Why Are CEOs Paid So Much?
Elan Journo
May 02, 2006
Successful CEOs are indispensable to their companies and deserve their high salaries.
During his final year as chairman of Exxon, Lee Raymond received one of the largest compensation and retirement packages in history--worth nearly $400 million. Such disclosures fuel the rampant suspicion that directors and managers are overpaid.
Astonished to learn that what an average worker earns in a year, some CEOs earn in less than a week--people ask themselves: "How can the work of a corporate paper-pusher be worth so many millions of dollars?"
The answer is that successful CEOs are indispensable to their companies. They earn their rewards.
In business, success requires long-range thinking. CEOs must project a strategic game plan in terms not merely of a month or two, but of years and decades. A biotechnology company, for example, may spend 15 years and billions of dollars developing a new cancer-fighting medicine. Success is impossible without the business acumen of its CEO. For years before a marketable product exists, he must raise sufficient capital to sustain the research. What long-term business model will attract venture capital? Should the company accept partial short-term sponsorship from a large drug manufacturer in exchange for a modest royalty on the drug in the future--or risk going it alone and possibly running out of funds? It is on such decisions that a company's success is made--and lives of cancer patients may depend.
In order to be successful in the long range, the CEO's strategy must encompass countless factors. He must devise a plan to grow the business in the face of competitors, not only from within the United States, but from any and every region of today's global economy. The CEO calls the plays for a team of tens (and sometimes hundreds) of thousands of workers. All of the actions of every employee and every aspect of the business must be coordinated and integrated to produce the cars, computers or CAT scanners that yield profits to the company. It is the CEO who is responsible for that integration.
To successfully steer a corporation across the span of years by integrating its strengths toward the goal of creating wealth, requires from the CEO exceptional thought and judgment. Excellent CEOs are as rare as MLB-caliber pitchers or NFL-caliber quarterbacks. And in the business world, every day is the Super Bowl. There is no off-season or respite from the need to perform at one's peak.
How big an influence can one man have on the fortunes of the entire corporation? Consider Lee Raymond's impact on Exxon. During his years at the helm, Exxon's market value quadrupled to $375 billion, "overtaking BP as the largest oil company and General Electric as the largest American corporation. Net income soared from $4.8 billion in 1992 to last year's record-setting $36.13 billion" reports the New York Times. Among his strategic accomplishments was the acquisition of competitor Mobil; the merger was among the biggest in corporate America. Last year alone Exxon Mobil paid more than $65 billion in dividends to shareholders.
Given the effect a CEO can have on a company's success, we can understand why their compensation packages can be so high. One way employers reward excellence is through bonuses. For many CEOs, bonuses amount to a large portion of their earnings. Some CEOs are paid a token salary, but are rewarded with large parcels of company stock. As is the case with athletes and other individuals whose talents are rare and much prized, the CEO's pay package is calculated with an eye on the competition. Companies pay millions of dollars to a valuable CEO, one who they judge will produce wealth for the shareholders, in part so he will not be hired away by a competitor.
On the gridiron, the baseball diamond and the basketball court, we see and admire the physical prowess of a superlative athlete--one who earns the title of MVP--and we understand that it is morally proper to reward him accordingly. Though the efforts of CEOs are not televised on Monday Night Football, their achievements are real and have a profound benefit to all our lives. It is time that we learned to appreciate the work of successful CEOs and recognize that they deserve every penny of their salaries.
During his final year as chairman of Exxon, Lee Raymond received one of the largest compensation and retirement packages in history--worth nearly $400 million. Such disclosures fuel the rampant suspicion that directors and managers are overpaid.
Astonished to learn that what an average worker earns in a year, some CEOs earn in less than a week--people ask themselves: "How can the work of a corporate paper-pusher be worth so many millions of dollars?"
The answer is that successful CEOs are indispensable to their companies. They earn their rewards.
In business, success requires long-range thinking. CEOs must project a strategic game plan in terms not merely of a month or two, but of years and decades. A biotechnology company, for example, may spend 15 years and billions of dollars developing a new cancer-fighting medicine. Success is impossible without the business acumen of its CEO. For years before a marketable product exists, he must raise sufficient capital to sustain the research. What long-term business model will attract venture capital? Should the company accept partial short-term sponsorship from a large drug manufacturer in exchange for a modest royalty on the drug in the future--or risk going it alone and possibly running out of funds? It is on such decisions that a company's success is made--and lives of cancer patients may depend.
In order to be successful in the long range, the CEO's strategy must encompass countless factors. He must devise a plan to grow the business in the face of competitors, not only from within the United States, but from any and every region of today's global economy. The CEO calls the plays for a team of tens (and sometimes hundreds) of thousands of workers. All of the actions of every employee and every aspect of the business must be coordinated and integrated to produce the cars, computers or CAT scanners that yield profits to the company. It is the CEO who is responsible for that integration.
To successfully steer a corporation across the span of years by integrating its strengths toward the goal of creating wealth, requires from the CEO exceptional thought and judgment. Excellent CEOs are as rare as MLB-caliber pitchers or NFL-caliber quarterbacks. And in the business world, every day is the Super Bowl. There is no off-season or respite from the need to perform at one's peak.
How big an influence can one man have on the fortunes of the entire corporation? Consider Lee Raymond's impact on Exxon. During his years at the helm, Exxon's market value quadrupled to $375 billion, "overtaking BP as the largest oil company and General Electric as the largest American corporation. Net income soared from $4.8 billion in 1992 to last year's record-setting $36.13 billion" reports the New York Times. Among his strategic accomplishments was the acquisition of competitor Mobil; the merger was among the biggest in corporate America. Last year alone Exxon Mobil paid more than $65 billion in dividends to shareholders.
Given the effect a CEO can have on a company's success, we can understand why their compensation packages can be so high. One way employers reward excellence is through bonuses. For many CEOs, bonuses amount to a large portion of their earnings. Some CEOs are paid a token salary, but are rewarded with large parcels of company stock. As is the case with athletes and other individuals whose talents are rare and much prized, the CEO's pay package is calculated with an eye on the competition. Companies pay millions of dollars to a valuable CEO, one who they judge will produce wealth for the shareholders, in part so he will not be hired away by a competitor.
On the gridiron, the baseball diamond and the basketball court, we see and admire the physical prowess of a superlative athlete--one who earns the title of MVP--and we understand that it is morally proper to reward him accordingly. Though the efforts of CEOs are not televised on Monday Night Football, their achievements are real and have a profound benefit to all our lives. It is time that we learned to appreciate the work of successful CEOs and recognize that they deserve every penny of their salaries.
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