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
Recent Posts
Reader Comments
(Page 3)42. So, uh, where do I send my two cents to Cuban?
Posted at 12:52PM on Apr 17th 2008 by A. Vitale
43. I think this is a great idea. To really make this fly I think the US government would have to pass a law making it illegal to grant options and stock to executives unless all the employees at the rest of the company were offered the same percentage of stock and/or options. Share the success!
Posted at 12:59PM on Apr 17th 2008 by jmb
44. Let's go one step further. In the startup world, we hire CEOs because we expect them to be passionately committed to the idea, to the industry, and to the company. We can't afford to pay them millions and they realize that the stock is a risky bet.
The idea that we have to pay millions for a dedicated, committed CEO who takes the same risk as the shareholders and employees is hogwash. They're STILL doing studies to justify linking CEO pay to performance. Get real, people: if the link is STILL unclear in an era of nine-digit salaries, then guess what? It's not strong enough to justify anything. So let's go for CEOs who don't demand a multimillion dollar payout just to take the job.
There are only 4,000 chances in America to be the CEO of a public company. Just 4,000. That's called "a scarce commodity." Rather than paying CEOs *anything*, let them bid on the job. Only 4,000 people will ever get the chance to play in that arena, try things on that scale, and have that kind of impact. I want the people who are so committed to the job, company, and industry that they'd pay for the privilege. And let's let them pay.
(And yes, there are some people in the F500 driven by non-monetary considerations. I've met and talked with two Fortune 500 CEOs extensively. Both had companies doing extraordinarily well. Both were so committed to and in love with the job that they told me the money was completely beside the point. "Where else could I learn this much, try this much, and have so much fun learning?" one said.)
Posted at 6:30PM on Apr 17th 2008 by Stever Robbins
45. The issue of CEO pay has been always been a controversial subject. Would it be any different if you or I, labored endless hours to build a company from the ground up, made significant personal sacrifices to amass a fortune and in the process created jobs for thousands of people ? How is this different from the $50 million salary for a sports star or Hollywood actor who barely made it through high school and contributes what to society ? We are all capable of deciding if we want to buy stock in a company that pays it CEO a high salary, just as we are capable deciding not patronize the sports game, or watch the TV show or movie of a particular, overpaid star. Perhaps it's human nature to complain about it rather than do something about it. We certainly cry louder when the stock is going down, as opposed to going up.
I'm no CEO but I am reminded of what Thomas Sowell was credited with writing on the Carpe Diem website;
Many people who have never run one business for one day are nevertheless confident that they know corporate CEOs are not worth as much as they are paid.
I am a big fan of Mr. Cuban and first saw him on Mad Money and Dancing with the Stars. I have few heroes in the world today and count him as one of them. He has presented a potential solution to the problem. I would add the "Board of Directors" must also be called on the carpet, as many of them are "aiding and abetting" the "crime."
Posted at 10:45PM on Apr 17th 2008 by Paul Perez
46. Mark, do you fall into the Fuck You Wealth Category?
If so, drop by the Dallas Hooters for complementary wings and a jug of beer :)
Posted at 8:28AM on Apr 18th 2008 by Hooters girl
47. Hooters girl, that was the best post of all... and the others were pretty good.
Posted at 9:56AM on Apr 18th 2008 by Jake
48. Maybe, it should be tied into performance. High performance, high compensation, low performance, low compensation. I know this will stir up the hornet's nest and meet with alot of objections, but why should someone get paid who isn't doing anything? Why should someone be guaranteed a certain salary, when his company and stock are tanking? If you're good, you're good, and if you're just lucky, you're just lucky. Completely different things. I KNOW I'm good. :)
Posted at 11:19AM on Apr 18th 2008 by anothermark
49. Changing subjects for a minute:
Mark, please help, please say something to the other owners about the Sonics leaving Seattle. I've always respected you as an owner and hope you and other owners can lead the NBA into the right vote.
The Oklahoma group has swindled Seattle on the change of ownership from the start, never intended to keep the team in Seattle regardless of the agreement with prior ownership that they would work hard to make it work in Seattle. The other NBA owners best interest isn't to have a team in OK, Seattle is a great NBA city. 41 years of history being flushed if you and other owners don't help stop this.
