Rule #1 Finance Blog

With Investor Phil Town

How Much Should CEOs Make?

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!

Phil