What CEOs earn is a much-maligned topic and the source of great criticism; however, the compensation for leaders of U.S.-based companies is about right, and not out of line with pay in other countries, according to a new study.
The report by researchers from the University of Virginia’s Darden School of Business and elsewhere compared CEO salary data from more than 1,600 firms in the U.S. and 13 European countries. The team concluded that differences in the way U.S. firms are structured justifies the sometimes substantial pay advantage enjoyed by American CEOs.
The difference? American firms are more likely to have institutional owners and independent boards. These differences lead to better oversight of American firms. In addition, they found, U.S. CEOs are more likely to have compensation tied to performance, which any business owner can appreciate.
That said, criticism of excessive CEO pay isn’t about to go away. And it’s not always coming from anti-establishment agitators. Moody’s Investors Service recently warned that an outsized compensation package an investment bank granted to its two top officers endangered the firms’ credit rating.
Admittedly, the two execs’ paychecks were rich. The firm, investment banker Jefferies Group Inc., plans to pay CEO Richard Handler $58 million for his work last year, including $12 million in salary and $39 million in stock. Another official, Brian Friedman, is due a $53.3 million payday.
With paychecks like that, these CEOs can afford to tip their parking valet what the average U.S. small-business owner earns in a year. According to Payscale.com, a salary research firm, $65,000 is the typical salary earned by the first-time owner of a year-old business with $1 million in sales in Austin, Texas.
Occupy protesters hold a sign of Bank of America CEO Brian Moynihan on October 6, 2011 in Los Angeles. (Photo by Getty Images)
That $65,000 is a median figure, meaning half of business owners make more and half make less. The earnings also go up with more experience as a business owner, and vary by industry and location.
Why Your Pay is Important
CEO pay is another expense on the profit and loss statement. So small-business owners could be forgiven for wanting to pay themselves as little as possible, even if their counterparts at large publicly owned companies look at things differently.
However, it’s important for business owners to compensate themselves appropriately. For one thing, they have responsibilities to themselves, family members and their employees. Business owners need to eat right, get good medical care, live reasonably comfortably and take enough vacations to maintain adequate health, vigor and enthusiasm.
Also, not all businesses succeed, and none of them last forever. Business owners who don’t pay themselves enough may find they have failed to save for retirement or have built up burdensome debt loads in the event their business goes under.
What to Pay Yourself
Deciding what to pay yourself requires taking into account the needs of multiple stakeholders. As a worker, you need to make enough to pay your bills and support those who depend on you. As an owner, you need to leave enough in the business that it can financially support itself and grow.
Beyond balancing those needs, it’s a good idea to look at what owners of similar businesses pay themselves. You can get comparable income figures from sites like Payscale, from checking with trade and professional groups, and from talking to peers and colleagues.
Also look at what your employees earn. If your employees are getting minimum wage, it may be inappropriate for you to take home a Jefferies-size check. On the other hand, if your employees are earning more than you, it may be time to give yourself a raise.
The Way We Pay
For the last few decades, since the rise of shareholder value as the most important concern for business managers, executive pay has supposedly been linked to performance. The idea was that if CEOs were motivated to look at the interests of the owners of the company, they’d make better decisions for all concerned.
It hasn’t turned out that way, however, according to some critics. A study from the University of Illinois found that public firms that claim to base compensation on shareholder return actually pay leaders more than other firms, even when performance is worse.
Researcher Taekjin Shin, a professor of labor and employment relations, says companies that adopt policies to base pay on shareholder return claim to be helping investors, not executives. “But those reforms are often just a fig leaf, and serve CEO interests by further justifying their hefty compensation packages,” Shin says.
Basing compensation on shareholder return has defenders too. A recent University of Toronto study, for instance, shows CEO pay lined up pretty well with performance at 81 percent of the corporations in one major public companies index between 2004 and 2011. “And we certainly aren’t seeing any cases in the eight-year observation where it is completely out of whack, where pay goes up 1,000 percent and [total shareholder return] is minus 90 percent,” researcher Matt Fullbrook says.
Of course, few small-business owners have to meet demands for quarterly earnings improvement and other pressures faced by CEOs of publicly owned companies. That frees them to focus on innovation, research and development, operations and developing human capital—the concerns Shin says really makes companies run well.
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