Cover Image for How Much Should CEOs Make?

How Much Should CEOs Make?

Phil Town
Phil Town

This just came in from Michelle in Colorado:

My husband learned about your book from you at a motivational seminar you participated in here this past summer in Denver. He bought into Investools for me, thinking this was a business I could do from home. I purchased your book soon after completing the Investools 5 step classes via DVD.

To my question... Following your criteria for uncovering the annual income of CEO's of prospective businesses, I am discovering they tend to make incredible incomes. What is a reasonable yearly income for the CEO of a "wonderful" company?

It was disheartening to learn that the CEO of a "wonderful" company I like was on the top 10 list of highest paid CEO's in the country! That was obvious, but what is acceptable? One million? Three million? Including stock options of course. So far, none of the companies I like, which have meaning to me, have "low paid" CEOs. Bummer. I really don't want to share my profits with a "mercenary."

Happy Trails,Michelle

Here's what I told her:

I'm with you Michelle,

I really don't like the attitude that a lot of CEO's have about the money they get paid.  Whole Foods keeps a lid on exec pay.  Something like 14 times what the lowest paid person makes.  But they've had to change it recently because competitors were stealing their key people by offering them a lot more money. 

As business owners we want someone running the business who we really trust.  And I don't mind them getting paid big bonuses for doing great things.  I do mind, however, the current practice of giving a CEO a big bonus for doing nothing out of the ordinary. 

By that I mean that a lot of CEO's get a bonus or stock options simply because the business grew as it would in the ordinary course of business.  They didn't do anything wonderfully great.  They just were there and the business, which was growing before they ever showed up, kept growing.  So it's like they got a reward for not screwing it up.  What's up with that?  Do you get a bonus for not screwing up at work?  Why should they?

CEO's should be compensated for doing a great job with surplus capital.  They should focus on reinvesting the money into the business and on getting a very high rate of return on that money.  If they can do that, they deserve some of the surplus as a bonus. 

If they want stock, they can buy it just like me and you.  I'd love to see a CEO with enough confidence in his own skill and performance to put his money on the line just like an ordinary investor.  Why not let them get rich with us?  They deserve it.  But why let them get rich without any skin in the game? And if you think you have skin in the game, Mr. CEO, if you are getting a salary of $2 million a year, you are smoking something.

We want CEO's who lead, who have big dreams, who can pick great people and motivate them with a vision of the future.  We're sick of CEO's who are in it for the money.  Hey, do you really need another $20 million? Who are you impressing?  If you think your friends care, get new friends.  The rest of us just think you're an [expletive deleted] for living in a 40,000 sq ft mansion like the King of France. 

And like the King of France, you better watch your head, because there is a revolution going on and we're not going to stand for it any more.  Pay attention to what happened to Lay and Skilling and many others, Mr. CEO.  We're pissed off and we're not going to take it any more.  If you haven't earned those huge bonuses, you better think seriously about giving that money back to the stakeholders -- the employees and the owners -- before you take it home with you, because we're watching.

Bottom line, Michelle, if the CEO is making more than 40 or 50 times their lowest full time people, they are making too much.  That's what the ratio was in 1980.  25 years later and the ratio is now about 500 to 1.  That's sick.

Let's say the low end guy at McDonald's is making $20K a year.  At 500 to 1, the CEO could be making $10 mil a year. Hey, man -- unless you can hit a jump shot from 25 feet at the buzzer 90% of the time, you don't deserve $10 mil on the backs of your people. 

What happened to leadership?  When I was in the Army they taught young lieutenants to put our people before us.  They get fed before we do.  You make sure they get their poncho before you get yours, and if there are new socks they get them first. 

Leaders, in the Army model, are there to serve their people by being there for them, by setting the standard.  Today, it's like these guys are out to see who can rip off the workers and the owners fastest.  They are acting like European kings in the middle ages.  And it has to change.

And how is this revolution going to come about?  The same way it changed back then.  The little guys learned to read. With reading came knowledge.  With knowledge came outrage.  With outrage came revolution, and a bunch of heads rolled. 

Today, we are getting tools to learn to read financially.  And with our newfound financial knowledge we are seeing the outrageous behavior of these so-called leaders, and we're going to bring them down.  We are.  You and me.  The little guys.

The way we do that is the way the little guy has always beaten the big bully -- by banding together and by taking action.  We band together by insisting on a level playing field -- no insider trading, no early disclosure to the pros.  And we take action by voting with our money. Get your money out of the hands of fund managers who invest with these rip-off CEO's.  Put it in funds that invest with good people, or do it yourself.

Believe me, the result of this will be enormous.  You will see the mighty fall and the meek shall inherit.  Guaran-frick'n- teed.

Now, if you are not a rich ripoff CEO, go play!