My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Tuesday, August 2, 2011

CEO compensation-Does any human being deserve that much money?

Janet Mcfarland recently had a special report in the Globe and Mail on Canada’s highest paid chief executive officers. The Globe and Mail review of executive pay for the l00 largest companies reflected a 13 percent jump in compensation for 2010.

In March, United Auto Workers President Bob King had this to say about Ford President Alan Mulally, "I think Alan Mulally is a great CEO, but I don't think any human being in the world deserves that much money. I think it's outrageous." King went on to say "I like Alan Mulally, but I just think it's morally wrong," referring to Mulally's compensation package for 2010, which included 3.8 million shares of company stock.

Ignoring the union versus company bias, I think Mr. King captures the mindset of many shareholders and observers of CEO compensation.

The compensation issue is multi-layered. At the simplest level, are CEO’s salaries outrageous? At the next level, should pay be linked to performance? If pay is linked to performance, how do you ensure a CEO is not rewarded when their company’s stock price increases solely because they are in a hot sector and all companies in that sector have outperformed?

Niko Resources Ltd.’s CEO Edward Sampson was the top paid Canadian CEO in 2010 with compensation of $16,500,000, although more than $15,000,000 came from stock option grants. Personally, I think Mr. Sampson is an excellent CEO and Niko a very good company (save Niko's recent bribery charge), yet in 2010 Niko’s stock price only increased 5% from $98.40 to $103.18, hardly the performance you would expect of the top paid CEO.

In my professional capacity I have/had several CEO’s as clients. Some are/were quite brilliant and a couple former clients were far less impressive. I have clients who are owner-managers of private companies who match the intelligence and foresight of some of these public company CEO’s, yet make far less compensation, even when you take into account the value of the corporations they have built and will sell, or have sold. The point being, not all CEO’s are created equally and not all deserve to be put on a pedestal.

That being said, I would group CEO’s into three camps; the builders of value, the enhancers of value and the freeloaders.

The builders, such as a Steven Jobs or Frank Stronach, who start a company from essentially scratch, deserve huge compensation, at least in the initial building and early post building stage.

I consider an enhancer of value to be a CEO who either takes (1) a  mature company and through strategic vision creates more value for the shareholders, or (2) is a turnaround specialist, or (3) is someone who can take a moribund company and changes its direction to make it profitable. These CEO's in my opinion deserve significant compensation.

The problem I have is with the “freeloader” type who earn massive compensation riding economic or cyclical waves while adding very little value to their companies.

In the end, I agree to a large extent with Mr. King. I don’t think any human being deserves the compensation some CEO’s are paid. However, in certain cases as noted above, I believe significant compensation is warranted and that level of compensation should be determined by performance, not the office of the CEO.

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  1. We have this debate all the time with regards to compensation for the top athletes in sport. In the athletes' case, they train and sacrifice all their lives to become the best in the world at what they do.

    With a top CEO, there are very few people in the world that have what it takes to run a large company. They sacrifice time with their families, sleep in hotels 200 nights a year, and become obsessive workaholics.

    Surely the best in the world deserve to be paid what the market is willing to pay for their talents.

  2. Echo, thx for your comments. I am in the middle of reading Willie Mays autobiography and he was famous for saying he would play baseball for free, just to have such a great job. I personally think current athletes are way overpaid, but since they share the pie with greedy owners who charge ridiculous prices for tickets, I can live with their salaries. I am sure you have also discussed what you consider overpaid professions versus underpaid. The Doctor, fireman, nurse, teacher etc versus businessman, lawyer, accountant :). What has perceived value to society is often not compensated very well compared too many professions. But I digress.

    Back to the blog, I can’t dispute your assertion; however, the market for public companies is a bit funny. The people making the decisions are using monopoly money (not theirs). I have had clients with far more profitable companies then some small to mid cap companies who do not pay their CEO's anywhere close to those of a public company. In the end, where the wages are measured I am generally okay, however, I must say, I personally think there is an imaginary line that Mr. King is essentially referencing, where CEO’s wages become outrageous.

  3. It's none of my business what Ford's CEO is paid, since I'm not a shareholder.

    Now, if you're a shareholder, than by all means put a question on the ballot about CEO compensation. If 51% of your fellow shareholders (company owners) agree, you can change the CEO's salary.