CEO Pay is a Problem, but not THE Problem

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First, I want to make it clear that plenty of CEOs are paid way too much money, but most are probably paid in accordance with the value they deliver. But, that is a topic for another post. Let’s talk about how much CEOs get paid. I took a quick look at the CEO pay for the 2013 Fortune 100. In 2013, these 100 individuals were paid cumulative compensation of $918M! That is a lot of money; in fact, it’s a smack in the face. They are paid so much obviously they must be the most heavy-hitting movers and shakers among the wealthiest people in our country. So, I checked the 2015 list of Fortune’s 400 wealthiest Americans*.

It turns out the $918M cumulative pay for the Fortune 100 CEOs, was little more than a rounding error on the list of the top 25 richest Americans. The top 25 (I stopped there because looking any further hurt my brain a bit) are worth around $490.8B. The .8 represents $800,000,000 or a bit more than 80% of the entire annual pay for the CEOs. And, only 5 of the CEOs showed up on the “wealthiest” list. Warren Buffet is the second wealthiest person and he’s on the CEO list. It should be noted that his CE0 pay is an understated $490K. Other CEOs who made both lists included: Larry Ellison, founder of Oracle (pay $14.9M), Larry Page, the cofounder of Google (pay $1.00), Michael Dell, founder of Dell Computers (pay 4.3M), Steven Ballmer, employee 30 at Microsoft (pay 1.4M).

Four of the five CEOs among the 25 wealthiest Americans were founders of incredibly successful companies. The fifth started pretty darned early at Microsoft.

There is an idea that cutting CEO pay will somehow result in pay increases for the rest of the company. Even if you cut CEO pay down to the level of the median employee at most companies, the impact on staff pay would be immaterial. In one of the most incredible examples, cutting Michael Duke of Walmart’s approximately $20M pay down to $0, would result in every Walmart employee in the US (about 1.4M of them) getting a fantastic annual bonus of about $14.25.

Somehow the issues of high CEO pay and low employee pay has been placed on two sides of a balance as if there is a direct correlation between the two. Politicians claim that if we find a way to fix one we will also fix the other. Sadly, that is not how it works. There simply isn’t enough money being given to CEOs to redistribute it to their employees and make the problem go away. So, is there a solution?

If the money isn't going to the CEOs it may be going to shareholders. In fact, the CEOs on the list made their own fortunes from stock holdings. Nearly every other person in the top 25 built their wealth from owning shares. Perhaps shareholders would be willing to take lesser gains to increase the pay of broad-based staff, but that seems unlikely. Perhaps companies can once again move to a broader and more equal usage of equity compensation programs and allow everyone to enjoy the gains of a successful company (as long as people are also OK losing money if things fail.)

I don't have a perfect solution, but I hope people stop distracting the public with false solutions. If people stormed the gates and held companies hostage until CEO pay was cut, it would not result in raises. Implying otherwise isn't helping the situation.

*I know the years don't match, but the comparison was close enough to make a point.

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with company strategy and culture. Do you want to know more about Performance-Base Equity Compensation? Dan’s new comprehensive issue brief is now in print. Dan has also contributed toEverything You Do in COMPENSATION IS COMMUNICATION”, with Comp Café writers, Ann Bares and Margaret O’Hanlon. And if you’re still not sick of Dan, he has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

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