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Reasonable CEO Pay Can Boost Your Returns

By Anders Bylund - Updated Apr 5, 2017 at 7:58PM

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Who's making money in your investments -- you or the CEO?

When it comes to the economy, business leaders drive growth. When America's great companies produce and sell more of their products and services, the entire nation basks in the glories of bigger profits, bigger salaries, and bigger opportunities. So it only makes sense to pay the people who are responsible for all this growth according to their importance. Right?

As it turns out, the average CEO makes a whole lot more money than that. While our GDP has increased by about 2% a year since 1950, slowing down a bit in recent years, CEO salaries have skyrocketed this decade, with regular double-digit annual increases. In 2007, the average CEO made 364 times the average worker's paycheck, and 885 times minimum wage. Some of the biggest jumps in compensation went to serious underperformers like Capital One (NYSE:COF) CEO Richard Fairbank and Lehman Brothers' Richard Fuld. Wouldn't their egregiously massive salaries have been better spent on running their businesses instead, or at least adding a few million dollars to their dividend payouts?

That's why I like humble executives with some sort of perspective on their relative worth. So it's good news to me when:

  • Gymboree (NASDAQ:GYMB) CEO Matt McCauley and his executive team announce 10% to 15% pay cuts, effective immediately.
  • Motorola (NYSE:MOT) co-CEOs Sanjay Jha and Greg Brown go even further, with 20% to 25% voluntary salary reductions and some forfeited cash bonuses.
  • FedEx (NYSE:FDX) head honcho Fred Smith leads by example, taking a 20% hit to his paycheck while reducing other executives' pay by up to 10%.
  • Bank of America (NYSE:BAC) CEO Ken Lewis kicks out some of his friends and supporters from the management team.

Sure, that last one doesn't hit home like a personal pay cut, but I think it still counts as trimming the fat in a way that hurts Mr. Lewis.

These moves show me that management is committed to running their companies rather than just cashing in a massive paycheck and calling it a day. I own just one mutual fund, Bridgeway Aggressive Investors II (FUND:BRAIX), and Bridgeway's salary cap that limits the CEO to seven times the salary of the lowest-paid employee was a big influence on my buying decision. And Google's (NASDAQ:GOOG) famous $1 CEO salary ensures that Eric Schmidt works hard to increase the value of his stock holdings -- and mine.

Low CEO compensation is no guarantee for stock market performance, of course, but it's a useful first screen that points you to businesses that put their money where their mouths are. In the long run, the cost savings and harder-working executives should add up to bigger profits, and yes, greater stock returns.

Further Foolishness:

Bridgeway Aggressive Investors 2 is a Motley Fool Champion Funds pick and Bank of America is a Motley Fool Income Investor recommendation. Google is a Motley Fool Rule Breakers selection, while FedEx is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in Google, Gymboree, and that Bridgeway fund, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.

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Stocks Mentioned

Bridgeway Funds, Inc. - Bridgeway Aggressive Investors 2 Fund Stock Quote
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Alphabet Inc. Stock Quote
Alphabet Inc.
Bank of America Corporation Stock Quote
Bank of America Corporation
FedEx Corporation Stock Quote
FedEx Corporation
Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
Motorola Solutions, Inc. Stock Quote
Motorola Solutions, Inc.

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