CEO’s Compensation- Too much with little to show for it
Daniel J. Stone
Ohio Dominican University
It is debated that the compensation that a Chief Executive Officer (CEO) makes is excessive. Those in favor of the excessive salaries justify this due to a weak pool of qualified CEOs to choose from. The knowledge and leadership talent that a CEO possesses is retained due to the hefty salaries. Also, the high salaries are driven by competition between private equity firms and publicly traded companies. With this being said, there are several indicators that would suggest that CEOs in corporate America are overcompensated and while they are making in a day what the average American worker makes in a year, corporations are cutting staff and those corporations are underperforming.
Keywords: Chief Executive Officers, average American worker, excessive salaries, weak pool of CEOs, knowledge and leadership talent, driven by competition, staff reduction, underperformance.
A Chief Executive Officer (CEO) bears great responsibility, risk, and blame for a company’s successes and failures. By law, the President of the US earns the highest salary in the federal government. CEOs in corporate America are the highest paid individuals in the world. Advocates for the CEOs high salaries justify this due to a weak pool of qualified CEOs to choose from. On the other hand, CEOs in corporate America are overcompensated since they can make as much in one day than the average worker at the firm makes the entire year (Street and Street, 2010).
Statistics show that CEOs are overcompensated in the US. In comparing the 20 highest paid European managers to the 20-highest paid American managers; the European managers only make 33% of what the American manager makes. In Japan, a CEO makes approximately 15 times what the lowest worker makes. The same can be said about CEOs in corporate America versus the CEOs of non-business sectors. In taking the top earners of the federal government’s executive and legislative branches, military leaders, and non-profit CEOs earn only 3.4% of what the top earners in corporate America. (Street and Street, 2010).
On the other hand, the excessive salaries for CEOs are justified. Currently, the market for solid CEOs is competitive and wage-increasing bidding wars are the norm. Therefore, in making a case for the current CEO pay scales is two-fold. First, CEOs are paid the salaries that they are paid so that the knowledge and leadership talent that a CEO possesses is retained. Second, there is strong competition between private equity firms and publicly traded companies. Attracting and retaining the employees who generate value for the shareholders is worth the return on investment for the pay that the CEO earns (Street and Street, 2010).
Having said this, the current compensation for CEOs is very excessive. CEOs of major US companies earned as much money from one day’s worth of work as the average worker made over the course of an entire year. If the average American worker earns approximately $30,000 per year and the average ratio of a CEO’s salary when compared to the average worker is 364:1, the CEO is making $10.8 million per year (Street and Street, 2010).
Furthermore, there is a lot of skepticism of CEO pay after the corporate scandals such as the HealthSouth corporate accounting scandal. Also, the CEOs salary is not linked to performance. In the middle of the sub-prime mortgage crisis, failing CEOs walked away with hundreds of millions of dollars (Weiss, 2009).
Excessive salaries for CEOs can be said about local government CEOs. Ed Driggers is the City Administrator of a municipal government in the rural state of South Carolina. It was reported in 2011 that Mr. Driggers was making $153,724 annually. (Staff Reports 2011). Three years prior, at the start of the Great Recession, Driggers collected a salary $127,548. During the same year, Driggers laid off three employees that were each earning approximately $30,000 per year (McGranahan 2008). Two of the three positions could have been kept if funds were shifted from Driggers’ salary. The period when families have earners either unemployed or underemployed and not meeting their full earning potential, Mr. Driggers saw a pay increase of $26,000 which is nearly the equivalent of one average American’s salary. Having grown up in South Carolina, an annual salary of $67,000 is more than enough to live off as the breadwinner of a family of four. Regardless of the economies of scale, the current compensation of a CEO in the private or public sectors is excessive when compared to the workers of his or her organization. (Street and Street, 2010).
In conclusion, CEOs are overcompensated in corporate America. For example, a top earning CEO in Germany only earns a third of what a top earning CEO in the US makes. However, CEOs are short in supply and their hefty salaries are justified to retain the leadership talent. Having said this, the current compensation for a CEO is very excessive. However, it is debated that failing CEOs are allowed to walk away with hundreds of millions of dollars in the middle of the sub-prime mortgage crisis.
In reflecting on the reading, in 1982, Mr. S. Truett Cathy, CEO of the fast food chicken restaurant chain, Chick-Fil-A did not take a salary when his company fell on hard times. Mr. Cathy looked at raising prices as the last resort during that year. Chick-fil-A has restaurants in 38 of the 50 states and is not publicly traded. With most restaurants making 20% of their revenue on Sundays, Chick-fil-A has remained closed on that day (Cathy, 2002).
CEOs are getting paid millions of dollars while the firm is reducing its workforce via layoffs, downsizing, and outsourcing at the same time. (Street and Street, 2010). Back around the time that Mr. Cathy was not taking a salary, big-time corporate CEOs took over 40 times the pay of the average worker. Now, a CEO makes 365 times the pay of the average worker. Therefore, it is in my opinion that not only are CEOs in corporate America overcompensated, they are disconnected from the realities that many Americans face.
Cathy, S.T. (2002). Eat Mor Chikin: Inspire More People. Crisis and Purpose. 118-126.
McGranahan, H. (2008). City cuts staff, facing shortfall. Retrieved from the Greer Citizen:
Shackleford, L. (2009). Several area leaders are not under contract. Retrieved from the
Spartanburg Herald: http://www.goupstate.com/article/20090222/ARTICLES/902221097?
p=3&tc=pg
Weiss, J. (2009). Business Ethics: A Stakeholder & Issues Management Approach. Fifth Edition.
http://daniel-j-stone.blogspot.com (C) 2009-12
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