How Much Should a CEO Make?
“Greed’s worst point is its ingratitude.” – Seneca (Letters to Lucilius, first century)
When I first read the statistic quoted above, I accepted it without thinking. Then my brother questioned it and I realized it was one of those trumped-up pieces of data meant to score a point.
What is a typical salary today? According to my brother, the average hourly pay for a full-time worker in private industry two years ago was $16.66. Four hundred times $16.66 is $6,664 an hour. An executive who is earning $6, 664 an hour would be taking in almost $14 million a year. Even at the height of the Internet bubble, most CEOs were not making $14 million a year.
Yes, there were plenty of obscenities — guys who were getting billions to run businesses that were bilking naive investors out of their savings. But most senior executives make between $100,000 and $300,000, and even CEOs rarely make more than a million bucks a year.
How much should you make?
I’ve talked about this at least once before. (See Message #135, “How Much Should You Pay Yourself?”) CEOs should make at least as much as it would cost to replace them. Usually, this is more than you think. But, occasionally, you will find a CEO making more than he should.
Putting aside the complicated (and complicating) question of stock options, let’s take a very broad view of the value of any profit-center manager. If a business, or division of a business, is grossing $5 million and netting $1 million (before compensating the CEO), how much can it afford to spend on its top executive? The short answer: Generally speaking, I’d be willing to fork out between 10% and 15% of that million dollars — in other words, between $100,000 and $150,000. For a business that produces twice that profit? Again, 10% to 15% ($200,000 to $300,000).
I don’t think you need to spend much more than that on your top guy. But if you have to in order to maintain the profits, then do so. The guy who runs your business is critical to its long-term health. You don’t want to cut corners when it comes to a CEO.
That said, you should never feel as if you are being held hostage by your CEO. And you should never believe that he has special powers.
This is, unfortunately, the view many people had of CEOs for the past 10 or 15 years. The beneficiaries of that thinking got a lot of press and big houses. Three of Time magazine’s men of the year in the 1990s were from business: CNN’s Ted Turner, Intel’s Andy Grove, and Amazon.com’s Jeff Bezos. Jack Welch and Bill Gates also shared in the glory.
But when people today think “CEO,” they think of the guys who ran Enron and Tyco and Worldcom and Qwest — not to mention Adelphia and Global Crossings. (You might have seen a recent newspaper cartoon that showed a mother trying to break up a fight between two children: “Mommy!” one complains. “He called me a CEO!”
In the old days, CEOs were ordinary men who worked extraordinarily hard. In the book “Kindred Spirits” David Callahan follows the careers of 700 men who graduated from Harvard Business School in 1949. Callahan found that most of these men had a realistic view of themselves and their limitations that came from living through both the Great Depression and World War II. With their experience, he says, “came a patriotic attitude that characterized the business leaders of that generation as hard-working pragmatists, not rock stars.
“They were shaped by the Great Depression and the war and came into business with modest expectations regarding the amount of wealth they would accrue … They didn’t have a strong sense of entitlement to great wealth … and believed wealth should be shared more equally than it is now,” Callahan says.
These men succeeded by working hard and staying humble — and succeed they did. The stars of the class include Tom Murphy of Capital Cities/ABC, Jack Davis of Resorts International, Jim Burke who made Tylenol a top seller for Johnson & Johnson, Marvin Traub, the man behind Bloomingdale’s, and many more.
[Ed. Note. Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]