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Posted: June 22, 2021
Over the past several years, watching top executives rake in millions of dollars in salaries, bonuses, and incentives has become the norm. On the other hand, it feels like the battle to raise the minimum wage by just a few dollars has been going on for decades and is still highly controversial. According to the Economic Policy Institute, executive compensation has grown by about 940% compared to just 12% for workers since 1978. If CEOs and other top management were already so well paid, why does executive pay continue to increase year over year? Let’s take a look at how executives justify continuously increasing compensation plans. Limited Talent Pool When you think of elite CEOs, there are usually only a handful that jump to mind. This is mainly because it takes years to develop the skills and experience that are necessary to become a successful corporate leader. In this sense, the justification for large compensation packages for CEOs essentially comes down to simple supply and demand. If there were millions of excellent CEOs in the world then they would likely get paid considerably less since corporations would have their pick of who they wanted to hire. However, since there is a huge demand for great CEOs and so few to choose from, the price to hire and retain top talent goes way up. Additionally, having the right person in charge of the company can determine the breadth of a company's success or shortcoming. Enterprise Level Leadership Leadership is important regardless of context, and a great corporate CEO will generally enact policies that can increase the valuation of a company. Let’s take a look at a few examples: Tim Cook of Apple - He was a long-time Apple employee with tons of experience with the company and many of his policies contributed to the increase in Apple's valuation as a company. One of his big recent initiatives was to double Apple’s services revenue from 2016-2020 to make them less dependent on the iPhone. Reaching this goal early was part of the reason why the company is now valued at over $2 trillion. Mark Zuckerberg of Facebook - Mark Zuckerberg is the founder and CEO of Facebook, and has played a major role in the company’s growth over the years. At one point, he turned down an offer to sell to Yahoo for $800 million (a deal where he personally stood to gain about $300 million). While this may have seemed crazy at the time, it ended up being the right call as Facebook is now valued at $941 billion. In addition to CEOs being in limited supply and crucial to the success of the company, there is one more reason why executive pay keeps rising - compensation plan diversity and incentive based pay. Executive Pay and Stock Awards Over the years, executive pay has become linked more and more to stock awards provided as part of a more complex compensation structure. In 2018, stock options averaged about $7.5 million in 2018, which made up about half of all executive compensation. Tying executive pay to stock performance is a good idea at its core because it motivates the CEO to perform as best they can in order to boost the stock price and please shareholders while simultaneously increasing their own personal wealth. Since stock prices have no defined ceiling, it also means that CEOs have the ability to earn significantly more money than workers ever will. The latter situation is the one that has been playing out in America over the past few decades, and while pay disparity has been a frequently discussed issue in the last few years, this argument frequently leaves out the monumental impact that a top performing executive has on his or her company. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.
