What's a CEO Really Worth?

• Report this Comment On November 07, 2011, at 1:09 PM, rickw4s wrote:

  Often CEOs and execs are paid handsomely while the shareholders are losing money. To me, that's a huge problem, and where executive pay is currently out-of-touch with reality and reason.

  But if a company is making lots of money, and the stock price is continually rising, then large CEO pay *could* be considered OK. But why stop at CEOs? If a company is making lots of money, why can't all the employees be paid handsomely? Didn't they all contribute?

• Report this Comment On November 07, 2011, at 2:07 PM, lrmacds wrote:

  What is an engaged workforce who executes strategy in an exemplary manner worth?

• Report this Comment On November 07, 2011, at 2:41 PM, devoish wrote:

  http://caps.fool.com/player/highpaidceo.aspx

• Report this Comment On November 07, 2011, at 6:37 PM, WikiCPA wrote:

  Rickw4s,

  How are the shareholders losing money? By buying GS at 180 and selling at $90? How can Lloyd Blankfein help that? If a stock price is decreasing, it is possible that the CEOs and employees still get paid handsomely. At a firm like GS, i doubt they care much about their shareholders.That's how the cookie crumbles, share price does not dictate company success 100% of the time. Their employees are taken care of very well though, no mistake about that.

  And in business 101, a company like McDonalds, who prospers all times, bull or bear market, how are they going to give a bonus compensation to every janitorial worker for a successful quarter? When an employee is taken on, there is no compensation clause that allows them to be paid more when a company is doing well. Explain to me how one worker in one branch, contributed to the overall global success of the company? And this applies to many companies.

• Report this Comment On November 07, 2011, at 8:37 PM, richthegeek wrote:

  How about making the CEOs pay largely comprised of stock options. It they make the right calls, then the CEO profits, if not, they work for free (or nearly so). A large salary will not necessarily provide you with someone you can trust, just someone who is grateful to you for their wealth. Stock options will make a CEO you can trust because they will be as interested in the growth of the company as you - if not more so.

  Take you piles of cash, then, and sink it into R&D, so the company has the innovation to stay ahead of the game. Now you have a motivated CEO AND the tools for them to succeed. That should make everyone grab a coke and a smile.

  Rich

• Report this Comment On November 07, 2011, at 10:06 PM, ajk241 wrote:

  Great article about an important question! I honestly don't mind high CEO/Executive pay. A CEO is responsible for creating a culture of success at a company. What does bother me is what happens if the highly paid CEO makes poor decisions that destroy shareholder value and cause employees to lose their jobs. It is much harder for the average shareholder or employee to survive a significant loss to say a retirement fund or worse the loss of a main source of income than it is for a person who made $25 million per year. Even if that CEO has to downsize his/her lifestyle and expenses significantly, it is not to far of a stretch to think they will never need to work to make a living again. The same cannot be said for the average shareholder or employee who may have to put off retirement or worse. To me, this is nothing more than privatizing success and socializing failure. I’d be interested to know others thoughts.

• Report this Comment On November 07, 2011, at 10:50 PM, griderX wrote:

  Looking forward to your future articles regarding CEO pay.

• Report this Comment On November 08, 2011, at 12:24 AM, esxokm wrote:

  This is indeed a very interesting, important topic. And, I have to be honest: I am continually amazed at the idea that there is support for high CEO pay.

  The problem with saying a CEO needs a large amount of money to be incentivized to do a great job is problematic for an aforementioned reason: if high pay leads to great ROI's, then why not pay every worker triple what each is making? Simply put, that wouldn't make economic sense.

  But then we come to the problem of Kent's compensation. I own KO; I believe he takes too much money. Let's say we lowered his salary to $2 million total compensation per year. Here are a couple things to think about with such a thought experiment.

  Is that an immoral amount of money to pay for his position? I myself do not believe it is. Would he balk at such a pay package? Perhaps; but why wouldn't someone else step up and take it? Either a smart younger person or a person who is already rich?

  I think lowering a CEO's pay would not necessarily lead to a lack of qualified candidates. It would simply mean the candidates would have different backgrounds. An often-used comparison with CEO pay is the president's salary. Think about it this way: the president makes $400,000 per year. Why do people spend millions to become president? Who spends these millions? They are usually people who have already made a lot of money; they are also people who are accomplished. If you think Kent needs to be paid more than $2 million per year to run Coke, then you must believe we have never had a great president.

  And isn't the board more important than the CEO in theory? What type of people comprise a board of directors? Aren't they paid a lot less? Aren't they usually already accomplished and already rich? Couldn't we get someone from the universe of the board of directors to run a company? It's more work, perhaps, but let's be honest: a CEO really doesn't have a lot of physical work to do. And the mental drudgery of mathematical due diligence is left to underlings. A CEO simply makes decisions, travels, meets people, and gives speeches.

