Why CEOs Deserve Millions: A Case for Performance-Based Compensation

Imagine this scenario: You are a shareholder in a billion-dollar company that’s on a unsustainable trajectory towards bankruptcy. Companies like General Motors (GM), 3M, and General Electric (GE) have experienced similar downturns before. But suppose you find the exceptional CEO who has brought several troubled companies back from the brink of failure. Would their worth be only measured in the millions, or would they be invaluable to your company’s survival?

Why CEOs Deserve Millions

Take Apple, for instance. At one point, it was on the edge of bankruptcy, saved only by its former rival, Bill Gates. John Sculley, Apple’s former president, was fired, and Steve Jobs was brought back. Under Jobs’ leadership, Apple transformed into the most successful company in American history, defying all expectations. If someone offered Steve Jobs $30 to turn Apple around, he would likely have called it insulting and walked away, knowing his true value. This is the reality of capitalism, where performance is rewarded accordingly.

Or consider myself as a CEO who has directly contributed an additional $2 billion in revenue to the firm, in addition to the company’s several previous years of billion-dollar growth. How much compensation would be reasonable? The answer lies in the fact that leading a company can be a high-risk, high-reward proposition.

The Economic Contribution of CEOs

CEOs are not just leaders; they are stewards of the economy. Their ability to drive value creation can far surpass that of high-profile professional athletes, who command millions in compensation. In our capitalist society, the value of a CEO’s contribution is directly tied to the economic outcomes they generate for their companies.

CEOs with a proven track record can add tens or even hundreds of millions of dollars to a company’s bottom line within a short period. If the company is sizable, a successful CEO might even add billions of dollars. Conversely, an underqualified CEO is a significant risk. The rewards for success are high, and so are the risks.

The Search for a CEO

The search for a CEO is never a simple process of posting a job and waiting for applications. Instead, it’s an intensive negotiation where the company seeks the right candidate and offers them increasingly higher compensation packages. This process ensures that the best candidate is rewarded with the appropriate compensation for their expertise and the risk involved in leading a major company.

A study by Nature revealed that highly qualified CEO candidates typically agree to the role only when offered a salary in the millions. Companies, aware of this, are willing to spend substantial sums to secure the best talent, believing it’s a wise investment in the long term.

Conclusion: A Rational Approach to CEO Compensation

While many might argue that compensation for CEOs is too high, the reality is that these top executives are crucial to the success and economic health of many companies. The rewards they receive are tied to the value they bring to their companies, not just to a vague sense of worth.

The board of directors recognizes the delicate balance between risk and reward. Spending millions to secure a proven leader is far wiser than taking a chance on a cheaper, unproven CEO whose failure could lead to billions of dollars in losses and the collapse of the company.

In a world where diversity and equal treatment are important, it’s important to recognize that performance and contribution should be the primary factors in determining compensation. CEOs are not just hired to lead, but to drive the success and growth of their companies, and they deserve to be compensated for their efforts and results.