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Cisco's $30M Man: Worth Every Penny

Stocks in this article: CSCO

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- "John Chambers is making $30 million? That's corporate greed!" We are bound to hear that today as Cisco (CSCO) announces CEO Chambers' new compensation package. Rather than follow others in a knee-jerk reaction, let's be thoughtful. Is $30 million fair?

Cisco CEO John Chambers

To address the fairness question, we must begin by asking, "What is fairness?" Some, like Occupy Wall Street, believe fairness is when all share similar rewards. Others believe that fairness is getting what you deserve -- and some deserve more than others. While it is not possible to resolve the moral question of fairness, it is easy to conclude which definition delivers the best results.

Consider East vs. West Germany, China vs. Hong Kong, Cuba vs. Miami, North vs. South Korea. In all cases, citizens of both countries had the same DNA and started with the same culture -- four nearly perfect control groups. In all four cases, the results were virtually identical -- fairness as "getting what you deserve" works dramatically better. This "free market approach" improves the standard of living of almost every citizen. In China, its near-180 degree shift from the Cultural Revolution approach of equal rewards to today's free market approach has created a huge income gap. But, it has also rescued hundreds of millions from poverty and starvation. Let's assess Chambers' compensation on the free market model.

What Is Fair Pay for John Chambers?

There are various ways to determine fairness from a free market perspective. Let's look at Chambers' package from three different assumption sets.

Assumption 1: Fair is what owners say is fair. Don't you hate it when others make your business into their business? It's really no one else's business what Chambers makes -- owners/shareholders can pay him whatever they want. If they don't like his pay, they can stop being owners with a single key stroke. Cisco stock price on Oct. 21 was 17.37. When Chambers' pay plan was initially announced, the stock increased by almost 1% to 17.54. The announcement did not seem to bother the owners. Many owners see high compensation as an insurance policy to retain talent -- Chambers will continue on. Under this assumption, $30 million is fair.

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