  Now, as to the point of should-we-care-if-someone-makes-$24-million-when-the-company-makes-$11-billion-in-profits? First, I would compare the CEO salary to free cash flow and, more importantly, the dollar amount of dividends paid. Second, consider the following: what would happen to the rest of managerial compensation if we lowered the CEO's compensation? It would decrease presumably. A significant reduction in compensation for all executives across the board might add up.

  CEO pay becomes more important depending on the ambiguity of the value of smaller amounts of money to a company. Let's take another of my holdings, Disney. Bob Iger made $29 million one year.

  Let's say we reduced his salary to $2 million (again, not an immoral thing to do). That leaves $27 million for the company to play with. "High School Musical" supposedly cost $4 million to make. According to the company, that franchise contributed large amounts of value to the company. Well, $27 million allows the company six more shots at creating franchises that cost $4 million to produce. A content company depends on its ability to make many bets. And if Iger made only $2 million, then his subordinates also would give back many millions to the business, allowing for more content bets which are important to the business model.

  I have to wonder: if all CEOs suddenly made $2 million in total compensation (all cash, no stock options; this would include health benefits, 401k, etc.), what would the theoretical effect on the dividend yield of the S&P 500 be? That would be worth a study...

• Report this Comment On November 08, 2011, at 4:54 AM, marc5477 wrote:

  A company is not run by a CEO. It is run by the people who do productive work. The CEO simply manages the business on a macro scale. Very few actually have any skill or know the details about their company.

  Its poor thinking to associate confidence in your business with an executives compensation. For the most part, you will not get better quality people by paying more money. That is not how the real world works. This is just what executives want you to believe. You can probably get the smartest human on the planet for less than $500k because they probably cant get a great job due to not knowing the right people despite their skill.

  Also, a company like Coke has thousands of employees. You would be much better served by promoting your top 500 people with $50k raises than to give all that money to one person. This is the most fundamental of principles... also known as "dont put all your eggs in the same basket" or to those who actually work for big companies... diversification. These people are much more useful than a CEO.

• Report this Comment On November 08, 2011, at 6:55 AM, dbtheonly wrote:

  Wici,

  What about those companies that have cut/elinminated their dividends?

  I wish there was a way to put a shareholder's vote in on the issue, "No Executive Bonuses will be paid, nor raises provided, until the dividend is restored to the X level".

• Report this Comment On November 08, 2011, at 11:37 AM, rickw4s wrote:

  WikiCpa:

  Investors buy stock as an investment. That means we expect that the stock will increase in value. It's that disconnect between executive pay and increases in shareholder value that's the problem.

  Regarding McDonalds, why can't the company give profit-sharing to all employees? Or as marc5477 says, why can't bonuses go to the top 500 people instead of only to the CEO? Again, the success of a company depends on a lot more than just one guy. But the current system is to reward only the top 1 or 3 execs.

  In a more perfect world, all employees would get some sort of profit sharing, some sort of bonus based on achieving goals, and all would be granted [some] stock options. (In the best case, options would be granted-- meaning priced--- quarterly so that they only make money if the stock continually goes up.)

• Report this Comment On November 08, 2011, at 1:22 PM, WikiCPA wrote:

  ES,

  "I think lowering a CEO's pay would not necessarily lead to a lack of qualified candidates. It would simply mean the candidates would have different backgrounds. An often-used comparison with CEO pay is the president's salary. Think about it this way: the president makes $400,000 per year. Why do people spend millions to become president? Who spends these millions? "

  The intellectual property of a CEO is much higher than an average worker. It's obvious as some companies pay up to 6-figures just to recruit an executive. These people can't be picked up off the street, their life and future are at stake. A CEO has to plan his career and life much more differently than an average McDonald's worker who has to come in everyday to plan out work shifts. If that worker messed up, it is very likely they could be hired at the Wendy's down the street. Whereas a CEO may be blacklisted from the industry (Tony Hayward for BP compared to the thousands of drillers that kept their jobs/moved to Exxon). Imagine that, 4 years of college, 4 years of graduate school, 20 years of working for a great company, and you could lose all that notoriety because your in a high position.

  As for the President, if you really believe he'll only make $400,000 each year, you have to do more digging. The white house seat is a launch chair for your portfolio. Add in book deals and speeches, he is up there with the executives, except he has a bunch of advisors to tell him what to do, whereas a CEO must make the decision.

  DBTheonly,

  The way i view dividends is that it is a gift, i should be happy i get one in the first place.

  Rick,

  Profit-sharing in my eyes are an employee benefit, like dental and vision. At McDonalds, and other blue chip companies, the top 500 do get bonuses at the end of the year. They also get stock option plans and profit sharing. I don't feel that these should be extended to all employees, but those who earn it by meeting company wide policies.

  In a perfect world, big macs would be free and the french fries would make me live longer. But to ask McDonalds to pay all their employees more for doing the same amount of work, to raise the dividend payout every year for the past 15 years, and increase shareholder value while making the CEO take a 75% pay cut? Doesn't sound like much incentive for that job...

