CEO's and The Tradeoffs

Many people complain about how much CEO's or "fat cats" make. According to the AFL-CIO "A chief executive officer of a Standard & Poor's 500 company was paid, on average, $10.9 million in total compensation in 2008". The same article talks about how CEO's are paid 10 times more than the average full-time worker. Let's examine this statement. Yes, CEO's are paid 10 times what the average full-time worker is however the average CEO is most likely 10 times more productive than most employees in the company. Goldman Sachs in 2009 doled out $700,000 in bonuses to the average employee. People demonstrated public outrage when they learned how much people at Goldman Sachs were getting paid. Anywhere between 1,500-2000 MBA students interview for a first round interview at Goldman Sachs. Usually there is between 4-6 interview before someone is offered a job. Out of this pool of candidates around 200 people are hired. Clearly, this shows a very small percentage of candidates are accepted into the Goldman Sachs culture.

When people hear about executive payouts they hear the rewards, but never hear anything about the costs. Being a CEO does have costs. An executive works long hours, is usually away from his/her family for long periods at a time, and generally has a high stress level. CEO’s and executives also process traits that very few people have. Often times CEO’s are very great communicators, good at delegating, and can take complex situations and simplify them. Since only a small percentage of people have these characteristics it makes them highly valuable. People don’t understand that CEO’s and paid so much because of their productivity. Companies have alternatives when hiring CEO’s. The board of directors or some type of committee is placed in charge of what executives and CEO’s are paid. These groups have a vested interest since they usually own stock in the company.

What seems to be evident is that CEO’s are paid the market value for their services. Board of directors and committee members are not stupid. The excuse that people are greedy doesn’t make any sense. Since greed has existed since the beginning of time and since greed can’t increase an executive’s salary it’s hard to say greed is the reason. If a CEO’s job pays so well why doesn’t everyone want to be a CEO? Clearly, there are costs and benefits to everything.