How Did CEOs Start Earning Like Movie Stars? The Answer Is Not What You Think
Today’s headlines are rife with alarm over income inequality and the widening gap between CEOs and the people who work for them. Beyond the sensationalist headlines, however, lies a more nuanced picture and it’s likely not what those on the left want to hear.
Bill Clinton created the soaring salaries for CEOs in 1994 when he introduced section 162 (m) of the Internal Revenue Code. The new provision was to discourage companies from paying in excess of $1 million to their CEOs. It was acceptable for elite athletes, musicians and celebrities to earn millions, but not the elite CEOs who could create wealth for employees, pensions funds, investors, retirees and even nations. These elite performers were to be capped at $1M.
In response, companies started to provide the compensation they needed to attract elite CEOs with options. Now CEOs and other executives could participate in a small degree with the wealth they created for everyone else.
As a company grew in value, the benefit in rising shareprice not only benefitted the shareholders (teachers, firemen, retirees, pension funds and governments) who invested in the company, but the shareprice also benefitted the CEO. The CEO would get a small slice of the wealth created.
Option pools are a small part of the shares, and if there’s no gain in share price, they’re worth nothing. What you don’t hear about are the CEOs who work hard and don’t get much — or nothing at all — if they’re unable to increase the value of the company.
Imagine paying basketball players in options related to winning the NBA finals. Every player would get options, and if they didn’t make the playoffs their options would be worth nothing. They would have played all season for free. If they entered the playoff they’d make a modest amount. If they won the NBA finals then they’d get a large payday. All would then be reset to next season. Options and pay for CEOs is exactly like that.
Even though CEOs receive more pay, they only get paid when they make money for everyone else. In the top 350 firms in the US, the average CEO pay due to stock options is a staggering $17.2M. But this number is misleading as it’s mostly made up of the value of the options. What it doesn’t account for is that options can only be cashed in once. If a CEO has options worth $10M one year, and the same options are worth $20M the next, it doesn’t mean the CEO has $20M in pocket. The CEO has to cash them out, once, and then start rebuilding options all over again.
Still, if you’re an elite CEO, like Jack Welch in his time at General Electric, or Jeff Bezos and Elon Musk of today, high CEO payments come only after they make the majority of the money for everyone else. Jeff Bezos owns about 10 percent of Amazon, the company he founded and created. It’s an amazing company, second only to Walmart for creating new jobs, and creating new jobs globally — good ones too. It invests tens of billions of dollars into research and development in the US. The media is very focused on what the value of Bezos’ shares are to him personally, while neglecting to mention how much value he has created for pension funds, government treasuries, and all of the other investors that own the remaining 90 percent of Amazon.
In 2020, Amazon went from an enterprise value of $920 billion at the beginning of the year to $1,490 billion at the end of the year. That’s an increase of $570 billion! If the founder owns about 10 percent, he increased his net worth by $57 billion. However, at the same time, Jeff Bezos created $513 billion (that’s half a trillion dollars!) of value for everyone else who was a shareholder in Amazon. I’m certain that many pensioners in the US and Canada are paid from pension funds that own significant positions in Amazon.
Being a CEO is like being the chef and host of a large dinner party. You invest the money in groceries, spend the time cooking and host a wonderful meal for everyone. Then, once everyone is fed and takes most of what you made, you get a slice for yourself. The press then comes and criticizes you for making and eating the meal while ignoring the thousands you fed first.
In 2018, after 26 years, I sold the majority of my company to a private equity firm for more than $100M. Some focused on what I made in the deal. What people didn’t see is that, over the 26 years, I paid more than $4 billion in salaries to the people who worked for me. I created more than $4 billion in real dollars for the communities where we worked across Canada, and I worked very hard to make it happen. I paid out substantial sums over two-and-a-half decades before I could reap my reward for being a successful CEO.
Elite CEOs create new wealth for the shareholders who believe in them. They create jobs and they create possibilities. The smartphone, computer, automobile and every cold beverage you drink was created by a CEO, small or large, that started risking time, money and vision to bring something new into the world. Elite CEOs are multipliers, creating significant wealth for everyone else first. They never take more than they create.
Written by Derek Bullen.
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