We always hear about how much CEOs are paid and how horrible it is that they can make millions while they employ people making $10 per hour.  Are they really overpaid?  If they are, how much should they make?  Is $650 million in one year too much for one person, even if they are a CEO?

Perhaps the most absurd example of CEO pay was Steve Jobs, CEO of Apple, Inc., when he was paid $646.6 million in 2007 — one year’s work for enough money to live hundreds of opulent lifetimes.  That breaks down to Mr. Jobs making a little less than two million dollars per day.  Steve Jobs was certainly paid a boatload of money and it is likely that the people assembling iPods in China for less than $60 per month were unable to share in the riches.  Were his efforts as CEO really worth almost $650 million dollars?  Of course he was worth it – and then some.  If you really analyze the numbers you may find that Steve Jobs was in fact underpaid during 2007.

In 2007, Apple saw its net income soar to about $3.5 billion, up more than $1.5 billion over 2006.  Not only did Apple increase its net income by over $1.5 billion in 2007, but the share price went from about $85 at the beginning of 2007 to about $200 at the end of the year.  When you consider that this $115 increase in the price of shares of Apple translates into an increase of about $101 billion dollars in value for the company and its shareholders, you begin to see how $646.6 million is actually a very small number.

The people hiring Steve Jobs are the shareholders of Apple, and their goal is to have Apple increase in value so they can make as much money as possible.  The reason they are willing to pay Mr. Jobs so much for a year’s work is because he is able to give them huge amounts of money in return.  In essence, Steve Jobs was paid $646.6 million to make his shareholders over $101 billion.  He made his “bosses”, as it were, more than $157 for every $1 he was paid.  For comparison’s sake, if the company you work at pays you $40,000 per year and you were as efficient as Steve Jobs, you would be making your boss about $6.3 million in any given year.  Given that situation, it may be time to ask for a raise.

Granted, Steve Jobs does not run Apple by himself, and I can all but guarantee that he has a team of some of the brightest minds in the world around him.  I can also all but guarantee that most of those people are well compensated for their efforts.  You may complain that the people in China manufacturing iPods and other Apple products for $60 per month is not fair and that Steve Jobs should take a pay cut to help them out.  There are a few problems with this suggestion:

1. The people being paid $60 per month are likely very happy with that wage, otherwise they wouldn’t do it.
2. Putting together iPods does not take as much ability or talent as running a successful corporation and deserves far less pay as the supply of people willing and able to do the job are numerous where as the number of people that can run Apple the way Jobs does it is likely one — Steve Jobs.
3. If Apple were to pay its CEO less, then Jobs would have an incentive to work for a company that recognizes his value and pays him more.   The people that would pay the price for losing a talented CEO would be Apple shareholders and everyone Apple employs.

Steve Jobs is but one example of the numerous CEOs there are in the world.  Most CEOs are like Jobs in that they are good at their jobs and deserve every bit of their pay, but there are no doubt bad CEOs that are overpaid.  The beautiful part of it all is that the only people who lose out when a CEO is overpaid are the ones hiring that CEO, the shareholders of that company, so the blame rests solely on the CEO’s boss.  You may imagine that if a CEO is paid less that other employees will be paid more, but that is not how it works for numerous reasons and it is simply never how it will be in the beautiful free market.  CEOs are CEOs for a reason; they are typically well qualified and very good at what they do.

I should note that not all CEOs are paid even close to what Steve Jobs made in 2007.  The average pay for a CEO of an S&P 500 company (500 of the biggest, most successful companies in the world) is $14.2 million per year.  Of course, CEOs of smaller companies make far less than that.

CEOs are paid by their bosses just like the rest of us.  It is safe to assume that they typically make what they are worth because no boss will want to pay their employee more than what they are worth, and if they are being paid more than they are worth they will likely be fired in a very short time.