There is a game played by CEOs with the corporate issuance of lottery tickets. Otherwise known as stock. Stock can be issued in any number of ways, shapes or forms. Warrants, options, restricted or unrestricted stock. No matter what you call it, every CEO hired, is asking for equity knowing that their only goal is to hit the jackpot and create a pool of wealth that puts them in the "fuck you" wealth category. Thats enough money to buy or rent just about anything you can think of and put you in position to never have to work again. You just live off the cash in the bank.
Put another way, every hired CEO is looking to be in a position to look in the mirror , smile and tell themselves they have made it. They are living the American dream. The only way to do that is to grab as much equity equivalents as you can and do everything you can to get that stock price up as high as you can while periodically liquidating the stock and stuffing the cash in your bank account.
There is absolutely nothing wrong with doing so. Any CEO who doesnt take advantage of this golden ticket opportunity is an idiot. In fact, although I don't have actual numbers, I would hazard a guess that more than 95pct of CEOs hired to run companies with a billion dollar plus public market caps probably do get themselves to the position of having more than 10mm dollars in equity very quickly. While those who manage to hold on to their jobs a while and not screw up too bad, can relatively quickly get past the 25mm dollar in equity mark and reach the 50mm dollar mark with in 10 years. Its actually pretty tough to screw up and not get there if you have any brains at all.
Why ?
Because you have the entire Mutual Fund, Hedge Fun and Brokerage industry doing everything they can to get you there. Think about it.
You can't turn on CNBC or Fox Business without them cheerleading the market to go up. Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher. They don't really care how you run the company and they care less about the results of the company than they do about the performance of the stock. Heck, even if they did care, shareholders dont really own anything and have zero say in the company. If you really dig into it, its the ultimate in social networking. Everyone who owns the stock belongs to the fan page or group for the stock and they are telling everyone they can how wonderful the company is and why the stock will go up, all while praying it does so.
Its the American way and it works ! Hundreds of millions of dollars are spent every year by brokerages telling every American that the stock market over time will go up 7pct per year. All you have to do is diversify and hold onto your stock long enough. For better or worse, everyone believes it.
With all of that social networking power, call it stocksourcing behind stocks, how can CEOs not get rich ?
The problem with all of this is that there is a huge disconnect between the CEO and shareholders doing well and those who work for the company doing well
Yes, its true, particularly in markets like we are experiencing now, stocks can hit 52 week, or even multi-year lows.(although more often than not, in spite of low stock prices, market caps have increased).
Yes, its true that CEOs see the value of their holdings shrink. However, unlike lottery tickets whose value goes to zero when you dont hit the number, the CEO equity positions retain their upside and history has shown us that if they go far enough underwater, they will get repriced and /or reissued. All in the name of keeping the CEO happy. So while CEOs may get "less rich" for awhile, the game is stacked so that a downturn gets them happy real fast when the upturn comes.
The disconnect is that there is a big difference between not making Wall Street happy and not making money.
The pressure from Wall Street is to grow earnings forever. Not matter what it takes. This isnt a problem when a company is doing well. EVeryone is happy. But when the economy hits a bump like it has now, when the market is hitting a bump and stock prices are declining, like it is now, the pressure comes. Everyone owning the stock reacts and whats to know what the CEO will do to get the price back up. This, as they say "is where the CEO earns their pay" Unfortunately, what this really means is that everyone who works for that company is at risk. At risk of losing their jobs, benefits, raises, you name it. Its at risk.
All of which is a long winded way of saying that employees live in the corporate cash zone, CEOs and the top few in management live in the equity/lottery ticket zone.
Those in the cash zone always take the first hit. People,places and things that consume cash are the first things to go because cash expenses immediately reduce earnings. If you or anyone like you consumes cash, unless someone upstairs thinks you generate a straight to the bottom line return on the cash expenditure, you are about to become a corporate ghost. Your person, place and thing will be memorialized as a cut to increase earnings mentioned in a press release that wall street will cheer and use to push up the stock price.
What makes me sad about all of this is that I really think that in this country if there truly was a connection between shareholders and management, that if given a choice by profitable companies, most of us would choose to hold on to our shares and accept an expanded PE for some period of time in exchange for people keeping their jobs.
