I don’t really understand why CEO’s have a salary? Isn’t their income based on the income of the company? Such as, everything that is net profit…is theirs?
My best guess is salaries are required for any company which has stock.
How is this salary determined?
No, the company is owned by the stockholders and they keep the profits. The CEO is an employee hired by the stockholders (via the board of directors) to manage the company.
What about companies that don’t pay out dividends?
CEOs are largely hired employees, same as everyone else. Stockholders are the owners of the company (assuming we’re talking about a public company). CEOs are hired by the Board of Directors, who nominally represent the stockholders. CEOs do not just get the net profits of the company - those are either reinvested in some type of capital or given to shareholders in the form of dividends.
CEOs of large companies usually have generous and diverse compensation packages. Because of a law passed in 1993 that was intended to reign in executive compensation, CEO salaries are usually under $1 million. Additional compensation takes the form of annual incentives (bonuses that are usually based on company performance), stock options, restricted stock (stock that the executive will get at a future date assuming he/she remains employed), and often long-term incentives (like a bonus, but based on the company’s performance over a number of years, often 3-5).
Salaries, while standard, are not required. For example, a former CEO of PepsiCo had an annual salary of $1 for several years.
Salaries, and other types of compensation, are determined by the Board of Directors, usually with the help of executive compensation consultants. Because executive compensation must be publicly disclosed, it is fairly easy to know what is competitive for a given position. Of course, since everyone wants to make more than average, we have a little growth problem with CEO pay…
Hope that helps!
I have also read that CEO in lieu of compensation are now being GIVEN things like condo in Manhattan and cars and other expensive things tangible items that are worth a great deal but obviously aren’t money. I assume they are still taxable.
Absolutely. They are considered as taxable income equal to what they would have cost to purchase.
Then the money is the company’s to spend how it sees fit. It usually goes into capital investment, paying down debt, etc. It still doesn’t automatically go to the CEO, though.
So in a tiny company where the profits go the owner, the owner can’t or just doesn’t call himself the CEO?
Doesn’t. There’s no point to it. Unless the company is large enough to require a many-leveled leadership structure, a CEO is irrelevant.
It’s like in the old days you could be a prince, or duke, or count, or whatever and still be ruler. Only when they started putting together larger multi-ruled areas did you need a king to rule over them, and then an emperor to rule over a number of kings. A CEO is just an emperor who reigns over presidents.
And if all the presidents make a lot of money, which they do, then the CEO has to make proportionately more to justify his or her existence.
The owner needs to give himself a title like CEO or president because the bank will require that an officer be named on the signature card. Similarly, you technically need to be an officer to sign a lease , a contract, or a financing agreement.
The owner of a corporation can’t act on behalf of the corporation just because he happens to be an owner.
Private companies are not necessarily small. The Mars candy company, for example, is still owned by the Mars family. Koch Industries is a privately owned chemical company with 85,000 employees and its CEO is Charles Koch. Big corporations like this will almost always have a CEO, who will either be the owner, a member of the owning family, or somebody hired by the owning family.
Officers are usually a part of a company that has incorporated itself. There are many other types of arrangements that a business can use for legal purposes. Not all companies are incorporated, even some large ones.
Yeah, Menards is still privately owned, that is a huge company.
Which brings me to some more questions.
What is the largest privately owned company?
How much does a business have to be worth before they can issue stock? I have seen businesses with a market cap of $1.2 million, but thats the lowest i can remember. So is there a certain value that must be maintained by the company, or can i open up a lemonade stand and issue shares on the OTC market?
I’ve seen very small companies that are incorporated and issue stock.
My neighbor’s father owns a local window and glass company (installing windows in homes and et cetera.) He’s been in business for about thirty years in the area, it’s a successful business but nothing huge (only a handful of employees.) Anyway, she and her three siblings all own equal stake in the company and it actually is in the form of stock. Her brother that works with the company and her father both draw salaries which means they make more from the company than the rest of the family which only receives dividends (which the dad does pay out periodically.) Most of the company’s profits get reinvested, though. The guy who runs it and his son both draw salaries that they live on and in general don’t reap the overall profits of the company personally.
I think it depends how you define the word “company.” Can you give me an example of a large “company” that isn’t incorporated?
Off the top of my head, the one that comes to mind is law firms may be partnerships.
From the Forbes Magazine Website
The Top Ten (companies that are private)
Cargill
Koch Industries
Mars
PricewaterhouseCoopers
Publix Super Markets
Bechtel
Ernst & Young
C&S Wholesale Grocers
SemGroup
Meijer
No, all of those businesses are corporations. What makes them unusual is that they’re privately not publicly owned.
That’s a tough question. Most businesses of any size are corporations (unless they are organized under some alternative legal structure like a partnership or foundation). The largest business owned under a proprietorship would be fairly small.
Yeah, even most businesses that were formerly sole proprietorships, in many many cases would actually be much better off forming LLCs, which offer many of the benefits of corporations (limited liability being the big one) but most of the time don’t result in the high corporate taxes, and the owner can still file their taxes like they were operating a proprietorship (it’s my understanding this is not the case anymore in all 50 states.)
A lot of law firms are LLPs or more traditional partnerships, and I know some doctors have partnerships which are similar as well.
FWIW, while proprietorships aren’t generally large businesses, I believe the number of businesses in the United States which operate as proprietorships vastly outnumbers the ones which operate as corporations.