ceos are the highest paid people in the world period but unlike most of us who take our salaries
and cash ceos generally receive the vast majority of their compensation in stock for example in 2020
tim cook was paid 281 million dollars but only three million of this was cash this means that
only about one percent of tim's compensation was in cash now that's already quite extreme
in comparison to us average people but founder ceos generally take the strategy to a whole
another level everyone from elon musk and steve jobs stop mark zuckerberg larry page and sergey
brin have all taken one dollar cash salaries in the past this isn't to say that they weren't
paid at all though they often receive hundreds of millions if not billions of dollars worth of stock
elon musk for example recently unlocked a 23 billion compensation tier even on the years that
these guys don't get a stock compensation they're compensated in the form of travel
security housing and so on but what's even the point of this why take a one dollar salary
one dollar salaries aren't a new phenomenon by any means in fact they've been around since the early
1900s but the first time they gained significant prominence was during world war ii unlike the one
dollar ceos today who received extraordinary amounts of compensation through other avenues
the original one dollar ceos actually only earned one dollar well kind of you see it during
the height of world war ii the us government was struggling to recruit taunted individuals
much of the young talent was sent to the war while the others preferred to record private companies
so a few prominent ceos decided to help out the government for free and set an example this
included executives like philip reid the ceo of ge and william not senate the ceo of gm these guys
were basically volunteering for the government but the law prevents the government from hiring
unpaid volunteers so they of course decided to pay them out one dollar per year and these guys became
known as the dollar a year men it should be noted though that these guys were still being paid their
regular salaries from their companies so it's not like the total compensation was only one dollar
but their work at the government specifically was truly only awarded one dollar by the end of the
war the u.s employed a one thousand dollar minute and these guys served in all sorts of positions
william nutson for example started off in the national defense advisory commission before
becoming lieutenant general and then the director of production william was an invaluable resource
in this role because his knowledge of running efficient factories and scaling up production
were unmatched before the u.s joined the war they were producing just 3 000 aircraft per year but
by the end of the war they are producing 300 000 aircrafts per year cargo and navy ship production
also went through the roof which helped the war effort astronomically after the war ended though
most of these guys returned to their original jobs full time or they retired and most people forgot
about the one dollar salary up until 1979. at the time the automotive ministry had been devastated
by the oil crisis and the company that was hit the hardest was chrysler things got so bad that
chrysler needed a bailout from the government and to show that the company was serious about
spending the bill of money effectively chrysler ceo lee iacocca decided to take a one dollar
salary if you're not familiar with this man he's an absolute icon within the automotive industry
and he made one dollar salaries the default pr move for wealthy ceos
the next prominent example of the one dollar salary is steve jobs when steve joined apple
in 1996 the company was on the brink of bankruptcy so it's no wonder he settled for one dollar salary
especially given that he was already a billionaire thanks to pixar and as the dot-com bubble burst we
saw dozens of ceos follow his lead but this was really the last time that the 1 salary was truly
a sacrifice since then the one dollar salary has become more of a strategy than a sacrifice
one of the greatest perks of taking a one dollar cash salary is that you can receive
significantly larger compensation through other avenues while also minimizing public scrutiny
as you might have already guessed on average one dollar ceos are paid significantly more than
regular ceos on average one dollar ceos do earn 623 dollars less in salary nine hundred forty
one thousand dollars less in bonus and one hundred and seventeen thousand dollars less in other forms
of cash compensation this adds up to a total of one point six eight million dollars less in cash
compensation however on average they also earn 515 000 more in options 1.5 million more in stock
and 1.5 million dollars more in other forms of non-cash compensation this adds up to an extra
3.5 million dollars worth of non-cash compensation this means that the average one dollar ceo earns
1.87 million more than the average ceo in terms of total compensation not only does one dollar cash
salaries help these ceos minimize public scrutiny but it's the main reason that they're able to
earn so much in the first place here's the thing many of the biggest companies in the world run at
little to no profit so they can't afford to pay massive cash salaries take tesla for example it
wasn't till 2020 that tesla posted their first full year of profitability do you really think
that tesla could afford to pay elon a few hundred million dollars per year much less 23 billion
dollars of course not even now tesla only has 17.5 billion dollars in cash so if they were to pay
elon 23 billion dollars they would literally burn through their entire cash reserves even paying
him a few billion in cash would be an extremely irresponsible move but if we're talking about
options or stock that's actually doable here's the thing when companies give employees and executives
talk compensation they don't actually pay for the stock it's not like the company buys the shares