I would love to receive an email from a company I own saying something to the effect of:
Dear Shareholder,
We are facing a very difficult decision that we would like your feedback on . Our earnings per share last quarter were 20 cents, and for the entire last year, 80 cents. Because of a downturn in business caused by XYZ factors, we face the choice of making 10 pct less, or cutting headcount and related expenses in order to maintain our earnings and possibly even grow our earnings a couple cents this year.
As a shareholder, we would like to ask you whether you would consider allowing us to retain these valued employees. We recognize that it would require you accepting a PE multiple 10 pct higher than the current market. We hope you would be willing to make this concession. We think that the jobs this will save will return far greater value to shareholders over the long run.
We look forward to your vote.
Personally, Im willing to give a higher multiple in exchange for saving people's jobs. At least once.
Unfortunately, this of course is a fantasy that can't happen in this country.
Which brings us back to CEO Pay.
As long as CEOs live in the equity/lottery ticket zone and employees in the cash zone, CEO pay is going to be outrageous relative to everyone else.
The only possible way to change this is to put CEOs in the cash zone. Make companies generate 100pct of their compensation in cash that is 100pct expensable in the quarter paid. Thats not to say they cant own stock. Hell yes they can own stock. But make them buy it either on the open market, or as part of the programs that make stock available to every company employee, on the same terms. They are getting paid enough in cash and if they believe in their ability to run the company, they can put their money where their mouth is. Eliminate all the free lottery tickets. Make them buy stock, options, warrants, whatever, on the same terms as everyone else can.
Shareholders tend to ignore how much stock is given to management, they don't ignore cash. Companies will always be a lot more stringent with their cash, whether its paid to the CEO or anyone else. CEO cash compensation will go way up, but total compensation will come way down. More importantly , CEOs getting paid huge sums in cash will stand out like a sore thumb when things arent going so well. They will be treated like everyone else in the cash zone and held far more accountable for their work.
Of course this is all just my opinion, but to me its a good thing for all involved. The rich can still get richer, but everyone shares in the risk.
My 2 Cents on CEO Pay
Reader Comments
(Page 1)3. A friend of mine wrote the following to me in an email yesterday:
"Why should I bust my ass so you can fire me the second things get a little bad. And why should I work hard when most of my effort rewards the people above me. Sometimes you hear older people say our generation is lazier. I disagree. It's just we don't have the same loyality to our employers that our parents did, and they don't have the same loyalties towards us (good work, but since wall street says we need to cut labor costs where "right-sizing" and security will now escort you to the door, leave your keys with them.)"
I agree with him.
GR-
Posted at 4:44AM on Apr 15th 2008 by Gregory Rueda
4. I like the idea of putting CEO's in the cash zone. As long as they are held accountable for their work in terms of what they get paid, they will devote their 100%.
Posted at 4:50AM on Apr 15th 2008 by navtej kohli
5. You want to be the CEO for my company....please? I enjoy my job, I do it well, I am not in danger of being let go, however there are those in my company that are getting severed. At the end of every quarter we see the boxes getting packed up. What bothers me is I go to Yahoo finance and check the insider trading log. here are Directors and Officers buying stock for pennies and selling for market price. I am sure what they are selling is not the exact same stock, its probably something they bought last year for pennies and in 6 months they will sell what they are getting now. Its depressing to see friends lose jobs while the fat cats are getting fatter.
6. Here's a thought: let's pay CEOs and top executives only in stock. I know this goes opposite to the point of the article, but I think it has the same desired effect. By tying the earnings of the people in charge to the fortunes of the company, you force them to become accountable, as they themselves are the shareholders. I'm reminded of the scene from "Wall Street" where Gordon Gecko is talking to the shareholders of Teldar Paper and remarks that the executives own less than 1% of the company. In how many corporations is that true today?
My point, and your's as well, is that top executives are no longer accountable to the companies they run. As a more or less entry level employee, I find myself one budget cut away from having to find another job. In this uncertain economic climate, it can be difficult at best. When a company has to boost it's stock price, guys like me are the first ones on the chopping block.
People wonder why the kids of my generation have no loyalty. It's because no one has any loyalty to us.
