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Why do CEOs Make so Much Money?

Updated on March 27, 2014

Do you think that it is fair for CEO's to receive such high salaries?

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With just a single Google search, you can find the salaries of top CEO's from around the world. As we look at the astronomical paychecks that some of these Chief Operating Executives earn, it can be overwhelming. We begin to question if the economy could ever really be bad when single individuals receive such extravagant paychecks.

Jeffery Boyd, the CEO of priceline.com (the 7th highest paid CEO according to Forbes), made $50 million last year. Assuming he has two weeks of vacation time, he is making $1 million a week! In other words, if you made $40,000 a year, you would have to work for 25 years to earn what Boyd receives in just one week.

That's a lot of money. Is one week of Boyd's time really worth 25 years of yours? That's for you to decide.

Although you may be reading this article simply out of curiosity, it is likely that the majority of readers have one of two agendas when questioning why CEO's make so much: either you believe that CEO's do not deserve the compensation they receive or you want to know what you can do to become someone who's time at work is worth 1000x times that of the average employee.

Keep reading and you will discover why CEO's receive the compensation they do, and what you can do to join their ranks if you so desire. In this article we will take a look at 1) What a CEO does, 2) What it takes to become a CEO, 3) Why CEO's get paid so much, 4) Why it's a good thing that CEO's get paid so much, and 5) How you can become a CEO.

Ultimately, the objective of a CEO is to increase the value of the company while following the mission statement laid out by the organization.

It takes a lot to become a CEO.
It takes a lot to become a CEO. | Source

What Does a CEO Do?

Many people have the perception of a CEO as someone who sits in an office for a few hours, tells other people what to do, and then goes on a Mediterranean vacation in is $5 million yacht.

This is not the case.

The life of a chief executive officer is one that consumes high levels of time and energy, effecting every aspect of the individual's life. Not only does a CEO have to make important decisions regarding the future of the company, but the CEO's job and reputation are dependent on the outcome of these results.

While a janitor may be able to cheat in his job without it having a drastic effect on the company (his failure to clean the bathroom thoroughly simply means that people will be a bit disgusted), the CEO who cheats in his job has the potential to make the front page of the newspaper and bankrupt the company - resulting in the loss of thousands of jobs and invested funds. Yes, the responsibilities of a CEO are intimidating.

While the actual job duties vary depending on the size and type of the organization, here are some of the typical duties of a CEO:

  • Developing a vision and long-term strategy for the company.
  • Setting the tone of the organization through his/her words and actions.
  • Hiring executive and managerial staff.
  • Having the final say in decisions regarding all aspects of the company (including dealing with finances, operations, expansions, promotion, and purpose).
  • Meeting with employees at all levels of the organization to determine the overall quality of the organization.
  • Meeting with the board of directors and other interest groups.
  • Building up relationships with company suppliers, customers, associates and competitors.

As you can see from the list above, being a CEO requires a lot of work and dedication. Each category above could be expanded to make this list much longer.

Characteristics of Effective CEO's

According to Compass Management Consultants, a good CEO should have the following characteristics:

  1. Recognize people's efforts
  2. Develop a power base
  3. Use authority effectively
  4. Use the power of the position
  5. Build a reputation
  6. Develop skills and abilities
  7. Clarify personal objectives
  8. Communicate with stakeholders
  9. Develop a positive self-image
  10. Combine vision with attention to detail

What Does It Take to Become a CEO?

For someone to become a CEO, there are a large number of factors that play a valuable role, but here is a general rundown of how someone becomes the president of an organization:

Intelligence: Yes, it is important to be smart enough to make good decisions. After all, if millions of dollars worth of equipment, thousands of people's careers, and the safety of the entire nation (depending on the product that is produced), is going to be placed into the hands of someone, that person certainly needs to be intelligent enough to make the right choices as to how to operate the company.

Dedication: Do you want to work from 8-5 so that you can get home in time to watch your favorite shows and spend every evening with your family? Then become a CEO is not for you. An executive has a job that requires his time at the office at all hours of the day and night - he must be committed to his work. Additionally, even when he is not at work, he is constantly thinking about the tasks and meetings that he must deal with when he returns to work - there is no "time off" when you are a CEO.

Integrity: An executive job provides ample opportunities to be dishonest. Sadly there are CEO's that fall for these "easy ways out". Because of this, a CEO must be someone who has standards and values that go above that of simply being an okay person.

Passion for Work: Most people who complain about the high salaries that CEO's receive have little motivation. CEO's don't end up in that position because of luck, they become CEO's because they have passion to be and do the best that they can. Someone who struggles to become motivated under light stress will certainly fail as a CEO.

