What is a CEO, Chief Executive Officer? Many would envision a sharply dressed individual, briefcase in hand, who sets at the top of the corporate ladder, flies from one business meeting to the next in the company jet, and leads a personal life of wealth and luxury unknown to most. The dictionary defines a CEO as "The highest-ranking executive in a company or organization, responsible for carrying out the policies of the board of directors on a day-to day basis."
A CEO is much more than just another upper level manager who has been promoted due to standard of experience or performance. CEO's function as the main artery between the cooperate board members and the various levels of the organization itself. The CEO is often held solely responsible for the success or failure of a corporation. It is also the CEO's responsibility to maintain and implement the corporate objectives established by the board members. There are three major responsibilities of a corporate CEO.
The first responsibility of a CEO is that he or she must have is a vision. The CEO must be able to scan the environment for hints of future changes within the industry. A CEO must be able to look into the future and predict changes as well as to project solutions to these changes. Seeing what is coming is only half of the job. Communicating this change to all other parts of the corporation is just as important. All of the various functions within the organization must be prepared to deal with foreseen changes or the company may not survive. This means that a CEO must be a visionary, a problem solver, and a communicator.
The second requirement is that a CEO must act as a role model for the entire organization. Everything from how he or she dresses to what his or her values and attitudes represent, serve as models for employees and managers alike. Therefore, the CEO has the responsibility of setting a good example for the corporation. This requirement challenges the CEO to be a role model and a leader.
The third responsibility is that a CEO should set performance standards for the company and should promote those standards with confidence. The CEO must determine what standards are required to maintain a competitive advantage in the industry and implement these standards into the output of the corporation. Standards need to be set high to remain competitive yet still be within an attainable range. This responsibility requires that the CEO be a motivator as well as a supporter.
These three duties of a CEO are vital to the success of the company, but the CEO's responsibilities do not end at the boundaries of the corporation. Every decision a CEO makes affects many different people both internal and external to the corporation. Therefore, every decision must be well thought out and planned; the consequences of a bad decision could destroy the company.
The CEO's job is to implement and maintain the corporation's objectives through unexpected as well as foreseen threats and opportunities. The CEO is the key that keeps the corporation in focus. With highly competitive global markets and the fast-paced growth of technology, today's CEO's are faced with increasing requirements to meet success and the risks are greater then ever.
CEO's are paid very well for their time and effort. Not only do they earn million dollar salaries and bonuses; they also receive stock-based pay. This means that the executive is also an owner of the corporation he or she works for. Stock-based pay is usually in the form of stock options or stock grants.
According to William J. Smith of the Washington CEO, stock options are the most popular form of stock-based pay. A stock option is the right to buy a share of stock at a fixed price for a specified period of time, usually five to ten years. If the price of the company's stock rises above the exercise price, the CEO realizes gains equal to the difference between the exercise price and the current fair market value of the stock.
Stock grants are also commonly used in addition to stock options. Under this form of stock-based pay, the company grants employees shares of the company stock. These shares of stock can be restricted for a certain period of time or can be performance based. Performance based stock grants are given to employees based on the company's performance over a specified period of time.
Stock-based programs are a large part of a CEO's compensation. Many CEO's are reaping large rewards merely because their company's stock price has soared. In fact, many CEO's are receiving large gains on stock-based compensation, even though their company may be losing millions of dollars.
According to Business Week, the average CEO of a major corporation made 42 times the pay of a typical American factory worker in 1980. By 1990, that ratio had more than doubled 85 times and almost quintupled again to a staggering 419 times in 1998. If that rate of exponential growth were to continue, the average CEO would make the salary equivalent of more than 150,000 American factory workers in 2050.
Business Week also stated that the average salary and bonus for a chief executive rose a phenomenal 39%, to $2.3 million in 1996. Retirement benefits, incentive plans, and gains from stock options are also added to the CEO's compensation package. This increase in CEO pay is creating a disturbing message. This message is that the CEO deserves nearly all the credit for the company's success. Managers and other key employees who are responsible for day-to-day company activities are receiving much smaller compensation for their efforts.
Are there ways to curb the excess compensation packages of America's CEO's? The answer is yes. According to a web site titled http://www.paywatch.org/paywatch/what2do.htm, there are ways to fight runaway CEO pay.
The first step you should take is to get inside the boardroom. Find out about the role that your company's Board of Directors and Compensation Committee play in approving salaries. Another way to fight excessive compensation is to use your shareholder clout. If you own shares of stock, use your shareholder power to oppose excessive CEO salaries. A third thing you can do is to rally your co-workers and community. When it comes to excessive CEO pay and corporate practices that threaten jobs, no one has more at stake than the workers and their communities. This website also lists alerting the IRS, contacting the SEC, and participating in campaigns as ways to fight runaway CEO compensation.
Business Week named two CEO's, Bill Gates of Microsoft and James Preston of Avon Products, as the best-performing executives over a three-year period. Gates, who made $1.436 million in total pay from 1994 to 1996, gave Microsoft shareholders a very good return for their investment. Microsoft's shareholders received a 310 percent return for the period. Preston, whose three-year total pay was $7.907 million, racked up the highest return on equity. Relative to Preston's pay, Avon's return on equity was 141 percent for the three-year average.
Business Week also pointed out some low performing CEO's. One of them was America Online's CEO, Steve Case. He earned $33.5 million over three years, while the return on equity was a negative 413 percent.
http://www.paywatch.org/paywatch/ceou_compare.htm
This website allows you to see what your paycheck would be like today if, for the past five years, it had grown at the same rate of increase as an average CEO's.
http://www.fpdnu.com/fp04001.htm
This website features an article that lists the top 25 highest paid HMO executives of 1996. You will be surprised to know what some of them make in a year.
http://spyglass1.sjmercury.com/archives/salsur/whodecid.htm
This is an article written by Ricardo Sandoval that shows you how to figure CEO salaries.
http://www.forbes.com/forbes/98/0518/potential.htm
This website lists various CEO's compensation in 1997. Some of the CEO's listed are Michael Eisner of Walt Disney and Douglas Ivester of Coca-Cola.
There is no doubt that CEO's are making the big bucks by being the person in charge. But some are questioning whether or not the CEO's deserve all the money they are making. CEO's put a lot of time and effort into trying to make their company a success. There is one question left to answer: Is the CEO's time worth more than the factory worker who is standing on the assembly line making the company's product for a minimum wage?
CEO's too Cozy with Compensation Committees. http://www.foxmarketwire.com/040899/ceo.sml
Reingold, Jennifer. "CEO Pay - It's Out of Control." Business Week April 21, 1997.
Runaway CEO Pay. http://www.paywatch.org/paywatch/ceopay.htm
Smith, William J. "Aligning the Interests of Executives and Owners."
Washington CEO September 1997.
What You Can Do. http://www.paywatch.org/paywatch/what2do.htm
Workers of America - CEO Pay. http://www.vais.net/~woa/issues/ceopay.htm
My name is Shala McClayland and I am an accounting student at Emporia State University. I received my degree in Business in August of 1998 and I am currently studying for the CPA exam, which I plan to take in May. I am from Fredonia, Kansas and graduated from Fredonia High School in 1995.
Email Me: mcclayls@esuvm.emporia.edu
Return To Class Homepage: http://academic.emporia.edu/smithwil/s99mg444/home.htm
Last Updated April 20, 1999
