In this segment of the MarketFoolery podcast, host Chris Hill and Foolish investor-at-large Tim Hanson discuss the absurdity of C-suite compensation. Granted, running a large public company is a tough job, but the complete disconnect between what the top executives are paid and the results they produce should have shareholders, board members, and employees up in arms.
The Fools consider the number of overpaid CEOs who were actually fired for cause, the lack of a connection between CEO pay and organizational or shareholder benefit, the size of their golden parachutes, and more.
A full transcript follows the video.
This video was recorded on May 15, 2018.
Chris Hill: It's nice that some of the CEOs of public companies are making a good living, because I was really worried about some of them. And congrats to Evan Spiegel, the CEO of Snap (NYSE:SNAP), who, as it turns out, was the highest paid CEO in 2017. He made just over $500 million.
Tim Hanson: That wasn't all cash, though, was it? No!
Hill: No, much of that came from a huge stock grant that vested when Snap went public.
Hanson: I mean, that'll be worthless soon.
Hill: [laughs] But here's the thing. When you juxtapose the just north of $500 million that he made in 2017 with the $720 million loss that Snap took in 2017, I can't help but think, there's a way to decrease that loss. You looked at the list. What stood out to you?
Hanson: This came from The Wall Street Journal. What they were pointing out was, was it nine of --
Hanson: Eight of the top 20 --
Hill: Eight of the top 20!
Hanson: -- don't even have their jobs anymore! They included Steve Wynn, who obviously resigned in shame for that. Then, Hunter Harrison, who passed away after trying to steer CSX. After successfully turning around some other railroads, he was attracted to CSX by an activist investor. He had health problems and passed away. Still pocketed something on the order of $100 million or something along those lines.
It was just fascinating. You like to think, at any company, that you have a pay-for-performance culture, right? That the people who are making the money are the people who are helping grow value for the business. And obviously, CEOs make a lot of money. And the fact that the turnover is so high for doing a bad job -- these people mostly lost their jobs for cause. They were doing a terrible job! And they were making well into nine figures!
Hill: That's the thing that always has me scratching my head. Because you're right. All kidding aside about Evan Spiegel, in general, rather than CEOs being paid a tremendous amount of cash, we'd much rather see their interests align with the interests of individual shareholders like you and me. But, I don't think I will ever stop shaking my head at some of the pay packages that are put together for CEOs who don't perform, to the point that you made, and also some of the parachutes. Even people who are being fired for cause, it's like, "Oh, yeah, but we're also going to give you this enormous bag of money on your way out the door."
Hanson: Yeah, it's crazy. In sports, there are obviously some overpaid athletes, but they got overpaid because at some point, they were probably underpaid, or their talents were marketable. There's some connection there between the compensation and their relative ranking among their peer group. With CEOs, there's almost no correlation between skill and pay when it comes to C-level management. None. So, why any board of directors feels the need to overpay a CEO to keep them or to hire them when you could probably find someone of equal or greater ability for less money if you're just willing to work a little harder continues to baffle me. And you have all sorts of corporate executive headhunting firms that make a lot of money looking for these people. And yet, there's no science to it! I mean, I like to measure things and be very quantitative --
Hanson: Yeah, and I believe in meritocracy, so on and so forth. And this is a thing that continues to annoy me about management teams, is how much money they think they're worth when it's demonstrably not true that they're worth that money.
Hill: You just reminded me, when you mentioned professional athletes, of the great line that Chris Rock had about the difference between being rich and being wealthy. It was, "Shaquille O'Neal is rich. The owner of the team who signs his paychecks, he's wealthy."