Determination: A woman does not wake up one day and say, "Hey, I want to become a chief executive", and then go down and apply to run the local Fortune 500 company. A CEO has a plan from the beginning. They have the drive to do the best that they can and take up the opportunities that are placed in front of them. Organizations want CEO's that are dedicated to the success of the company - this dedication must be shown through determination and a significant investment of time.

Charisma: To be a good leader you need to be considered a leader by others, not only by yourself. A CEO must have the ability to communicate effectively with all groups associated with the organization. Understanding how to motivate and inspire people, while being capable of making final decisions, is essential for success as a CEO.

Top Paid CEO's

CEO Name
Salary (in Millions)
Company
John H Hammergren
131.19
McKesson
Ralph Lauren
66.65
Ralph Lauren
Michael D Fascitelli
64.40
Vornado Realty
Richard D Kinder
60.94
Kinder Morgan
David M Cote
55.79
Honeywell
George Paz
51.52
Express Scripts
Jeffery H Boyd
50.18
Priceline.com
Stephen J Hemsley
48.83
UnitedHealth Group
Clarence P Cazalot Jr
43.71
Marathon Oil
John C Martin
43.19
Gilead Sciences
Top 10 paid CEO's according to Forbes Magazine.

Top CEO's in America

Why Do CEO's Get Paid so Much?

Here is the answer that you have been looking for since the beginning: Why do CEO's get paid so much?

There are two reasons.

Reason 1: A CEO is Worth the Investment

You have one hour of free time and my neighbor and I both come talk to you. Out of the two options below, which would you choose?

Option A: I will pay you $10/hour to mow my lawn.

Option B: My neighbor will pay you $50/hour to mow her lawn.

Clearly, because both require the same amount of time, you would choose Option B - which gives you 5x the amount of money in the same amount of time. All other things being the same, Option B is definitely the best choice. Why? Because it is the best return on your investment.

Now let's go to the position of CEO. You know who decides how much money a CEO makes? The owners of the company.

If I own a company and I need someone to manage it, I am going to be interested in making as much money as a can. My cousin Elmo says that he will run the company for just $30,000 a year. However, if I hire him the company will only make $50,000 a year - meaning that I make $20,000.

On the other hand, I can hire John, an executive from another company. To convince him to leave his company and join mine, I will have to pay him more. I would have to pay John $100,000 to do the job. But because John knows how to do the job well, the company is able to make $200,000 a year under his leadership. This means that I would make $100,000.

Which is the better choice? Should I hire Elmo or John.

Even though John will cost me more than Elmo, because he will make a lot more money for the company, it would be smartest for me to hire John. When I hire John I can make $80,000 more.

For the Socialist: At this point you may be thinking, "That's incredibly selfish that you did not hire your cousin Elmo! You capitalist pig - clearly you don't care about anyone other than yourself."

But wait a minute... If I hire John, I make $80,000 more per year. This means that I could now hire Elmo for $30,000 (to do something else) AND hire my other cousin Frankie for $30,000. Even with hiring both of them I make $40,000 a year - double what I would make by hiring Elmo (additionally, I am providing two more people with jobs).

A CEO is paid based on the value that it is believed she can add to the organization. Someone will not be paid millions of dollars unless it is believed that they can added far more value to the company.

What are you saying now? You still think that you can do a better job then a particular CEO? Okay! Go start your own company. Any CEO who runs a multi-million dollar organization could start his own. So why don't you go do that?

Reason 2: A CEO Gives the Company Far More Time Than Other Employees

We all want to get paid for our time. We expect to get paid for our time. If I work 8 hours, and I believe that my time is worth $10 an hour, than I believe that I should get $80.

A CEO however, is responsible for everything that a company does, regardless of when it happens. While the hourly employee only gets in trouble for things that happen while he is working, the CEO is held responsible for things that happen while she is sleeping, on vacation, or enjoying her weekend. Everyone would expect overtime pay for that.

Additionally, a CEO is bringing hours, even years, of education and experience into the company - the company is compensating the executive for all of this time as well. Again, everyone expects to get paid for the time that they spend working.

Here is a breakdown of the time investment that a CEO is actually being paid for:

  • Time at work: Just like any employee, the CEO deserves pay for the time he is at work.
  • Time working at home: A CEO's job does not end when he leaves the office. There are meetings, ideas, and strategies that he must spend hours in the evening thinking about. A CEO may end up unable to sleep because of a difficult decision that he will have to make the next day.
  • On-call time: A nurse is paid several dollars an hour for every hour she is on call. We would expect to be paid as well - if it was required of us to show up at any time we were needed - day or night, weekday or weekend. A CEO is always responsible. Therefore, he receives on-call pay 24/365.
  • Past work experience: When a CEO is hired, he is hired because of his track record. In other words, he is being paid for his past work experience as well. The CEO has spent years working at other jobs to become capable of doing this job. Isn't he entitled to being paid for that?
  • Time in school: A CEO is likely someone who has spent 5-8 years studying beyond high school. Therefore, the pay that the CEO receives should compensate him for those 6 years of work. If he had gone straight into working, he would have made around $180,000 during those 6 years (at $30,000/year). Therefore, that pay needs to be taken into consideration.
  • Cost of school: Education is not cheap. If the cost of studying and supporting oneself while studying amounts to $20,000/year, the CEO needs to receive compensation of $120,000 for the 6 years that he spent in school.

