CEO salaries

A few weeks ago I had a debate on Twitter (if you can call 140 character tweets arguments) about CEO salaries. A Labour acquaintance had tweeted that the Westpac CEO’s tax cut last year could pay for 500 KiwiSaver subsidies for workers on the average wage.

I responded that may be so, but it overlooks that even after the tax cut, the Westpac CEO still pays so much income tax that they fund around 2,600 KiwiSaver subsidies for workers on the average wage.

This then turned the debate more into well they should not get paid so much. I think they are on $5 million a year or so (which I tend to think is high, but I am not a shareholder or customer of Westpac so it is none of my business). The argument was paid that no one is worth that much. And I suspect many people probably share that view that no CEO should be paid more than a certain level.

I don’t share that view.

First of all, I think is is rather sad that as a society we celebrate someone who wins $1 million through blink luck at Lotto, but many condemn someone who through decades of hard work and excellence gets to earn a salary of $1 million a year.

Few people complain that someone like Anna Paquin earns over a million dollars a year through her incredible acting skills, but they resent someone earning that much through their incredible business skills.

Some people seem to have the view that anyone could be a sucessful CEO. That the impact of a CEO on a business is around the margins, and they are not worth more than a few hundred thousand dollars.

Now sure some CEOs are not worth one million dollars, but I can think of one who clearly is – Rob Fyfe of Air New Zealand. He has done some amazing stuff at Air NZ, and his personal brand has become very linked to the corporate brand. I think it is a no brainer that Fyfe is easily worth a salary of $1 million or more a year.

But how about the $5 million salary the Westpac CEO is on. Is anyone worth $5 million a year? Personally I’m not sure if the Westpac CEO is, as I don’t know much about them, and what they have done with Westpac.

But I saw a story this week which reminded me of this debate. It is Steve Jobs returns to Apple. That saw Apple share price alone increase 3% which I guess is a value somewhere between $100 million and $1 billion. Now as it happens Jobs has a salary of $1 (but I guess a lot of stock), but would anyone really want to argue that Jobs would not be worth a salary of $5 million a year for Apple if that is waht is needed to keep him?

So I don’t think there is anything wrong with someone earning a salary of $1 million a year, or $10 million a year or $50 million a year. Some on the left say it is obscene and no one should earn that much money, yet I don’t hear them argue a price cap for Hollywood stars, for sports stars, for musicians, for lottery payouts. And I don’t hear them argue that there should be a maximum amount you can earn from being an entrepreneur.

I think why large CEO salaries get a lot of criticism, is because sometimes the performance doesn’t justify it. And there I have some sympathy. Nothing worse than seeing a CEO get paid several millions dollars, while the company’s share prices plummets, and it makes a huge loss.

But the solution is not to set limits on CEO salaries. It is to sack CEOs who don’t perform to the level you would expect from their salary.