How Much Should You Pay Your CEO?
You’ve almost certainly seen the headlines about what some are calling Canada’s “new gilded age.” Earlier this year, The Canadian Centre for Policy Alternatives announced the findings of its most recent report. In 2022, the pay for this country’s 100 highest paid CEOs broke new records with those on the list earning, on average, $14.9 million.
“That’s $7,162 an hour, 246 times more than what the average Canadian worker makes,” the report authors pointed out. While worker pay increased 3% on average since 2021, those top 100 CEOs saw an average increase of 4.4% — over $600,000.
But the pay for this rarefied few doesn’t reflect the situation in many small and medium sized businesses (SMB), and the perception that most CEOs are overpaid should be tempered by a thorough consideration of the value they deliver.
If you are someone who just acquired a SMB and you’ve begun your search for a CEO, here are a few things to think about when you’re trying to figure out how much to pay them.
CEO Pay Range for SMBs
CEOs are responsible for the company’s performance. They set its strategic direction, oversee the often complex and wide-ranging operations, and their decisions can have a profound impact on the success — or failure — of the company.
According to the U.S. Bureau of Labor Statistics, the average pay for a CEO of a mid-sized American business was $210,000 in 2020. But, crucially, there is also incredible variability within that figure. CEOs on the lower end may earn as little as $25,000 to those on the upper end earning nearly $700,000.
Some CEOs also have far more creative pay structure which is tied more closely to the success of the company, as is the case with a few high-profile CEOs who have famously taken very low salaries or forgone a salary altogether. Marc Benioff of Salesforce was being paid $1 at the time of the company’s IPO, and Patrick Shiong of Nant Health receives no salary at all.
As a rule, CEOs of newer businesses are often paid less as they help build the company and stabilize earnings and are rewarded in the form of equity. At established companies, CEOs — especially ones with proven track records in competitive industries — tend to command higher salaries and more generous compensation packages, many of which have bearing on performance.
4 Key Considerations for Determining Pay
Regardless of the size of your business, it’s important to keep the following things in mind when determining CEO pay:
1.That the CEO/operator’s base salary is enough to allow them to live comfortably, so they can focus on running the business without compromising their lifestyle.
2. That this base salary is consistent and competitive with the fair market value for the role or roles that they perform (many CEOs perform multiple roles and this should be a factor in their compensation).
3. Additional incentives in the form of stock options and performance-based bonuses that link their performance with the success of the company.
4. That all these things, in combination, account for:
a. The current context of the business (its earnings, potential future earnings, the competitiveness of the industry).
b. The CEO’s experience and competence.
When The Right CEO Wins, You Win
Michael Girdley is the CEO of a holding company that owns 11 businesses and has amassed a large following dispensing advice for how best to manage these companies. He explains that when he is hiring CEOs pay is an important part of the offer but it’s also not the only one. The opportunity for personal growth and accomplishment, as well as the business’ impact on the community or the wider world are also important factors.
“I get asked for rules of thumb on percentage of revenue SMB CEOs earn,” he says. “That's bad thinking.” Pay should be enough to be competitive in the open market for a candidate who presumably has other choices, but hiring requires a lot of research. That means talking extensively to candidates and peers to find out what your ideal candidate looks like, what matters to them, and how they fit into the business.
“As I look at my wins in hiring, every time, (the CEO) care(s) as much as an owner would,” he says. Ultimately you want to structure compensation to facilitate that kind of effort, or as Girdley calls it, “grit and give-a-shit.” In the end, the right operator/CEO is worth the money.
The idea is that when the CEO wins, the business wins.
Opinions expressed here by contributors are their own.
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