Posted at 8:41AM on Apr 15th 2008 by Adam
7. Awesome post, thanks so much!
Posted at 8:45AM on Apr 15th 2008 by Keith Sader
9. This would be great, now how to get it done. It reminds me of a documentary I saw awhile back.
http://www.youtube.com/watch?v=Pin8fbdGV9Y
10. i'll see your 2 bits and raise you a BLATANT SEC Violation & the next Ted Turner.
1) You know as well as i do that you can have the most honest, hardest working, best prepared, most leveraged corporate CEO ever, and all it takes is 1 subordinate to screw it all up for everyone. As an auditor, even i know you can't keep an eye on everyone all the time. But yes, even the union worker looses everything he has b/c s/he didn't know s/he could put his 30yrs of 401k contributions into something other than, 'just the company's stock'
2) SEC Violation
"Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher."
Does anyone remember the kid whose parents gave him $10k for a birthday present (or something) just over 10yrs ago. Probably not. Anyway, the 'kid' put the $ into 1 stock. He then turned around and over the next 2weeks signed-in to every yahoo chatroom he could find and told people about how this company had just developed some new invention/drug type thing that hadn't even hit the open news just yet... the stock shot up, and in 2 weeks the kid turned $10k into over $200k.
THE ONLY thing that made it illegal for the kid was that he wasn't on FOX or CNN. Not that he was lying. We all know they do that all the fuckin' time. Kramer-head gets a trip to the Virgin Islands to meat with Chuck, meanwhile he preaches how he like this one ratio imparticular of WhoTheFuckCares.com owned by Chuckie... stock price goes up. OR, Consumer Reports... HELLO. They were being paid (and everyone within reason knew it) by the car companies and everybody else to recommend their product. Probably still are.
Here you have Larry, Curly, and Moe every morning telling every retired asshole that XYZ is the place to put there $. We all know, eventually enough of them will. IT IS ILLEGAL for any news company, or individual commentator, or WHOEVER to broadcast suggestions on WHAT TO BUY, or WHAT NOT TO BUY if they have a vested interest in ANYTHING!!!
"I like ..., i don't like..." If ANY of them hold $1 of ownership ANYWHERE down the line...
"The most valuable commodity I know of is information. Wouldn't you agree?" - Gordon Gecko
I wonder if it would benefit you Mr. Cuban to own a TV station that does nothing but broadcast market economics. Kind of like the NFL Network. Only, your market economics channel is called, Cubanomics.
A) you'll de-sensitize the nation to that ugly word = Cuba.
B) you'll provide advice on making money, just like Lenny Dysktra is doing now for ex-athletes.
C) you'll be providing the gov't with tax $ so the IRS can't get too upset.
D) you'll get to be on TV more than you are already = free publicity for all your sports teams.
E) you'll make lots and lots of $ yourself, kinda like Ted Turner.
Sorry, that might've been more than 2 cents.
Posted at 10:02AM on Apr 15th 2008 by Jake
11. We'll call it 52cent
Posted at 10:04AM on Apr 15th 2008 by Jake
12. There were so many good points that were brought between this article and posts I really don't have much else to add. However, one thing I do notice that was briefly touched on was employees being let go, being nervous, and becoming completely dependent on those above them. First things first, you should never make your only investments be a car and a house that are supported by one source of income. Diversifying your sources for profit, take a risk and put yourself out there. If you are smart enough to make somebody else rich (CEO) than you can certainly do it for yourself. I feel I know so many people who don't invest their money are worried during this "fragile" time in our economy, but they don't have to be.This is the right time to start buying and building yourself a place to fall back on or even "depend on". I guarantee that once the cash starts to flow in (which does take time and a little effort) the jitters of being let go will not be so severe. I agree with the points made before me about CEO and their sources for income, but its time people start making the money they earn work for them. This was a great topic and a lot of great points made by others. I must say it made my morning.
13. Mark,
I'm curious what you think of Jeff Immelt's stance that he won't cash in any of his equity pay until his retirement and live completely on his cash accumulation. Granted, he's running GE (the mother load of a divested corporation), been doing it longer than the normal CEO (I'm guessing that normal lifespan is less than 5 years) and he's doing pretty good in the minds of shareholders and the Street.
