Here's a new way to look at a company as a possible investment. I ran across it on our discussion boards, where Clif P. of Hawaii was comparing his ownership of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) and Countrywide Financial (NYSE:CFC). He explained that, considering his total shares owned:
I now own almost exactly one millionth of Berkshire. This makes my share of [CEO Warren Buffett's $100,000] salary $0.10. ... In contrast, I own [about] 1/110,000 of Countrywide. Countrywide's CEO [Angelo Mozilo's] compensation for 2007 was recently reported as being $22 million. This means I forked over $200 for his management.
He noted how tempted he was to go to the Countrywide annual meeting and ask why Mozilo was worth 2,000 times more than Buffett.
It's an interesting way to view an investment, no? But it certainly has its limitations. For one thing, it's clear that you don't necessarily get more by paying more -- Buffett has certainly been a much more successful CEO than has Mozilo in terms of producing shareholder value. The metric also depends on how many shares you own, and while some of us might be lucky enough to own 20,000 shares of, say, PepsiCo (NYSE:PEP), worth nearly $1.4 million, someone else might own just 20 shares, worth nearly $1,400. The smaller investor will be paying just a thousandth of the CEO salary share that the bigger investor will pay, and that really doesn't shed much light on the stock as an investment.
A similar calculation is to figure out what percentage of a company you own. PepsiCo, for example has about 1.6 billion shares outstanding. If you own 20,000 of them, you own 0.00125% of the company. When it reports annual revenue of $40.5 billion, you can think of around $500,000 of that as yours. When its earnings per share are $3.47, you can think of it as nearly $70,000 that's attributable to your shares.
I think that what leads people to consider metrics like Clif P.'s is a growing frustration with CEO compensation packages, which have grown out of control in recent years. Learn more about this, and about possible fixes, in these articles:
