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The Value of a CEO

CEO VALUE. The SEC will be forced to enact this 2010 legislation from the Dodd Frank Act, where CEO pay versus the median employee pay will be a forced disclosure by next April – just in time for the primaries of the 2016 election! Rest assured this is NO coincidence.
 
This CEO pay ratio will likely be a central theme of “have and have not” discussions we have seen pushed into U.S. Presidential debates. Using this ratio to somehow establish CEO value/pay is old news. A number of companies have unsuccessfully attempted to derive an artificial pay ratio cap like 10:1 or 20:1 to determine CEO pay. While appearing noble in it’s cause, it is truly politically driven and it doesn’t address the current reality that U.S. compensation is predominately set by the external market in which companies compete for talent, not internal valuation of one employee versus another. 
 
What the media and politicians continue to forget to consider  is the overall VALUE of the CEO. There is a Latin phrase known as Quantum Meruit that roughly means “the value of services rendered.” It is a term used in the courts but it is one that we should also focus on when thinking about the whole value of a CEO. At NFPCCmp;A we constantly have to determine value for CEOs, executives and employees. This type of valuation is what we do. However, in an IRS case I was involved in, I took an unorthodox approach and introduced ALL of the value that CEO brought to the table. Oh sure, I did the typical peer-driven compensation analysis for base salary, bonus and long-term but I also did a separate analysis. In that analysis, I looked at all the jobs created; all the taxes paid by all the people hired; all the supporting services that received economic gain from these jobs like the arts; the healthcare community; the vendors; the banks; etc. The same type of analysis that is done by cities when trying to incent companies to relocate; the same type of analysis that allows cities and municipalities to give tax breaks to these companies for relocating.
 
When I was done, the amount paid to the CEO/ “value creator” in that case, was no more than a rounding error. His vision and direction had built a company from scratch that employed thousand of jobs that economically impacted the community into the several hundred million dollar range. What I showed the court was a CEO’s value is so much more than just what he or she is doing at the company they lead. A CEO’s value is also found in the influence and economic impact they have that creates an even higher standard of living for those in their community.
 
Since that case, NFPCCmp;A has done this type of analysis from time to time and it is always eye-opening. NFPCCmp;A wants this CEO valuation approach, to be part and parcel of the analysis performed for all boards on the values of the CEOs they oversee. Personally, I’d like Washington to add this to their debate while thinking about this upcoming requirement in comparing CEO pay to median employee pay. Ask yourself, would there be anything to compare CEO pay to if they were not out there creating the very jobs we are saying we are comparing them to? Or better yet, would there be the type of government we have today if not for the men and women we know as CEOs?!

Written by Brent Longnecker, Chairman & CEO, and Chris Crawford, President, of Longnecker & Associates.

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