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How CEO’s Make 351x

4 September 2021

It’s No Secret That CEOs Make a Ton of Money, but Are They Really Worth It? Read on to Find Out.

In 2021, reports came out about CEO’s making 351x more money than average workers.

People were… not happy.

This also came after news broke that the top 1% made billions during the pandemic, while the rest of the world suffered.

One could argue that billionaires shouldn’t exist in the first place.

So, how exactly did we get here? Will the rich get richer, forever?

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To understand the wage disparity, we need to look at how it all started. For that, we need to go back to the beginning.

Back in the 80’s two major political leaders spearheaded neoliberalism in the modern era. In the USA – it was President Ronald Reagan. In the UK – it was Prime Minister Margaret Thatcher.

Neoliberalism is just a fancy word to describe market-oriented reform policies – such as the privatization of the public sector and eliminating price controls. Both of which Thatcher and Reagan were major supporters of, solidifying free-market capitalism in both nations.

What they didn’t support though – was labour unions – which in effect left organizations less able to advocate for their workers.

This new wave of neoliberalist policies paved the way for a new model for CEO compensation, that involves paying the top dog their fixed salary – but also “asset-based rewards” AKA  stocks…. This is how Bezos is worth $200 Billion – it’s mostly assets.

But Why Pay Them So Much?

Well, to put it simply, the CEO is the most important person driving a company’s success, so their salary is decided by how financially successful the company is.

In addition to that, many major corporations rely on “compensation committees” to determine a CEO’s salary. These committees are typically composed of executives and board members from other companies, who meet once a year to talk shop. 

But how do they decide how much a CEO is worth?

Well, aside from the obvious experience level and past performance factors, the “compensation committee” will also use benchmarking to compare their CEO’s wages to that of others in the same position at similar companies.

To remain competitive, this usually leads to steady increases year-over-year. Essentially, they justify each other’s salary. 

On top of that fixed annual salary, members of the executive are offered incentives on three different levels – short, medium and long-term

Short-term incentives are typically paid out in cash and are performance-based –  the CEO increases a company’s profit margin, they get a bonus.

Medium term incentives are more often connected to the CEO being able to deliver on the company’s strategic goalscompany performance, not personal performance – these are handed out after targets have been achieved and assessed; In this case, the reward is more about talent-retention 2-3 years in. 

Then finally the long-term incentives are where you unlock options to buy stock in the company; usually at a major discount; which in effect aligns the goals of the CEO with that of the shareholder. 

Executives do well – the company does well – the stock does well – everyone benefits and keeps their jobs.

So between the salary and incentives, the CEO is remunerated…. a lot… which begs the question

Are They Worth It?

Well if you ask the average employee, they’d tell you the answer is NO. But again we gotta consider the big picture here. A picture many employees either don’t understand or flat-out ignore.

As we’ve already said, a CEO is the most important person in driving a company’s success – and their success ultimately makes the company more valuable, allowing them to create more jobs and generate more value for society as a whole.

When asked why it’s normal for him to be worth $200 billion dollars, Jeff Bezos quipped that people “don’t see the $850 billion value generated for shareholders along the way.” 

And he’s not joking – it’s easy to hate on Jeffrey, Jeffery Bezos when you ignore the fact that over a third of the world’s internet activity is hosted by Amazon Web Services  – that’s some major value he’s generated for society – without him, there is no Amazon, and we don’t want to live in that world… and if you’re being honest, neither do you.

When it comes to Fortune 500 companies, greater success for the CEO ultimately means greater success for the company. It’s high-value work that comes with high-value pay.

But Here’s Where It Gets Tricky

Those same Fortune 500 companies end up being faced with a social sciences game-theory called The Prisoner’s Dilemma… and no – it’s nothing to do with illegal shit.

The theory goes like this: the police arrest two suspects and interrogate them in separate rooms. 

Each of them have two options: confess & implicate the other, or keep silent. 

If one confesses but the other stays silent – the confessor gets better treatment for cooperating, while the silent suspect gets a harsher penalty for holding out. 

So, the best strategy for either of them is to confess – but if they both confess, neither of them is any better off than if they had both remained silent…. See, told ya it was a dilemma.

So, How Does This Apply to Our CEO Pay Scale?

Well, according to Sandy Pepper; who is an “executive pay expert” and professor of management and practice at the London School of Economics; corporations would pay their CEOs less if everyone else followed suit… but nobody wants to go first.

He reiterates the idea that companies keep their executive salaries high to stay competitive with other corporations – and essentially attract top-performers to their organization through those lucrative multi-level compensation packages we talked about earlier. 

If a company was to lower its salary without others following suit, they put themselves at a greater risk to land an under-performing CEO. Which as we have already established is the person responsible for the company’s success… and success – well, that shit’s not possible with an under-performing executive, now is it? 

So with this model in play, corporations keep CEO salary high straight across the board… 

If you want to know who the highest earning CEOs are, check out 10 Highest Earning CEOs in 2020.

But How Long Will This Model Last?

It’s hard to say for sure, but one thing is certain, more people are paying attention to this topic than ever before.

In November 2020, voters in San Francisco – very close to Silicon Valley and all its corporations – approved Proposition L, which imposes an additional tax on businesses in the city whose highest-paid executive makes in excess of 100x the median salary of employees.

The proposition – which is meant to give economic incentive to reduce the wage gap – passed with 65% voter support and comes into effect January 1st, 2022.

65 percent is a fair margin and could be fuelled by former president Trump’s Tax Cuts & Jobs Act which lowered the corporate tax rate to 21%, down from 35 percent previously; a stark contrast to Democratic candidate Bernie Sander’s approach. Which would have been to introduce a wealth tax and give workers an ownership stake in the companies employing them. 

But neither of these men are currently holding US office. And so far President Biden seems to be keeping the status quo on this one.

What’s Our Take on the Matter?

Well, at ALUX we fully believe the market rewards those who create value.

CEO’s deserve to be paid as much as they are, because at the end of the day – they’re the ones making the hardest and most stressful decisions. 

Based on their moves, literally everyone’s future at the company is at stake – employees, investors and shareholders. It all rests on the CEO’s shoulders, and that’s a f*ckload of pressure. 

If – like Warren Buffet – you’ve proven yourself time and time again to make smart moves and wise decisions – generating value for your company and the world – you deserve the extra cheddar because CEOs are paid based on their performance not on deliverables. 

A great CEO brings leverage with them; because of their skills and experience, they are multipliers and that’s the kind of thing the #EatTheRich crowd seems to misunderstand. Especially considering the value they bring, globally.

Critics had a lot to say about Elon Musk’s Starlink program. But internet access is basically a human right by this point – and he’s providing it to people who’ve never had it before. It means more people will have a genuine shot at educating themselves and moving up in the world. He also got clean water to Flint, Michigan when the US government wouldn’t – so there’s that too.

Between this, and the SpaceX mission to Mars, he’s quite literally pushing humanity forward. And that should be the goal of every CEO.

If you have your sights set on the executive level, our advice is to focus on building value, creating better lives for all. As we just said about Elon – push humanity forward.