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Monday, March 6, 2017

CEO Pay: Is it Fair?

Many news journalists push forward the premise that CEO pay is "unfair". Consider this the title of this article, "It's a Disgrace, this is how much CEO's make more than Workers".  The analysis is based on the difference, in pay, from the CEOs salary, as compared to the salaries of the workers. This a flawed analysis for various reasons.

Credentials

CEOs credentials, experience, and etc, are considered into the wage package. Most CEOs are college grads, many with Grad degrees, and years of experience. They chose to delay certain current choices, and invest into the future for their goal to be a CEO. Should the janitor's pay be equal or close to the CEOs based on their credentials? No. How about the entry level Accountant, that is fresh out of college? No. In short, time has allowed the CEO to demand a higher wage.

Risk

Does the Janitor, or the Staff Accountant have the same risk factor in their position, as compared to a CEO? Suppose an regulatory investigation begins: Who do the regulators interview and hold the most accountable? The CEO or the janitor? The CEO. So, it stands to reason that the CEO has more risk, qua CEO, as compared to someone being a janitor, or Staff Accountant. Thus, the CEO makes more money.

In reality, the CEO is UNDER PAID.

The median income of a CEO is around $1 million, yet what is the value of the firm he is managing? If it has a valuation of $100 million, he is under paid. A thought exercise: Review some of the top earning firms in the US, see the true market value. Then, compare the CEO's salary to the asset value. Most real estate firms, for example, charge around 10% for managing an asset.
If the CEO's salary, compensation package is less than 10% of the asset value, he *could* be under paid. NOTE: This does not mean the 10% is a magical baseline, the 10% is simply a means to demonstrate a point. The point: The CEO's wage should not be compared to the employees in the organization, but it should be compared to the value of the asset in which he is managing.

Conclusion

In reality, it is no one's business how much the CEO is compensated. That is a private agreement between the CEO and his board, or shareholders, or his superiors. The reality is that he has the most responsibility, as compared to any one in the organization. He ultimately is held accountable for the failure or success of the organization.

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