Understanding CEO pay is a matter of perspective

July 10, 2017 - by: admin 0 COMMENTS

Soon I'll be running this cityby Dan Oswald

You hear a lot today about CEO pay and how something needs to be done about it. That CEO compensation is out of hand. It’s spoken about as if it’s a wild, living creature that must somehow be tamed.

I agree that executive pay seems completely unreasonable when you look at the numbers. Last year, the highest-paid CEO, according to Equilar, made $94 million. $94 million! Is anyone worth that much for a year’s worth of work?

It’s easy to be outraged about executive compensation because most of us work for a living. We can compare what we make for toiling away every day to the pay of these high-profile executives and feel that an injustice is being done. What any of us wouldn’t give to get $94 million for a year’s work! Give most of us one percent of what one of these CEOs makes, and we’d be doing much better.

But is CEO pay the disease or just a symptom? Consider that LeBron James has made $77 million as a professional basketball player. Do we react the same way to that as we do to a CEO who makes a similar amount? I don’t think so. We reason that James has a rare talent that he is leveraging to be paid at the top of his profession and using his fame to garner lucrative endorsement deals. He’s not a bad guy—he’s just getting paid what the market will bear.

In 2016, Dwayne “The Rock” Johnson was the highest-paid actor. I know, go figure, but that’s what my research shows. Johnson pulled in a cool $64 million last year. Like athletes, we seem to give a free pass to actors and entertainers when it comes to compensation. Twenty-seven-year-old singer Taylor Swift made $170 million last year—nearly double the highest-paid CEO, but who begrudges the talented entertainer her salary? Maybe we feel we can’t complain about what they make because without us buying movie and concert tickets or downloading their songs, they wouldn’t make that kind of money. We’re complicit in their compensation.

Remember when I said that CEO compensation is complicated? Well, try this one on for size. Elon Musk, CEO of Tesla, had a base salary of $37,584 in 2016. That’s not a misprint—that was his salary. Yet, according to Bloomberg, Musk pulled in another $99 million in stock options. In the last five years, Tesla’s stock price has increased nearly tenfold, giving the company a $52 billion market cap. That means under Musk’s leadership, the company has gained approximately $47 billion in value in five years. And Musk’s compensation is almost completely tied to the value of the company, so if he were less successful, he would make less. And if he were unsuccessful in creating value, the options would be worthless, leaving him with only his base salary. How many of us want our compensation to be completely reliant on the success of the company? Is Musk an example of CEO compensation done right or another example of an overpaid executive? Both?

At the end of the day, we must remember that CEOs don’t set their own compensation. They are recruited to the companies for which they work just like the rest of us. The board of directors who recruit them and evaluate their performance set their pay. The market determines what CEO pay should be. Should CEOs reject the compensation packages they are being offered and demand something more reasonable? Maybe. But how many of us would turn down a lucrative pay package because we don’t think it’s right? And if a company refuses to pay what the market will bear, then it risks losing that person to another company.

Do you think CEOs justify what they make because they compare what they do to Dwayne Johnson and figure that they deserve at least what he gets? Consider Walmart CEO Doug McMillon. He made $22 million last year, but he runs a company that employs 2,200,000 people. He leads a business that allows millions of people to earn a living. Now, you could argue that McMillon could make less and pay his people more, but reducing his salary to $0 would only result in an extra $10 per year for each employee. Redistributing his compensation isn’t going to make a difference to the other Walmart employees.

So there’s no easy answer to CEO pay. It’s a complicated situation. CEOs must realize that they are, in part, villainized because of what they are paid. Half of all Americans think poorly of the people who are running our corporations. On the other hand, we must all realize that CEOs don’t set their own compensation.

There aren’t any easy answers to solving this issue, but gaining a better understanding of what’s driving this divide is a good place to start. Before you lump all CEOs together as being overpaid prima donnas, look at some individual cases. See how much of their compensation comes from the performance of the company. Take a look at the number of people the company employs. Look at the value that has been created for the shareholders. The conclusion may still be that most are overpaid, but at least you’ll have perspective.

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