If one brings up the subject of CEO compensation with anyone who isn’t a CEO, expect eye-rolls or assumptions that chief executives salaries are unfair; that they are outsized and outrageous.
Then there are, on the other end of the spectrum, CEOs like Mark Zuckerberg, who recently eschewed a multimillion-dollar salary for $1 in base pay.
Neither of these compensation models is sustainable. Executives of small to medium-sized companies need a benchmark against which to compare their salaries. How can CEOs determine appropriate compensation for themselves?
SMEs*: CEO Compensation is a Shot in the Dark
In 2010, someone in Las Vegas had a yard sale and included a drawing. Nothing special. Just a face, inexpertly rendered. $5? Sold! Only it was an Andy Warhol original, done when he was just 10. And it was worth more than $2 million. This is the same problem CEOs face: they often do not assign the right value to their position. Many, like the poor guy who could’ve been a millionaire, undervalue what they have to offer.
It’s a switch from the stereotypical claims that CEOs are overpaid. In Forbes, contributor Robert Sher recounts a story of a CEO in this predicament: he led an $11-million company, no debt, $3 million in cash, and revenue growth of 15% annually. His pay was 35% lower than market value.
How Much Is This Worth?
Often, CEOs just don’t know; they can’t just say, “Google, how much should I be making?” It’s difficult to find hard data on compensation for private companies, particularly small enterprises.
Here’s an example: The Chief Executive Group surveyed more than 1,000 companies with revenues under $10 million. The average base pay for a CEO is $1.23 million, but as they so helpfully point out, the top CEOs skew this and there are “Big differences in CEO compensation between companies with less than $2 million vs. those with $2-5 million in revenue…” In other words, that $1.23 million average doesn’t really apply to the “low end” of the little guys.
Another problem is that, if CEOs have been with their companies from startup, they are likely used to paying themselves however and whenever they can. Cash, at that time, is a precious commodity, and many CEOs forgo “normal” paychecks in order to put money into the company’s growth.
Even if it’s years later and their companies are on solid footing, they might not have taken a step back and asked, “What’s my position really worth?”
Grounding Compensation in Reality
Compensation has to be based, first and foremost, on market realities. Think about this: if a CEO were to go play golf and bring someone else in to do her job, how much would she have to pay?
The CEO of the $11-million company above might not be able to attract an equally qualified CEO to his company because he was paying himself too little! Appropriate compensation is a function of the industry, the size of the company, and the profits being generated.
A CEO of a profitable $1 million company, for example, is not going to make $250,000. $90,000 to $100,000 might be closer to the mark. Remember, this is about salary, not about the benefits or compensation a CEO receives in terms of profits. So many owners and executives blur the line between the money they get paid to do their jobs, and the money they receive as a reward for A leading a profitable company
Keeping this in mind, the question is, then, “How much would you have to pay a CEO to come in and do this job?”
CEOs of small and medium-sized enterprises must take a step back and assess the value of their role. How much is it worth to the company? How much would they have to pay someone else given the company’s size, its profits, and the industry in which it is operating? This gives leaders and their companies a solid compensation foundation that is both appropriate and fair.
*Small to medium enterprises