Why Are CEOs Paid So Much?

by | Apr 16, 2004 | POLITICS

Are America’s CEOs paid more than they deserve? Many people’s answer is a vehement: Yes. That view is reinforced anew every spring, when companies file their financial statements and we learn how much CEOs were paid last year. In 2003 the average pay for CEOs at 200 of the largest U.S. companies was $11.3 million–but […]

Are America’s CEOs paid more than they deserve?

Many people’s answer is a vehement: Yes. That view is reinforced anew every spring, when companies file their financial statements and we learn how much CEOs were paid last year.

In 2003 the average pay for CEOs at 200 of the largest U.S.

companies was $11.3 million–but there are a good number whose compensation packages approach the $100 million mark. Faced with these figures, Americans from all walks of life–who revile CEOs as greedy fat cats–are overcome with bewilderment and indignation. 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.

How big an influence can one man have on the fortunes of the entire corporation? Consider the impact of Jack Welch on General Electric. Before his tenure as CEO, the company was a bloated giant, floundering under its own weight. Splintered into dozens of distinct and inefficient business units, GE was scarcely making a profit. Welch turned it around. He streamlined and reorganized the company’s operations and implemented a sound business strategy yielding more than $400 billion worth of shareholder wealth.

In business, success requires long-range thinking. But 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 short-term partial 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.

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; last year, for instance, the CEO of Apple Computer, Steve Jobs, earned

$1 in salary and received stock valued at $75 million. 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.

Copyright 2004 Ayn Rand Institute. All rights reserved. That the Ayn Rand Institute (ARI) has granted permission to Capitalism Magazine to republish this article, does not mean ARI necessarily endorses or agrees with the other content on this website.

Elan Journo is director of policy research at the Ayn Rand Institute. His latest book -- What Justice Demands: America and the Israeli-Palestinian Conflict -- is on American policy toward the Israeli-Palestinian conflict. Visit his website at elanjourno.com

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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