The compensation of CEOs in large companies is high, especially compared to the average wages of workers, fueling debates about wage inequality. Critics argue that such pay is unfair and out of proportion to the company’s actual performance. Proponents argue that higher wages reflect productivity and are necessary to attract scarce high-skilled workers to large companies. Let’s go to the marking tape.
On August 12, Starbucks shares were trading at around $77, a level they had been stable at for a long time. On August 13, the shares were trading at $94. What has changed? On August 13, Starbucks announced that it was hiring a new CEO, Brian Niccol, who had held the top position at Chipotle.
There are approximately 1,132,800,000 Starbucks shares outstanding so hiring Niccol increased the value of Starbucks to just over $19 billion. In comparison, Niccol will be paid a salary of $1.6 million, a bonus payment of $10 million and potential equity awards that may be valued at the order. 
of $100 million or more if the stock continues to perform well.
No question, Niccol is well paid but only a small percentage of the billions the market estimates it will generate for other people, buyers and investors.
Niccol has had an amazing run as CEO of Chipotle increasing the stock price from about $6 to $56. So, it’s no surprise that when his move was announced, Chipotle stock dropped from $56 to $46 (it later recovered to around $52).
Using the latter number, Chipotle’s value dropped by about $5.5 billion on the day of Niccol’s announcement. That’s a surprising drop considering that number two at Chipotle is hardly a slouch. But heh, Kevin Durant doesn’t do as much as Steph Curry. (See yesterday’s post about the benefits of inequality!) Last year, Chipotle paid Niccol a total compensation package worth $22.5 million. Again, a nice pay package but is there any question that Chipotle investors are sorry to see Niccol go?
Note also that the market expects Niccol to raise the value of Starbucks going forward more than he would raise the value of Chipotle going forward so this move was a public benefit. It is important to remember that CEO pay is not just about incentives but about distribution.
The important thing is that in the estimation of people who put their money where their mouth is, Niccol deserves to be paid.
Addendum: Don’t forget my previous post in this series from 2013, CEO Value which looks at what happened when Ballmer left Microsoft. Same basic lesson but in reverse! Notice what has happened to Microsoft stock since then!
All of this should also be placed in the context of an extreme shortage of High IQ Workers and one can understand it as a talent shortage.
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