This list is just to give you an idea of the time commitment a CEO invests into a company. It is absurd for an hourly employee to believe that he is entitled to the same pay that the CEO receives while being able to enjoy his evenings, weekends, and holidays, having no threat of being sued, and having no responsibility for the jobs of hundreds or thousands of other people.

Becoming a CEO likely takes 20 years of dedication, commitment, and work. If you haven't spent much time dedicated or committed up to this point, and becoming a CEO is what you want to do, then get to work now - after 20 years of hard work and training you could be a million-dollar CEO.

Why is It Good That CEO's Get Paid so Much?

In economics there is a term known as "opportunity cost". Opportunity cost is the next best decision that someone loses when making a choice. In other words, if you spend an hour studying for an exam, the opportunity cost could be watching an hour of television, working for an hour, or spending an hour hanging out with friends.

Because of this concept, organizations need to pay CEO's a lot of money to attract qualified candidates. If I am an expert in shoe making, and I can start my own business making shoes that would earn me $1 million a year, then a company will need to pay me close to that in order to attract me as an employee.

Therefore, if big organizations did not pay competitive salaries to CEO's, they would work somewhere else or start businesses of their own - and this is bad for the average person. Why? Because most of these CEO's would start smaller businesses that would employ fewer people, and would not be traded on the stock market.

When a CEO is paid a large amount of money, his goal is to help the organization succeed - this means more jobs and more profit for our retirement funds that are invested in company stock.

Therefore, by offering high salaries, companies attract talented people who will provide jobs, provide value, and create a positive culture in the workplace (ideally).

A Better Question to Ask

"But there are so many corrupt CEO's who make millions even when the company is going bankrupt!"

That's true. But the solution is not to focus on their salaries. When everyone focuses on money, that's when corruption takes place. Often times, the people who say it is unfair that executives get paid so much are more focused on money then the executives themselves!

The focus should not be on money.

The question to focus on is instead is, "Does the CEO have integrity?"

A CEO who has integrity will focus on making society a better place rather than sucking up as much money for himself as possible.

In fact, a CEO with integrity is the exact type of person who should receive millions of dollars, because they will use the money to assist charities, start new businesses, and improve society. It is people who selfishly lack integrity that will cause harm to the world. And while these parasites can hurt society regardless of the amount of money they have, it is even easier when they are wealthy.

Therefore, ask the question, "Does he/she have integrity?" Ask this question of CEO's, leaders, pastors, teachers, politicians. Ask this question of everyone - but first, ask this question of yourself.

People with integrity (includes being ethical, working hard, doing your best, helping others, etc), will never struggle with finding a meaningful job and making enough to live on. More importantly, when you have integrity, you will leave a legacy regardless of the amount of money you make.

How Can You Become a CEO?

It is never to early, and rarely to late, to start preparing to become a CEO.

There are multiple ways of going about it, but the first is to decide how committed you are to following through. If you have a family, hobby, or television show that requires the majority of your time, you will certainly want to examine the type of CEO position you aim for. While some are flexible enough to give you time for other interests, some consume all of your time.

While it is possible to become a CEO by working your way up the corporate ladder, an often easier way to become a chief executive officer is to start your own business.

Either way, here are things to develop if you are interested in becoming the big boss:

  • Develop your character: Who you are is everything. Your integrity, charisma, work ethic - these all will play into your success.
  • Perfect your communication skills: The majority of a CEO's time is spent working with others. Make sure that you are able to share your ideas effectively and respectfully.
  • Read frequently: There are thousands of books on leadership, motivation, decision making, and organizational structure. Read as much as you can and this will help develop you into a successful leader.
  • Take on extra work: A CEO needs to understand all aspects of a business. Take on additional tasks constantly. If you already have a supervisory role in an organization, manage your team effectively and offer to take on more responsibility.
  • Be consistent: Consistency is essential in leadership. Do what you say you will do, be who others anticipate you to be, and follow through. This will help you greatly in succeeding.
  • Take advantage of every opportunity: Apply for positions that are slightly higher than your current position, slowly move your way up the corporate ladder. Although it will be slow, each move higher will provide you with more responsibility, more experience, and a stronger resume.
  • Consider being a big fish in a small pond: It is clearly easier to become the CEO of a small company than a giant corporation. Consider applying for a CEO position in a small company in a small community somewhere. After all, once you become a CEO, you will be able to become an executive in larger corporations much easier because you have the experience of managing all aspects of an organization.

