Why a great CEO is worth 6000 times more than the average worker

I was discussing this issue with a friend the other day. She thought it was not fair that a particular CEO was getting paid roughly 6000 times what the average worker was at his company. She thought the CEO was paid unfairly too much. I also found it not fair. I thought that perhaps the CEO might deserve much more than 6000 times what the average worker got. But, why?

Workers are commodities
Unless you have some special personality or skill, you do the same work that millions of others can do. Your wage is subject to a market rate based on what you do, how long you have been doing it, how reliable and good their work is, and a few other factors. People with specialized jobs like teachers, salespeople, CEO’s, etc., are not commodities. The subtle differences in their work can make a huge difference in profitablity.

The mechanic who was fast
If a mechanic comes into work in the morning, he can do “x” amount of work. If he is fast, he can do a little more, and if he is incompetent, he can get the garage in a little bit of trouble. But, the scale of trouble he can create is no larger than the particular car he is working on (assuming there is no multi-care collission caused by his carelessness installing brakes). A well seasoned (greased) mechanic compared to a functional beginner might be worth 3x the salary.

A tale of two teachers
But, let’s imagine differences in quality of a teacher for example. Joe the teacher comes in, bores his students all day, nobody learns much, and they all go home feeling depressed. Frank the teacher on the other hand is not only charismatic, but studied advanced techniques in learning styles and applies 30 different learning techniques that no other teacher in his town have even heard of. Frank got his students not only to stay awake in class, but think outside the box, do two hours of homework nightly, and amount to something in life. Frank’s contribution completely changed the destiny of 30 students, not to mention thousands of people who those students would interact with over the course of their lives. Therefor, Joe deserves $40,000 per year, but Frank gets $45,000 because he is putting in the extra mile. In real life, the school systems prefer Joe, because he doesn’t rock the boat, and Frank would probably get fired. But, in my mind, Joe should get $20,000 per year and Frank should get $150,000. The output of their work is drastically different and their effect on society is not even something that we can measure.

The miracle CEO
A good teacher can make a much larger benefit to society than a bad teacher. The difference in effect could be ten fold according to my style of thinking. But, choosing a CEO for a large company is much more critical than which mechanic or teacher you choose. CEOs are not workers. They don’t actually “do” anything. CEOs make decisions. They allocate funds. They hire and fire critical people in the company. They make long range decisions. They buy and sell huge assets.

A good CEO might think through a purchasing decision very carefully, analyzing all of the details and using very meticulous skills to make his decision. Imagine if a mediocre CEO made the same decision, they might buy a factory in the wrong location, or at the wrong price, the wrong size, or overlook some other critical aspect of the transaction. It might be only 70% as efficient as the one the smart CEO purchased. A single bad decision like that could cost a company 10 million per year for twenty years. That is 200 million in lost assets because of a bad CEO. A real CEO might make ten big decisions per year as well as many smaller decisions. If a CEO hires a dynamo Vice President who helps the company gain 20% market share, that could be worth 20 million the first year. A bad CEO might hire the wrong Vice President and lose an equal amount, or simply maintain the status quo instead of actualizing growth potential. The scope of how important a good decision is, is staggering.

Doing the math
Let’s say that the average worker at ZYX Company makes $20,000 per year, and the CEO makes 20 million per year. That is 1000 times as much as the average worker makes. Is it fair? If you put even the smartest of those workers in the CEOs position, how much money would they lose the first month through bad decision making? They could lose 20 million per month. Is it worth paying 20 million a year so that you don’t lose 200 million per year? Saving a little money by purchasing the services of a less than perfect CEO can cost you much more than their salary in losses or lost opportunities. Look at the bigger picture!

(1) Shelly says its not fair that the CEO gets 6000x the average worker. I feel he deserves more!
(2) A good CEO can save a company millions, train workers, and drive a company to success!
(3) A CEO’s salary is not based on how much he works, but the quality of his decisions.

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