Why CEO salaries are too high

I read this article from CNN on “why CEOs are paid so much”. I read that many are paid over 1,000 times the median employee salary. This is wrong. No CEO should be paid more than 50 times more than the lowest worker. Why 50? well I just picked a number. So if the lowest paid employee is earning $20k, the CEO can get no more than $1m.

If you have recently started a company do the right thing and pay yourself sensibly. So how does CEO pay get so high?. Below is my opinion with an example from my old company Tigerspike.

The reason is that the CEO has a hand in setting his salary. This line is from the article:

Compensation committees benchmark CEO pay against a self-selected peer group — often 12 to 20 companies that may be of similar size and complexity,

So the “independent” benchmarking firm approaches the CEO of company X (that they know is paid less than the average) and says “are you sure you are being compensated fairly? You should independently benchmark your pay packet”.

Lo and behold the CEO salary comes out lower than the average (duh! that’s why they were picked) and so it seems fair and reasonable to increase it. Maybe just increase it to the average, thats fair isn’t it? — if the CEO is underpaid compared to similar companies it’s ok to increase his salary, just to the average. Right?

WRONG

The issue is that all the CEOs are overpaid. The benchmarking company / committee just has to keep contacting the bottom 25% of salaried CEOs (which mathematically always has to exist), and continue with their ‘independent’ review and the CEO salaries as a group keep climbing higher and higher. And they think they deserve it. They don’t.

Here is my real life example:

When I was CEO of Tigerspike I would set salaries. If you are wondering what your salary policy should be it should be to pay everyone lower than market rates. Thats what we did. If people get upset and leave its because your culture isn’t good enough so it is a good indicator of that. Everyone including me had lower than market salaries, so anyone could always leave for a higher salary if they weren’t happy. Therefore the people who remained were the happy ones who really gave a shit.

People who really give a shit care more about culture and less about money. And people who give a shit about the mission and not about the money are by far the better workers.

After 2008, five years after we started there was a group of 6 of us who made up the leadership team. We made decisions together, but I still had final say on things including salaries. I kept salaries low because a lower cost base was what was best for the company, as well as being the culture indicator I mentioned earlier. Anyway since not all of the leadership team liked my dictatorial salary setting style, we agreed to be more collaborative on decisions and decide things as a democracy. All Happy now? good!

So at the next democracy meeting it was suggested by the group that we increase salaries which most of the team agreed were too low. This was evidenced by some “independent” reports (remember those?). “Majority in favour?” — yes! (surprise surprise). And because no one really wanted to explain why they should get more than anyone else, we all got AU$200k salaries. This was a mistake (one of many I made at Tigerspike). It meant that the company’s costs went up massively, and did it make everyone happier?

No. The opposite.

Pretty soon afterwards, some of the leadership team started saying “hey why is my salary the same as his, when I am more senior / doing more / getting better results etc etc… now I am demotivated!”.

Another learning here is people don’t care what they are paid, they care what they think they are worth relative to other people at the company. A woman isn’t unhappy with her pay until she finds out that a man at the same level is paid more.

The salary episode made me realise something. If you are allowed to play a part in setting your own salary you will end up with a higher one. And then you will think you deserve it. You will find the data to back that up. And find people to agree with you. And since CEOs will always play a part in their own salary setting, The solution is that rules must be set. Like the CEO salary not being paid more than 50 times the lowest paid salary or women and men being paid the same if their job is the same. Simple things like that built into the company constitution. Otherwise CEOs find reasons why its fair and right to pay themselves 1,000 times the average (not even the lowest!) worker.