from the stock market and then awards them to the employees rather companies are allowed to create
shares out of daenerys as long as that advised by their employee or executive compensation plans
now just because the companies creates the shares out of denir doesn't mean that the stock is free
rather all of the existing shareholders of the company are basically agreeing to dilute their
own stakes to pay for this talk compensation for example when elon was paid 23 billion dollars
tesla's valuation hovered at around 1 trillion so shareholders had to dilute their stakes by about
2.3 percent for elon to get paid such a massive amount but that's an extreme example even elon
doesn't usually get paid tens of billions usually his pay is closer to something like 500 million
and compared to tesla's big market cap that's only 0.05 dilution as you can see stock compensation
allows companies to offer extraordinary salaries without compromising their own balance sheets
and if you think about it it's truly quite brilliant but what it's not is a sacrifice
aside from earning a far greater salary many speculate that one dollar salaries allow ceos
to get away with a much smaller tax bill the idea is that executives don't have to pay taxes
at all until they sell so they'll only have to pay capital gains taxes as opposed to ordinary
income tax which is a lot higher but this isn't actually true executives do have to pay ordinary
income tax when they exercise their stock options and given the magnitude of their salaries they
usually end up paying 40 50 in income tax elon for example had to pay 11 billion in taxes last
year now elon cleverly made it seem like he was selling stock because people wanted him to
but really he had to you see it elon had stock options that translated to 22.8 million shares
of tesla and all of these options were expiring in august meaning that he had to exercise or sell
these options by august whenever you exercise or sell options though it counts as an ordinary
income event in the given that each year of tesla was worth over a thousand dollars at the time
exercising 22.8 million shares was equivalent to 23.5 billion worth of ordinary income at a 40 tax
rate this translates to 10.7 billion in taxes there's really no way of getting around this
and elon only had until august to exercise these stock options so he decided to sell while tesla
was near its all-time highs and he also made it seem like he was doing his civic duty when
really he was forced to pay a large tax bill if he wanted to exercise his options now that elon has
paid ordinary income tax on this stock he can hold for a long time and he'd only have to pay capital
gains taxes in the future but this isn't really a tax advantage if he was paid 23.5 billion cash
it wouldn't have really changed anything he would have still had to pay ordinary income tax on the
initial payment and he could have still benefited from long-term capital gains tax if he invested
the cash the only time that you can avoid ordinary income tax altogether is when you get equity from
founding a company and the original value of your shares is zero thus the ordinary income
tax on those shares is also zero and you only have to pay capital gains tax whenever you're paid with
stock that actually has a value though you do have to pay ordinary income tax now some of you
guys who earn stock compensation may be saying that you didn't have to pay ordinary income tax
on your stocks and the likely reason for this is that your stock was awarded in the form of
isos or incentive stock options isos are special stock options that are only tax capital gains
but the only problem with isos is they're capped at 100 000
per year so this benefit isn't really applicable to the executives that we're talking about
and the idea that one dollar ceos can just avoid ordinary income tax altogether is simply not true
while one dollar ceos may not be able to get a tax break by taking their compensations in stock
they do get one more massive advantage which is stakeholder morale there's very few things that
give shareholders more confidence than knowing that the ceo is all in and most ceos are more
than all in and given that they borrow money on their stakes to actually fund their lives
this means that if the underlying stock went to zero the ceo would be screwed
as they would literally lose 99.9 percent of their wealth take elon for example bloomberg estimates
that he only has three billion cash even after selling tens of billions of dollars worth of stock
this means that before he started selling tesla late last year he likely had less than
one billion dollars in cash now this is not a bad amount by any means and it's not like he's going
to go homeless if his companies collapse but i don't know about you but i wouldn't want to go
from 300 billion to 300 million overnight and this is likely extremely strong motivation to
not let any of his companies go bankrupt this isn't as big of a concern when we're talking
about mature companies with solid cash flow but for startups ceos taking one dollar salaries is
a strong commitment for example amazon stock crashed 95 percent after the dot-com bubble
jeff bezos being all in during this time period was no doubt quite a statement at the end of the
day one dollar salaries came about due to times of hardship but over time they've evolved into a
marketing ploy and a strategy for earning bigger compensations they don't have a bunch of tax
advantages like many assume but it does do one job better than anything else when a ceo takes
all of their salary in stock they don't get paid online shareholders also get paid and thus far
there has been no greater symbol of allegiance and loyalty to shareholders than taking a one dollar
salary would you be willing to take your entire salary in stock comment that down below also
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see more questions logically answered but until then i'm hardy i'll see you guys on the next one