This morning I read a post at Fast Company that’s sure to raise some hackles. Its subject was the 100 most over-compensated CEOs:
In 2019, the average top CEO’s pay increased 14% from 2018 to $21.3 million. Sundar Pichai, the CEO of Google’s parent company, Alphabet, earned $280,621,552 in total compensation—more than 1,000 times the income of a median company employee.
Pichai tops the new list of “100 Most Overpaid CEOs,†the seventh annual report published by As You Sow, a nonprofit promoting corporate social responsibility through shareholder advocacy. The report, subtitled “Are Fund Managers Asleep at the Wheel?†finds that, while shareholder opposition to this excess is growing, many of the biggest financial fiduciaries still did not vote against excessive CEO pay in last year’s annual shareholder meetings.
The report calculates how much CEOs should have earned in 2019 based on total shareholder return over the past five years, and then calculates the surplus pay they received; for instance, the report suggests that 95% of Pichai’s salary (a total of $266,698,263) was excessive. It found that, in Alphabet’s case, the CEO-to-employee pay ratio was 1,085:1; The Walt Disney Co.’s, ranked fifth, was 911:1; and The Kraft Heinz Co.’s, in sixth place, was 1,034:1.
The source of the hackles-raising will, I have little doubt, be who the heck are they to decide who’s over-compensated?
I think that both points are worthwhile and the underlying question is why are these people paid so much? I think it can be attributed to several factors including the dominance of funds in investing nowadays and increasing stock value rather than expanding enterprise value as a business strategy. As long as the stock continues to increase in value, fund managers have little incentive to complain about over-compensated CEOs.
Not that I disagree with tenor of the author’s piece; but the underlying data is ambiguous.
I am trying to understand how they came up with those calculations.
Google stock increased by 156% from Jan 1 2014 to Dec 31, 2019; compared to 75% for the S&P 500. If we use Jan 1 2015 to Dec 31 2020, Google increased by 250% while the S&P increased by 80%.
From a shareholder point of view, a return that exceeds the S&P 500 by 100-150% over a 5 years is actually very good.
Disney and Comcast look more deserving of criticism since their return mostly matched the S&P 500.
If the CEO pay should increase to match the run up in stock value, should the pay for everyone else also increase that much? Asking for a friend.
Steve
It’s been more than a generation since that was the case. I think that’s the source of some of our gravest problems. I attribute the change to a slack labor market and board mismanagement. Mismanaged because they should be applying the same standards to managers that are applied to ordinary workers. I find it hard to believe that the talents of the managers involved are as scarce as their compensation levels might lead you to believe. Said more directly, I think they could get other managers just as good for a tenth or even a hundredth of the price and failing to do so is not living up to their fiduciary responsibilities.
If it’s a consequence of interlocking directorates it should be addressed in law and enforced.
One other piece of info that is missed.
Larry Page and Sergey Brin have 81% of voting shares in Google. They, not the board, and not other shareholders determine executive pay, and almost every decision that matters at Google. Comcast is effectively controlled by the Roberts family.
How founder/family controlled businesses are managed/mismanaged vs true public companies are managed/mismanaged are different topics.
At the end of the day “who are you to say” is the proper argument. And if you want to be made King and dictate it that’s the road to hell. After all, I think a third rate second baseman making $20MM a year is absurd. Or Don Lemmon making $3MM/yr to spew inane garbage. So there. But its not my call.
Separately, a better way to look at things than in percentage increases is value added: capital appreciation. Alphabet’s market cap increased 700B the last 5 years. So what portion of that is appropriate for a CEO who got that done, vs one who didn’t. I don’t really know. What’s .1% of that increase per the past 5 years. Do the math.
My world differs from Dave’s. In smaller businesses the CEO can be the total difference in company performance. And worth many, many, many multiples of the average guy. Contra his observation, I can plug and play all kinds of functional heads, super salesmen etc. Not so much the CEO.
One of the gravest problems with our present economy is that the FANG (or FAANG) companies are not representative of anything other than themselves. They represent an enormous amount of total stock valuation which renders them important financially but are very nearly trivial from the standpoint of actual production or employment. It used to be said that what was good for General Motors was good for the U. S. It cannot equally be said that what’s good for Apple is good for the U. S. Heck, what’s good for GM isn’t even good for the U. S. anymore if it ever was.
I draw different lessons from that than many. I think that Facebook, Apple, and Google (at least) should be broken up for anti-competitive practices.
A good CEO with a good team and you can win. A bad CEO with a good team or a good CEO with a bad team and you probably lose. Leadership is valuable and it is worth multiples of what others earn, but there is no success without the other people too. For many reasons most of the rewards of success go only to those at the very top. Also, when things dont go well the guy the top still does well, just not as well while those lower down actually lose money and jobs. (Ok, the CEO may have a pay cut but is still making a lot.)
Steve
Not sure which A in FANG we are talking about.
But Amazon is now the second largest private employer in the US with 1 million employees. Their data centers in AWS are strategically important.
I was referring to Facebook, Apple, Netflix, Google.
IMO Amazon is in a category by itself. It, too, should be broken up for anti-competitive practices. My main question about Amazon is it a net job creator or destroyer? I think it’s a net job destroyer.