Becoming a CEO is no easy task. However, if you have the drive, commitment, and passion to make the world a better place, becoming a leader in the business world is certainly a valuable way to do that.

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    • suzettenaples profile image

      Suzette Walker 4 years ago from Taos, NM

      A very interesting and informative hub! I, personally, do not believe any one person is worth all that money in the position of CEO. A company or firm has many talented people who all work as a team to help the company grow and produce the service or product required all the way down to the janitor. Too many of these CEO's don't grow the company or are corrupt and still are paid their millions of dollars even when forced to resign. That is so wrong. A CEO's interest is only in producing profit for the shareholders, he/she doesn't always do what is ultimately best for the company or the product or service or even what is best for our country. That is how we are in this economic mess as it is. So, you will not find me being sympathetic with CEO's and the amount of money they make - it is too much for one person in the company.

    • Robert Erich profile image
      Author

      Robert Erich 4 years ago from California

      I agree. When someone's salary is more than a typical person would make in a lifetime, I find it ridiculous and unnecessary. But it is something interesting to think about.

      Ultimately it makes me ask myself to consider how valuable I am to society. Do I help out enough to be valued at $50 million (even if I never get paid that much)?

      Thanks for your input!

    • lindacee profile image

      lindacee 4 years ago from Southern Arizona

      Provocative Hub, Robert! My husband and I discuss this every time we read a news story about another CEO receiving obscene amounts of money. I'm certainly not in favor of government capping executive salaries, but I do think the companies themselves should consider scaling back salaries for upper management. And don't even get me started on their separation packages! A CEO can get fired and received more than I would make in hundreds of lifetimes! Ugh!

    • Robert Erich profile image
      Author

      Robert Erich 4 years ago from California

      I agree with you Linda. It is not the right of government to cap these things, but businesses certainly should. Of course, in the case of some businesses (like Ralph Lauren), the CEO is the primary owner (Ralph Lauren). When the owner and CEO are the same, it's hard to say how to compensate for the executive salary.

      But for the typical CEO, you are right - severance packages and salaries should be minimized by companies. After all, the less the CEO makes, the more the owners make - and the more that can be reinvested into the company.

      When the government does not intervene (as was the case several years ago) then companies get in trouble for their unintelligent behavior. It is when companies make stupid decisions and the government supports them anyway that we get into big trouble.

    • breakfastpop profile image

      breakfastpop 4 years ago

      It's a free country and people are entitled to earn as much as they can. I have no problem whatsoever seeing a successful person being rewarded. The last thing we need is having the intrusive arm of government deciding who should get paid what!

    • Robert Erich profile image
      Author

      Robert Erich 4 years ago from California

      Very well put. I think the mistake that many people make is this belief that, if the money doesn't go to the CEO's, it will go to them. Sadly, truthfully, this isn't the case.

    • rfmoran profile image

      Russ Moran 4 years ago from Long Island, New York

      Most people who fret over gigantic CEO pay do not stop to think about the factors you review here Robert. They often subscribe to the fallacious economic idea that there is a given sized pie, and if one person gets a large slice, that slice takes away from the others' share. Very well done hub.

    • Robert Erich profile image
      Author

      Robert Erich 4 years ago from California

      Thank you rfmoran! I appreciate your comment and insight. You have worded it perfectly! It is not an either/or situation. Just because someone else receives less does not mean that I will receive more.

    • tirelesstraveler profile image

      Judy Specht 4 years ago from California

      Caught between thinking big brother should stay away from business and thinking CEO's do get too much money I propose another reason why CEO's make so much money. Somewhere in the late 70's and 80' s the idea that companies should only hire the smartest and wonderful people to fill their positions. A star would arise from the the bottom and shoot to the top, because they were highly educated from the best of schools. They seemed to be doing the quintessential amazing job. So with less than two years actual experience they were promoted higher. Everyone accepted what they said and did, because they were the rising stars instead of good business practice and sense. Malcomb Gladwell talks about this in Outliers. Eventually companies like Enron fell apart, because they operated this way. There were no really experienced people to say, "Whoa Star this isn't O.K." By that time the cost of CEO's had inflated so high that for all the reasons you state companies had to pay exorbitant salaries. Somewhere there needs to be an internal correction. I don't see how companies can continue to be profitable if they don't. The Steve Jobs, Bill Hewlett, Dave Packard, Meg Whitman, Bill Gates etc. all earned what they when they started from the ground up. I don't see that kind of CEO lining up these days.

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