Posted at 11:05AM on Apr 15th 2008 by Cliff
15. Maybe I don't understand what you are suggesting. Are you suggesting that CEOs get paid a higher salary and receive less compensation from shares in the company? If so, that is ridiculous. I think it should be the exact opposite. CEO's should receive a much lower base salary. Their base salary should be X times higher than the average salary at the company; maybe, 10 times. Whatever that number is, it should be published so all investors and employees are clearly aware of that CEO's pay. If the average salary at a company is $65k and the ratio is 10:1, then the CEO's salary should be a simple $650k. Any remaining compensation should be strictly tied to the share price for the company. This way, CEOs don't get grossly over-compensated even when the stock goes down. In other words, the CEO should not continue to earn millions of $ in regular salary ($3-4 million salaries are not uncommon) during times when all the other shareholders and employees are suffering because their shares have taken a significant cut in value or are completely worthless. Warren Buffet's salary is in the $100-$200 thousand range. But, his net worth ($40 billion +) is closely tied to how well Berkshire Hathaway performs on the open market. I believe this model should be the norm, not the exception.
Posted at 12:26PM on Apr 15th 2008 by Prentice
16. Mark B:
payout relative to what?
a $500,000 a year salary is still higher than 90% of people make. I imagine the larger corporations would be shelling out 5-10 million a year in CEO compensation.
relative to a fund manager it might be on the low side.
The good of the CEO being paid on the "Cash Side" is that it takes away the mercenary aspect of the system. We get back to "good CEO's" that know how to run a business and less of the PR CEO who the markets like.
Of course, we will keep going down this road, companies will continue lowjacking their employees with GPS in order to provide "cause" when the next round of layoffs come through, automating functions to get rid of entire levels of management, and we can become a nation of entry-level employees that can't afford the products and services their company produces.
Posted at 12:29PM on Apr 15th 2008 by James
17. What about putting employees into the equity zone also? I prefer this approach, because we still have an incentive for performance and opportunities to get rich, but we're giving those opportunities to _all_ the players, not just the stars.
Posted at 12:44PM on Apr 15th 2008 by Patrick from Weston MA
18. Welcome to a free market society. CEO's get paid what the market deems worthy. No more, no less. You think its easy trying to steer a large corporate multinational like GE, or Citigroup?
These CEOs you are bashing, are some of the most talented, intelligent, individuals on the planet. If you were as talented, maybe you would have a chance to be CEO.
Sure, there are some obvious perks to being a CEO, but a lot of these guys bust their butts day in and day out, trying to boost corporate profits, so all shareholders can win. Think about the amount of stress they must endure on a daily basis.
Remember, corporate execuctives are also human beings, who, like everyone else, need to put food on the table to feed their families. Food and shelter are things we ALL should consider necessities.
Posted at 12:44PM on Apr 15th 2008 by Jack
19. there is an interesting chapter in "The logic of life" from Tim Harford that says "Why your boss is overpaid". It explores all the logical and rational reasons why CEO compensations are not necessarely linked to performance. It's a bit of a provocation, but extremely interesting and would suggest to read the whole book. It is funny and very interesting.
I reviewed it on my blog: http://www.think-through.com/2008/03/26/the-logic-of-life/
in case you want to know a bit more about the book.
Posted at 1:21PM on Apr 15th 2008 by gianluca carrera
20. I notice many of your posts take on the task of challenging the status quo. I like it - it's the main reason I read.
Posted at 1:38PM on Apr 15th 2008 by JB
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1. Interesting thought on cash v. stock for CEO pay. I have long thought it was bullsh#t to give the CEO tons of stock and say it's to make sure s/he drives up value. Well, then give a significant sum of stock to every single employee. The risk to the CEO is not buying the big house at Vail. The risk to the employee is losing his only house. Who has more risk/incentive? (The problem is the rank and file are not usually in a position to make large or strategic decisions.) Also, if you paid the CEO out of quarterly cash, no doubt the clever bastard would start monkeying around to optimize what ever financial metric for success s/he's paid on, and you would see some undesirable unintended consequences. BUT, it would make it very visible that the guy in the corner office extracted $2.5 million from the value of the company this quarter, on earnings of $2.5 million plus or minus some millions.
Posted at 3:57AM on Apr 15th 2008 by Charles