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Thaddeus McCarthy Headshot

What Exactly Is Fair CEO Compensation?

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There have been a couple of interesting news stories that have come out recently concerning the compensation that different business executives have been receiving. One concerns Elon Musk and his receiving of effectively $1 as CEO of Tesla Motors. The other has been in regards to Warren Buffett's decision not to vote on Coca-Cola's pay plan (he would have voted no), which will transfer $13 billion to management over the next four years. Both these cases are at opposite ends of the scale for Executive Compensation, and so it begs the question, what is fair?

Buffett has long been against the excessive pay packets that many company managements receive, himself receiving just $100,000 as CEO of Berkshire Hathaway. Buffett's reasoning for not voting for the plan is that he doesn't want to show disapproval of Coca-Colas Management. As he says, the compensation packages of many CEOs is totally out of whack with company performance. Buffett has said (many times in fact) that this practice is unfair on shareholders.

Back in business school, we were taught about the shareholder value theory, which said that businesses purpose should be to make a profit for the shareholders. But since, as Buffett says, management have enormous power over the compensation packages decided on by the board (much more than the Mom and Pop shareholder), then perhaps the shareholder value theory is always doomed to fail? And if that is the case, then maybe it is worthwhile for Investors and other interested parties to take a close look at those CEOs that opt for much less pay.

People like Elon Musk, and Steve Jobs before him, have opted to take only $1 in annual salary. Along with these two; Eric Schmidt, Meg Whitman, Larry Ellison and Sergey Brin have in the past opted for just $1 in salary. The news currently surrounding Elon, is that it was found out that he returned all but $1 of his $70,000 Tesla salary. As per his request he receives only $33,000 in base pay, which is a minimum. The other $37,000 comes from bonus pay, again a pitiful amount for the enormous hours he undoubtably puts in.

A common thread that can he found amongst the names above is that most of them were the Founders, which a couple of key observations can be drawn from. The first is that as they were the Founders, then they probably have a bit of wealth as a result, so likely don't need the money. The second is that as they are doing what they are doing for their companies benefit, not for their own. All of which is not to criticise Muhtar Kent (Coca-Cola CEO) in particular. I believe him to be one of the better CEOs around, and know that he is highly respected within Coca-Cola.

The main point to make about the difference between the $1 CEO and the over-bloated Wall Street Executive is that one is operating for a larger purpose, whereas the other is operating for something much smaller. Whether that much smaller purpose is in regards to his personal benefit, I cannot say, because that is not always the case. A lot of CEOs try to operate for their companies (and shareholders) benefit, but (no matter how good they are) they cannot share a Founders story or unique long-lasting and historical vision for their enterprises.

Elon Musk is a clear case in point with all of the companies he has created. When he was younger he decided that the three areas that believed would most affect the future of humanity would be space, renewable energy and the internet. He is or has been involved in all three areas. With Tesla he has said that the company's goal is to advance the advent of renewable transportation. Undoubtedly, both his childhood story and his vision for Tesla are unique to a Founding CEO.

So to go back to the main purpose of this article, which is to ask what is the fair level of compensation for company executives, it is obvious that compensating a CEO of a company that has lost money, with $50 million, is just not morally right. As Buffett says, it isn't fair on the shareholders. But by the same token, it isn't fair on the shareholders to expect CEOs and other company management to have such lofty goals as the Founding CEOs, like Musk and Jobs. And so not expect anything more than seeing the company do well. Ordinary CEOs (who haven't founded the company) should always expect to be well compensated if a company has made a large yearly profit. How well needs to decided on by the board, but should not be so large that it represents an unjust proportion of the companies revenues'.

If their company has made a loss however, then it is only fair on the shareholders and all interested parties that they receive a smaller compensation package, and if their positions in management are evaluated.

And as for the $1 CEOs; many shareholders would probably say that it is unfair on them to only be receiving that amount. As a Tesla shareholder myself, I certainly feel that way about Elon Musk's underwhelming compensation package. But we can all learn a valuable life lesson from people like Elon, Steve and co. which is that when you are passionate enough about something, you often don't need a lot in monetary compensation.