What about the 399,500 other CEOs?

Many times, people who find out that part of my business is focused on executive compensation consulting ask how I can support “CEOs who are already making so much money.” I usually answer with a variation of “but, hardly anyone makes as much as you think.” When I inform people that most (>75%) CEOs make salaries of less than $500,000 a year, I am often met with exclamations about “multi-millionaires”, “people who control everything”, “greedy executives”, "horrible pay ratios” and whatever other compensation outrage has made the news in the past year. I know it’s hard to believe, but most CEOs are paid in the middle of their range. So what is the middle?

Not surprisingly, when I talk to CEOs about their pay, the reaction is often similarly misinformed. You should see the reactions when I tell CEOs that about 50% of small companies pay their Chief Executive Officer $250,000, or less, in salary. They have seen the articles. They watch the news. They know in their bones that “hardly anyone makes that little.” There are about 400,000 CEOs in the United States. That means hundreds of thousands of them do not make a million dollars a year.

In fact, less than 10% of CEOs have annual salaries north of $1 million dollars. To be fair, CEOs at Fortune 500 companies do get paid an average of $10.8 million in total compensation (depending on how it was measured this number is quoted as high as $12.9 million). This amount is broken down approximately into thirds. With one-third being salary and bonus, one-third “other compensation” and one-third income from stock option exercises and vesting of other equity awards. I should note that few in this group are paid salaries above $1,000,000 due to 162(m) restrictions.

If you take these 500 people out of the mix, you have about 399,500 CEOs left. The vast majority of these have little in the way of equity with real intrinsic value. Virtually none have anything in the way of high-end perquisites. And, a huge percentage of these CEOs founded the companies they oversee. Most have never heard of, nor care about, ISS and Glass Lewis. Most don't care about Say on Pay, because they are large shareholders (or sole owners) of the companies they oversee.

These executives and the compensation professionals (internal or external) who support them are constantly striving to align compensation with success. The goal is seldom to pay at all costs. Pay for performance and well-designed compensation programs are not just for the front-page executives who make millions. Let’s be honest. Hardly anyone makes that much!

How do you define “enough” for your CEO? Are they overpaid, or is that just one more myth that compensation professionals need to dispel?

Interesting fact: Imagine the blue background of the image accompanying this post represents the 400,000 CEOs in the US. The five yellow dots would represent all of the CEOs at Fortune 500 Companies. Sometimes it seems like we may focus too much on too little.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Comments

[jacque.vilet@yahoo.com]

Just read that the SEC is going to require companies to provide the ratio of CEO pay to median pay of a selected group of employees.

What do your sources say about this?

[Dan Walter]

Hi Jacque,

Great question. The SEC has indeed said they hope to have the CEO:Staff pay ratio rules in place in 2 months. I wrote an article about this almost exactly 3 years ago. (http://www.compensationcafe.com/2010/08/the-top-3-provisions-of-doddfrankat-least-for-the-moment.html)

I do think the rule will make into reality before the end of this year. I also think that it will be unfortunate when that happens. The Pay ratios between to companies will ever make sense. The number will be used almost completely for media hype and political punditry.

[jacque.vilet@yahoo.com]

Agree with you. Different industries, company size, start-up vs established, etc.
People will make all kinds of assumptions and it will create a lot of confusion.

The article said there is brou-ha-ha about companies not having to count employees overseas because that pulls down the average salary and skews the ratio more than it should be.

I can't help but compare this to the attempt by SHRM to create metrics to be put in company financials. The same scenario ---- people making all kinds of wild assumptions.

I think the intent is worthwhile but the devil's in the details!

[jacque.vilet@yahoo.com]

Agree Dan. Too many factors involved --- size of company, start-up vs established, industry. People will make assumptions.
Not good. The devil's in the details.

[jacque.vilet@yahoo.com]

Reminds me of SHRM's attempt to make certain metrics required on company financial statements. With no education --- imagination runs wild. And people decide whether to invest in a company based on this "stuff".