• Report this Comment On November 08, 2011, at 1:26 PM, WikiCPA wrote:

  "I have to wonder: if all CEOs suddenly made $2 million in total compensation (all cash, no stock options; this would include health benefits, 401k, etc.), what would the theoretical effect on the dividend yield of the S&P 500 be? That would be worth a study..."

  A better study would to see how fast the S&P falls below $1,000. You kill all the incentives and you essentially kill capitalism.

• Report this Comment On November 08, 2011, at 1:33 PM, esxokm wrote:

  Marc5477:

  You hit the nail on the head with this statement:

  "This is just what executives want you to believe."

  That's all there is to it. Compensation committees and CEO-salary apologists simply want to convince shareholders -- the ones who actually take the risk -- that a great CEO must be paid millions for a unique talent. Nothing could be further from the truth. Besides the potential for a high payday, there is the allure of power to the position. The notion that great talents would still want to become CEO of KO or DIS on less than $2 million per year for reasons other than money should not be met with incredulity.

  I'm always amazed at the reactions of people I know when I criticize CEO compensation -- honestly, they immediately yell back at me: "They earned it! It's their right!" It's the same thing pundits yell on cable and radio.

  Thing is, yes, they do have a right to it if they can get it. Question is, why do shareholders allow it? Shouldn't those who take the risk be awarded unlimited compensation? For those who say being against high CEO compensation is the equivalent of being anti-capitalist, I say: aren't the true capitalists the ones who want lower pay for execs and higher dividends for themselves? Shareholders, it seems to me, are the ones who have the true right to want more...

• Report this Comment On November 08, 2011, at 1:53 PM, esxokm wrote:

  Wiki,

  I appreciate your response. Let me add some thoughts:

  Oh, believe me, I am well aware of the value of the presidency. You can make millions afterwards from book deals, speeches, Hollywood projects, etc. The proverbial sky is the limit, no question.

  In fact, this point is central to the argument. If you pay the president $50,000 per year, guess how many people would run for the office? The exact same number of people who run for the office now. Again, there are other reasons people want to be president; it isn't just for the salary. Which makes me think: why did we recently double the president's salary (as you'll recall, it was $200,000 per year not too long ago).

  Now, a CEO doesn't have advisors? Well, I'll have to respectfully disagree on that.

  As for picking up CEOs off the street: not literally speaking, but yes, you could recruit them easily enough from colleges, private industry entities, educational institutions, etc. They aren't necessarily that intellectual. As an example, how much intellectual equity did Bob Iger -- a former weatherman (not that there is anything wrong with that, he is a smart guy) -- need to buy Pixar? All he said was: buy Pixar. Other people did the rigid work of the deal, not him. Or Marvel: how much intellectual power was required to come up with the idea to buy Marvel? The business model at Disney was already there when he arrived. And, quite honestly, he was an exec at Disney during its bad times under Eisner, so I'm not certain he necessarily was the right guy for the job.

  A CEO will never be blacklisted unless they do something criminal. And even if you believe CEOs should receive high pay, the question still is: why? Is it because they are worth it, or is it because there is a system in place that rewards networking over true intellectual prowess? And why does a CEO need over $2 million? As a shareholder, I'm not responsible for his/her lavish lifestyle. I don't care whether he/she cannot afford a third estate. I simply want as much money as I can get from the risk I take.

  Thanks again for the discussion...

• Report this Comment On November 08, 2011, at 5:32 PM, WikiCPA wrote:

  I guess it's due to the fact that it is such a high power holding position. I believe that position has all the risk. When an accident happens, that sole person is the source and scapegoat, not the board of directors or advisors who agreed with the CEOs decision. I agree with your line 'I simply want as much money as I can get from the risk I take." I'm sure the CEO thinks the same. As for Bob Iger, I believe he was chosen because of his industry skills, he was the president of ABC after being a weatherman. This talent is what companies look for in a CEO, they wouldnt just hire a student to lead a company, you need someone that has been behind the reigns before, those few years Iger put in as president is what lead to his reward as CEO of Disney I believe. This may not have been intellectual prowess, and it could as easily have been networking rewards, but the fact that he put in his years of struggle to climb the rankings, I think he deserves his millions on millions. As for those who don't earn it, thats a whole other story...

  Thank YOU for your point of view and discussion, always nice to hear the other side.

• Report this Comment On November 09, 2011, at 1:41 PM, dbtheonly wrote:

  Wiki,

  "The way i view dividends is that it is a gift, i should be happy i get one in the first place."

  You & I have radically different views of dividends & of stock ownership in general, I suspect.

  When I buy stock in a company, I am buying into the ownership of that company. I own the company. Management works for me. Dividends are my share of the profits; not some gift that my employees give me out of the goodness of their heart. If those employees I have hired to manage my company fail to increase the value of the company; they need to be fired. Not rewarded by given salaries comensurate with industry standards. Not rewarded with multi-million dollar "bonuses" at the expense of the dividends paid to the owners.

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