What is a high performing CEO worth? This is a question that many companies struggle with when evaluating executive compensation. A CEO of a Standard and Poor’s 500 company can expect to earn an average of $13.51 million in total annual compensation. As the market for CEOs with the leadership skills needed to run a public company tightens, CEOs are able to command top dollar for their services. Each company’s board of directors must evaluate, and ultimately determine, what to pay a new CEO.
Background
The compensation of every executive is determined by the company owners through the board of directors. There usually exists a compensation committee that deals specifically with compensation packages. Compensation packages can include base salary, short-term incentives, long-term incentives, benefits, and perks. Many times, short-term incentives are formula driven and tied to company performance such as revenue growth or profit growth. Short-term incentives are just the beginning of the compensation debate. For many companies, the question of what the CEO’s package should be quickly arises. Is 10% fair? How about 1%? What if the company is a multi-billion dollar organization? Does that change what is fair? What if the company only brings in $250 million in annual revenues, but they have revenue growth of $50 million per year? How should the CEO be rewarded given these scenarios?
Compensation consultants argue that in today’s environment where institutional shareholders, regulatory acts, and corporate governance scrutiny have lead to CEO turnover due to non-performance and moral lapses, compensation needs to be high to attract and retain the best talent. Shareholders ...