The Typical CEO Salary: A Restoration of Sanity

By Markets Fool.com

Last week, Gravity Payments -- a Seattle-based credit card processing company -- made waves when it raised the minimum wage at the company to an astonishing $70,000 per year (by 2017). The media has largely framed the story within the narrative of the national debate about minimum wage.

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But while the minimum wage is certainly worthy of investigation, I'd like to shine a more intense light on Dan Price, the CEO who made the move. Raising Gravity's minimum wage so drastically meant that the company was going to be putting roughly 80% of its expected profits for the year back into employee salaries.

In order to help ease the blow, Price decided that his salary would be going from about $1 million to $70,000 -- effective immediately.

When a sky-high salary serves little purpose
While Price is an unapologetic capitalist, he also realizes that every person within our economic system has choice and agency -- including its CEOs. Reflecting on how much he could be earning every year, he said, "The market rate for me as a C.E.O. compared to a regular person is ridiculous, it's absurd." Without a wife or kids, and running the company at the ripe age of 30, Price said the only things he really splurges on are snowboarding and offering to pay for rounds at the bar.

Price got the idea for raising his employees' minimum wage after reading a study by Angus Deaton and Nobel winner Daniel Kahneman about the $75,000 per year threshold for happiness in America. In short, the study found that if a family had below this level of income, their emotional well-being suffered.

But the flip side of the findings was that beyond $75,000, the benefits of a higher salary on happiness were limited. While other studies have found varying thresholds -- and there are surely wide variances depending upon location, family situation, and age -- the basic premise remains: Money can't buy happiness, but lack of money can surely prevent you from being happy.

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In fact, a team of researchers led by Sonja Lyubomirsky of the University of California-Riverside found that external circumstances -- of which one's salary is a part -- account for very little in determining one's happiness.

What Determines How Happy We Are? | Create infographics

There are two things that are notable about this. First, Price is clearly willing to walk the walk. It would be one thing to raise employee salaries because it's possible -- due to profits -- or to make headlines. It's another thing entirely -- especially in our society -- to trust that money really doesn't buy happiness, and make personal decisions based on that belief.

The second takeaway is that this then leads us to question why other CEOs are paid so much. While I'm not in favor enforcing a cap on CEO pay, when we combine this research with our own real-world experiences, it becomes exceedingly clear that high salaries serve only one purpose: to stroke the egos of many corporate leaders.

No one needs a multimillion dollar salary to be happy (if you do, there are far more serious problems going on in your life). While a robust argument could be made for the fact that many CEOs deserve such pay (think about the type of value that Steve Jobs created, for example), what we are beginning to see is that the benefits of such salaries are superfluous, and could offer much more leverage spent in other places.

Price isn't alone, and that's important
Perhaps the greatest takeaway from this is that Price is operating well within the bounds of capitalism, while helping to redefine what that means. No government organization is demanding that he make such a move; he is doing this under his own volition.

And Price isn't alone: Larry Page and Sergey Brin -- co-founders of Google each earn $1 per year, as does John Mackey, who founded and runs Whole Foods Market, and Mark Zuckerberg of Facebook.

From a business perspective, what we're really talking about here might not be about wage inequality or what it takes to be happy. Instead, Price (and others like him) may simply be signaling a return to long-term thinking in the American business community. As he said, "[This move] is a risk in the short term, but I have 100% confidence [that] in the medium and long term, it's going to be great for the company."

Our nation's economy -- and its employees -- might appreciate a steady dose of such thinking.

The article The Typical CEO Salary: A Restoration of Sanity originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Facebook, Google (A shares), Google (C shares), and Whole Foods Market. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), and Whole Foods Market. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.