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Wednesday, April 17, 2024

Jeff Immelt, who got over $200 million when he left GE, on high CEO salaries: The ‘good ones are probably worth more’

When Jeff Immelt was pushed out as CEO of General Electric in 2017, he didn't leave empty handed.

If fact, he earned over $200 million in retirement pay on top of 35 years of big salaries plus bonuses, which amounted to $33 million in 2015 and $21.3 million in 2016, for instance. (Immelt also reportedly used two corporate jets when he would travel, according to a Wall Street Journal report.)

CNBC Make It asked Immelt, whose new book "Hot Seat: What I Learned Leading a Great American Company" details his time as CEO at GE, about his salary during those days and whether he believes executives get paid too much today. It's an "endless debate," he said.

The "good ones [executives] are probably worth more, others are probably worth less," Immelt says, though he did not name names.

Immelt says as CEO, he worked 24 hours a day, seven days a week.

"I was going to do that whether you paid me $5 million or $10 million," Immelt told The New York Times. "But I do think there's a misalignment. I do think that that's one of the reasons why business isn't as trusted as it should be."

Immelt himself admits he's a bit of a "bad messenger" when it comes to the topic of CEO compensation, he told the Times. Many investors and analysts fault Immelt for leaving the once storied GE debt-ridden and with its stock value demolished by the time he left in 2017. (For his part, Immelt says his book gives context to his tenure because the narrative has been unfair and incomplete, he says.)

So why do CEOs make so much money?

The average CEO of a large public firm earns about 320 times as much as a typical worker, according to a report released in 2020 by the Economic Policy Institute (EPI). CEO compensation has continued to surge and could rise again despite the pandemic, according to the report. CEO pay for the top 350 firms in the U.S. surged 14% in 2019 to $21.3 million. From 1978 to 2019, CEO pay increased by 1,167%.

Though most Americans think CEOs are overpaid (around 74%, according to a 2016 Stanford study), CEO pay is usually tied to a company's stock-related and financial performance. Typically, CEOs get a base salary, but most of their compensation comes from performance-related bonuses and stock options that allow executives to buy company shares for a set price.

And CEOs' successful performance makes their company more valuable at the end of the day, according to some experts.

That is also the explanation given by Fortune 500 companies, it's their "mantra," says Sandy Pepper, an expert in executive pay at the London School of Economics and professor of management practice. However there is a great deal of evidence that the strongest correlation is between CEO pay and company size, according to Pepper.

"So as companies get bigger, CEOs get paid more," he says.

Pepper also says that many Fortune 500 companies face a "prisoners' dilemma" when it comes to CEO compensation. A prisoners' dilemma is a game theory in social science that is sometimes applied to the world of business when fierce competition between companies can end up hurting those companies in the long run.

In this case, it's that the big companies would "be happy to pay more modestly if everyone else did as well. But they reason that, if they pay over the odds, they might get a top performer," Pepper says. "On the other hand, if they pay modestly and everyone else pays over the odds, they might get an underperforming CEO.

"So everyone ends up paying over the odds," he says.

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