and earnings which translate directly to growth and jobs.
Think about it in these terms. A sales rep for a company earns substantial compensation based on the revenue they bring into the organization. If a salesperson is responsible for generating $20 million annually in revenue, there are no concerns if they being compensated $1 million in commissions. Why can’t the same be said for a CEO?
The reality is the CEO has one of the most challenging jobs in the whole company. This guy is the martyr if things go astray. And he’s rarely the hero when things go well (unless he’s a superstar or came in the right time) CEOs are constantly under the microscope. Balancing growth and initiative like sideshow performer, only to be heckled often by the crowd.
A CEO’s job is to deliver exceptional results to the board and shareholders. Or be eliminated. Period. This is why the life of the CEO can be short lived.
The CEO is recruited based on an auction style bid format. In some sense, the term “you get what you pay for” is completely applicable. High paid CEO? Exceptional returns likely. Low paid CEO? Be wary. Next time you read the news and an article pops up around a company and its CEO, try evaluating its full enterprise value based and the CEO’s contributions relative to company performance. Then analyze it like any other cost vs return component in a company. Liabilities and shareholder equity fund the assets that allow the business to operate — including all human capital in an operation.
If a CEO’s contributions to his company provides a net return greater than his pay amount, then it is almost superfluous when viewed as a burden of liability at the expense of their organization chart. Meaning the CEO, is leading the company to higher profitability which in turn creates more wage growth, promotion, stock options, benefits. The value chain intensified by a great CEO creates more jobs, higher efficiency, increased productivity, competitive pricing, better quality of life for employees. A bad CEO kills jobs and drains resources. And trust me, the board of directors knows this metric and holds the CEO strictly to it. CEO are rarely offered grace and have a short window to turn things around. If a board approves a large package for a CEO, it's likely the net return back to the company is projected to be great.
