When I was a kid, if I got one candy bar for dessert, I was happy as could be. If my brother entered with two candy bars, however, the crime of the century had just occurred.
In terms of evolution, we are preprogrammed to believe in equal sharing. Back when we were all hunter-gatherers, everyone in a tribe shared things equally -- it was vital to survival. But the world we live in is far from that time and place, and oftentimes this disconnect leads to some irrational behavior.
What's this have to do with investing?
In Dan Ariely's brilliant book Predictably Irrational, Ariely shows how humans almost never think of things in absolute terms, but in relative terms. Today's example: CEO pay.
Back in 1993, the government decided that publicly traded companies needed to disclose executive compensation packages. Authorities demanded this because of the growing chasm between the average worker's pay and that of the CEO.
In 1976, a CEO was paid about 36 times the salary of an average worker. By 1993, that number had ballooned to 131 times the average worker's salary.
Source: Predictably Irrational.
The legislation was built on the premise that compensation committees would feel the squeeze from a disgruntled public and rein in their spending.
Did it work? Take a look below.
Source: Predictably Irrational.
The opposite occurred.
Instead of pay going down, growth accelerated: By 2008, the average CEO was making 369 times the salary of the average worker. And instead of an enraged public, we got a room full of enraged CEOs, wanting to know why they weren't paid as much relative to their peer at Cry Babies USA.
CEOs behaving badly
Don't believe me?
Take a look at Philippe Dauman, CEO of Viacom (NYSE: VIA ) . Last year, he took home $84.5 million, tops among all CEOs. Since Dauman took the reins in September 2006, Viacom's stock has returned a respectable 10% or so per year. That's not bad, but does Dauman deserve the highest compensation package in the country for that? I doubt it.
Or how about Hercules Offshore's (Nasdaq: HERO ) John Rynd, whose total compensation almost doubled in 2010, while shares fell 27% during the year.
Not to be outdone is Helix Energy Solutions (NYSE: HLX ) CEO Owen Kratz. He took over (for a second time) in February 2008; since then, both revenue and profits have shrunk dramatically. And yet over this time, his total compensation has stayed roughly in the $4 million range from 2008 to 2010.
Though one could argue that Hercules and Helix have suffered from a large industry downturn in offshore drilling, the question remains: Why should these CEOs be so handsomely compensated when the company's financials are deteriorating?
Our CEO heroes
As Ariely points out in his book, this incessant focus on compensation serves to distract CEOs from their actual job: creating value for shareholders. "The more we have, the more we want," Ariely states, "and the only cure is to break the cycle of relativity."
Here are three CEOs who have decided to buck the trend, working for a yearly salary of just $1.
CEO & Company
Total Return During Tenure
|Steve Jobs, Apple (Nasdaq: AAPL )||$1||8,998%*|
|John Mackey, Whole Foods (Nasdaq: WFM )||$1||2,390%**|
|Larry Page, Google (Nasdaq: GOOG )||$1||5%***|
Source: Google Finance, *Taken from July 1997, when Jobs rejoined Apple. **Mackey has been CEO since the company's 1992 IPO. ***Page started on April 4, 2011.
Clearly, investing in the companies run by these CEOs has been a profitable venture. If you follow Jobs, Mackey, and Page, you know that all three are passionate to a fault about their company. Jobs continues to create devices we need to have; Mackey's message of conscious capitalism is taking hold; and Page runs a company whose mission statement includes, "You can make money without doing evil."
Maybe I'm painting with too wide a brush. Some CEOs definitely deserve their salaries. Ford (NYSE: F ) CEO Alan Mulally, who earned 2010 compensation that placed him in nation's top 20, has been widely recognized for leading the carmaker from the brink of bankruptcy to sustainable profitability.
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