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CEOs make a lot more than you think they do, here's why

How much do you think the average CEO makes, $500,000? $1 million?

A new survey on public perception of CEO compensation by the Stanford Graduate School of Business found that Americans believe that Fortune 500 CEOs take home about $1 million annually, and they think it's too much. Of the 1,200 Americans surveyed, 74 percent think CEOs are overpaid.

That's before they find out that on average, American CEOs make much more than $1 million a year.

According to the Atlantic, the median annual salary for a Fortune 500 CEO is over $10 million (median $12.2 million). Today's CEOs make between 210 and 300 times the average salary of their employees.

“CEO compensation figures are much higher than the public is aware of,” Stanford Graduate School of Business professor David F. Larcker told the Atlantic. “In many parts of the country, it is incomprehensible that anyone can earn this much money.”

Indeed, some readers may be shocked by these seemingly exorbitant salaries, but executives understand that a lot of factors go into determining a CEO's pay— most of them having nothing to do with greed.

In a letter to American Enterprise Institute, one Fortune 500 CEO explained the process by which CEO salary is determined and expressed concern about the high salaries of underperforming CEOs. This CEO asked AEI not to print his name.

The CEO, who made three times the salary of the next-highest-paid executive in the company, said that his high salary didn't weigh down his conscience — most of the time.

"I made nothing like the really obscene compensation of some CEOs, of which there are a goodly number of examples, let alone of the athletes, private equity founders and, worst, the entertainers," the CEO told AEI. "So I slept okay, although admittedly not always and not without some anguish."

He goes on to explain that CEOs' salaries typically grow so much because they are performance based. If a company grows by 20 times under the current CEO (not uncommon), his or her salary will increase proportionately.

The problem is when CEOs make enormous amounts of money, even when their performance is average or poor. This happens because companies don't want their CEO to make less than average and therefore reflect poor performance.

This means that while average and poor performing CEOs receive an "average" salary, outstanding CEOs expect to be paid more than average, thus raising the average. The process repeats itself and CEOs' salaries continue to go up each year.

How to resolve the issue of overpaid CEOs is uncertain. The Atlantic reports that the Stanford survey asked Americans, and about half thought that the government should be involved in determining CEO salary limits.

But implementing government regulations to rein-in CEO compensation would be difficult. As Forbes contributor Adam Hartung puts it, "Americans can’t even hardly agree on whether there should be a minimum wage at all, much less where it should be set."

Hartung also said that after the Supreme Court ruled on Citizens United that corporate campaign spending cannot be restricted, large companies will use their financial power to lobby against government interference in setting private compensation rates.

Even if you take for granted that CEOs' salaries won't be coming down anytime soon — more than likely they will keep going up — you might wonder what they do with all that money.

Their expenditures usually hover somewhere between the substantially charitable, the lavishly excessive or some combination of the two.

According to Time, some prominent examples include a $131 million yacht commissioned by Apple's former CEO Steve Jobs. Jobs died before the yacht's completion.

Other big-ticket items purchased by rich CEOs include the Los Angeles Clippers basketball team, bought by Microsoft CEO Steve Ballmer, and the Hawaiian island of Lanai, 98 percent of which is owned by Oracle CEO Larry Ellison.

On the reverse side, some such as former Microsoft CEO Bill Gates and Facebook CEO Mark Zuckerberg have donated or pledged billions of dollars to charitable organizations.

"Our hopes for your generation focus on two ideas: advancing human potential and promoting equality," Zuckerberg said in a letter published on Facebook where he announced he would donate 99 percent of Facebook shares to charity.

"Advancing human potential is about pushing the boundaries on how great a human life can be. … Promoting equality is about making sure everyone has access to these opportunities — regardless of the nation, families or circumstances they are born into."

sturner@deseretnews.com

twitter: @zamturner