July 31, 2008

CEO Salaries: What Is the Average Salary of a CEO?

UPDATE: See PayScale’s infographic on CEO-to-worker pay ratios

By Shanon Lyon, special to PayScale.com

In 1970, CEO salary and bonus packages were typically about $700,000 – 25 times the average production worker salary; by 2000, CEO salaries had jumped to almost $2.2 million on average, 90 times the average salary of a worker, according to a 2004 study on CEO pay by Kevin J. Murphy and Jan Zabojnik. Toss in stock options and other benefits, and the salary of a CEO is nearly 500 times the average worker salary, the study says.

Dan Moynihan, principal of Compensation Resources, and expert in CEO salaries, theorizes that the shorter tenures of CEOs today than in years past could be one factor inflating the average salary of a CEO and widening the salary gap.

“I think there’s a capitalistic model that says ‘get as much as you can while it lasts because you don’t know how long it’ll last,'” he says. “I don’t think CEOs are doing more or less than they were 20 years ago and I don’t think line workers are either. Should [the salary gap] be rectified? Yes. Will it be? Probably not.”

Because CEO salaries are chart toppers in most companies, they tend to attract the most media attention. Less widely reported is the significant salary gap between employees and lower-level executive salaries. It varies by industry, but in most companies, the salary gap becomes pronounced at the vice president level, says Todd Milbourn, finance professor at the Olin Business School at Washington University. “This is when you start moving into a new pay echelon, but there’s still a pretty significant gap between, say, a senior vice president and a CEO,” he says.

CEO Salaries & Worker Morale

Though it is relatively rare, every year there is a story of a CEOs or other company leaders who reap substantial salaries while their company tanks and workers are shed. This can cause irreversible damage to worker morale. If your company is losing market share but the salary of a CEO continues to increase along with bonuses, feelings of discontent and frustration are inevitable. “When you have a thousand people who are unhappy and feel unfairly compensated, everyone’s going to be a little less efficient, and it’ll start impacting the bottom line,” Milbourn says.

Brent Longnecker, CEO salaries expert and president of Longnecker & Associates, an executive salaries and corporate governance consulting firm, is the first to admit that there are companies out there abusing the system without balancing the salary of a CEO with the average worker salary. He asserts, however, that in most cases, executive salaries and CEO salaries are reasonable and justified.

Why CEO Salaries Are Sky High

Where does the gap come from – and why are CEO salaries at major corporations so much higher than worker bee and mid-level executive salaries?

“A top-level executive is probably worth his or her weight in gold as far as what they do for the economy,” says Longnecker. “They create jobs. They increase the tax base with which the United States can grow. They give us a competitive edge in the world markets. They do a lot of things with a lot of pressure on them that we really never talk about.”

Milbourn agrees and stresses the importance of paying top dollar when it comes to the salary of a CEO, or executive salaries. If they’re wooed with higher pay from a competing company, everyone from he top down is likely to feel the effects.

Longnecker says the good news for everyone below the threshold of CEO salaries, is that the salary gap has closed slightly since 2000. The not-so-good news is that the salary gap separating CEO salaries, executive salaries, and the average worker salary is never going to be as small as some would like it to be.

Mending the Gap: The CEO Salary Transparency Trend

Most agree that the best move a company can make is one toward fair, honest, and transparent compensation. In 2006, the U.S. Securities and Exchange Commission (SEC) updated its rules for for the disclosure of CEO salaries, and executive salaries. These new rules require that CEO salaries and executive salaries be explained in terms a layperson can understand.

Companies now must provide one number for total annual compensation for each executive, and reports have to include detailed information on pension and estimated severance packages. Internally, Milbourn says, companies should be clear about executive performance targets and how they translate to bonuses, stock grants, and increases in executive salaries.

Longnecker even suggests that the story of a CEO be told as part of orientation, so as to explain CEO responsibilities in conjunction with the salary of a CEO. “People need to understand what the CEO does, what he or she represents, what they value, and what they’ve done for the company so far,” he says.

Concern about the gap between the salary of a CEO and an average worker salary can in some ways be attributed to the generation gap in today’s workforce, says Longnecker. In generations past, salary was often a taboo topic but the 20- and 30-somethings of today want to know more than what the average salary of a CEO

“Employees want to understand how companies decide on CEO salaries and executive salaries. “Once they understand it,” says Longnecker, “they say, ‘okay, thanks.’ That’s all they need.”

A clear view of the how, when, why, and what behind the salary of a CEO is not only good for morale and company confidence; it can even provide those on the low end of the salary scale with a roadmap to higher executive salaries. According to Moynihan, as companies continue to pull CEO salaries, and executive salaries out of the dark, people can start to see their own opportunities and the opportunities above them. “With this transparency,” he says, “employees can start to understand what it would take for them to become an executive and potentially reap some of the benefits.”

Top CEO Salaries in the United States

Here are the top CEO salaries in America, according to the 2007-2008 Forbes.com special report on CEO compensation. To see the full report, visit Forbes.com.

Rank	Name	Company	Pay ($mil)
1	Lawrence J Ellison	Oracle	192.92
2	Frederic M Poses	Trane	127.10
3	Aubrey K McClendon	Chesapeake Energy	116.89
4	Angelo R Mozilo	Countrywide Financial	102.84
5	Howard D Schultz	Starbucks	98.60
6	Nabeel Gareeb	MEMC Electronic Mats	79.56
7	Daniel P Amos	Aflac	75.16
8	Lloyd C Blankfein	Goldman Sachs Group	73.72
9	Richard D Fairbank	Capital One Financial	73.17
10	Bob R Simpson	XTO Energy	72.27
11	Richard S Fuld Jr	Lehman Bros Holdings	71.90
12	Steven Roth	Vornado Realty	71.85
13	Marijn E Dekkers	Thermo Fisher	69.00
14	Steven A Burd	Safeway	67.17
15	Gregg L Engles	Dean Foods	66.08
16	Nicholas D Chabraja	General Dynamics	60.26
17	Leslie H Wexner	Limited Brands	56.06
18	David C Novak	Yum Brands	54.91
19	John T Chambers	Cisco Systems	54.77
20	William R Berkley	WR Berkley	54.60