By: Brent Longnecker, Founder & CEO of 1 Reputation
I have worked for years w/ the IRS, FBI, DOJ, and so many more companies and agencies - over 6000 - it would make most people's head spin. Probably 70+ percent of the time, it centers around the VALUE OF A CEO! And everyone has an opinion. Further, the hard fact is that only some people will ever have the qualities, tenacity, skills, and perseverance to be one. They are rare and unique and always have people wanting to critique their every move. Sure, there are "pretenders,” but 95% of the CEOs I have dealt with over my 38 years as a consultant are the real deal, and I can also share that no one truly understands their actual value.
The attached article deals with the SEC’s new Actual- Realized Pay rules. For the first time, publicly traded companies have to reveal how much their CEOs are poised to get by calculating gains and losses in the stock awards that make up the majority of their pay packages. Base salary, annual incentives, and long-term are the 3 KEY BUCKETS of pay. To date, base and annual were easy to disclose. Still, the long-term component was more of a future value calculation built around models like Black-Scholes, Monte Carlo, Binomial, or variations. This new measure of compensation for long-term incentives is dubbed " actual compensation paid" and is designed to move executive compensation disclosures beyond a "moment-in-time snapshot" that has been in Summary Compensation Tables for years.
The article below is a great read... but it still needs to fully address the VALUE of a CEO... especially the good ones.
Years ago, the IRS and I were battling over the value of a great healthcare CEO. They had a low number... I had one that was much higher. They were using local market data, and I was using national data, which is what is taught. As an impasse looked imminent, I decided to make a dramatic statement; I decided to dig deeper into the value of the CEO in question. Specifically:
1. He had created over 700 jobs/ averaging at the time about $60,000/ employee OR $42,000,000 in pay w/ another 35% in benefits or $14,700,000 for a total of $56,700,000.
2. The taxes on that-- both local and federal-- were about $18,000,000.
3. And the "splash benefit" of donations into the community by both this company and the workforce was well over $3 million-- with most being put to the poor and the arts.
The executive was getting paid $1,150,000. My market analysis showed he was at the 60th percentile. However, when I took his $1,150,000 and divided it by the cumulative total of ($18,000,000 in taxes + $3,000,000 in donations), his pay was .054 of all the VALUE he was creating! That's a return of 388,888,889. When the IRS saw his pay from this perspective, they quickly acquiesced.
Bottom line, the SEC has taken a reasonable step here... but for good and great CEOs, I still contend we need to catch up to their TRUE VALUE!
Enjoy the read:
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