Also, Dallas also doesn't need another team "poaching" its fans.
What would you do if Dallas was being moved to Oklahoma if you had sold the team thinking they would remain in Dallas??
Posted at 1:51PM on Apr 18th 2008 by Ed
50. The small investor may have no direct influence on management, but large investors can, and market forces can. "going green" is a good example. Perhaps "going socially responsible" could be the next big thing.
Posted at 3:37PM on Apr 18th 2008 by DWM
51. Mark - Sorry I'm posting basketball stuff in response to an excellent blog about CEO pay. I stumbled across your blog trying to find an email address for you in order to extend my (and Sonics fans in Seattle) gratitude for your vote against Sonics relocation to Oklahoma. Ya we lost 28-2 but hey, we're on the ropes here so every bit helps. I know you've always been considered the "maverick" NBA owner (no pun intended) but thanks for stepping up and doing the right thing.
I always thought it was pretty gutsy of you to absorb those huge fines for criticizing the refs. (even though you can obviously afford it, not alot of people, even rich guys would do the same thing), so it's cool that once again you stand up for what's right. The NBA, and professional sports in general need more owners such as yourself. Guys that are passionate about the well being of the game and not only the business aspect of it.
But hey, the game in Seattle isn't over yet, we still have some pending litigation to hang on to. It's admittedly not much, but miracles can happen. After the Sonics, the Mavs. are my new 2nd fave team. Go Mavs in this years playoffs!!
Once again, sorry about the basketball stuff. But I've now set your blog up for RSS. Thx.
Posted at 3:52PM on Apr 18th 2008 by Mike-Seattle
52. Thank you for voting to keep the Sonics in Seattle. Clay Bennett is a jackass, and Stern is holding his buddy's hand while they rob Seattle in the middle of the night.
Shame on Stern, shame on Bennett, but big ups to you Mark.
/threadjack
Posted at 4:07PM on Apr 18th 2008 by Sam
54. Mr. Cuban,
I want to echo the sentiments of the above posters, and sincerely thank you for your vote today against the Sonics move to Oklahoma City. It took a lot of courage to stand up to David Stern on what he considers such an important issue. You warmed the hearts of a lot of Seattleites on what was otherwise a very difficult day.
I have been a fan of the Sonics for over 20 years, and have too many fond memories to count. One thing that professional sports has given me is a closer relationship with my father and brother, because we were able to share so many of those moments together. Professional sports has a special power to forge and enhance the bonds of family, friendship, and city pride that no other means of entertainment can match. Unfortunately, if the NBA succeeds in relocating the Sonics, many families and friends here in the Northwest will miss out on the opportunities I enjoyed growing up in Seattle. I know you understand what I am saying, because you consistently show the same love for your team that many of us here feel for the Sonics.
We suffered a big blow today, but we are not done fighting. Again, thank you so much for your support.
Save Our Sonics,
Steve Johnson, Seattle
Posted at 9:13PM on Apr 18th 2008 by Steve Johnson
55. Some great thoughts Mark. Honestly, it is frustrating to me that the machine runs this way, and ironic since many of us who live in the "cash zone" are also the same who hold stocks in companies - calling for them to rise ever higher. Perhaps not even recognizing it we push for our own dismissal as we create a nationwide focus on ever rising profits.
Posted at 9:44PM on Apr 18th 2008 by David Mackey
56. Thank you for your vote "No" at the NBA BofG Meeting. All of us Sonics fans up here really appreciate the voice. You seem to be in the minority with respect to true vision of the NBA. Seattle will be a big loss no mater what Stern says. My only hope is that the litigation will hold the team here until the end of the lease. If it does, I'm confident that the political leaders will be able to come up with a plan to help fund a major renovation which at the very least would attract another team. I hope the fans in Dallas realize how lucky they are to have such a passionate, dynamic individual running things. Best of luck in the playoffs, you are going to be my adopted team! We all love Jason Terry up here!
Posted at 1:29PM on Apr 19th 2008 by Todd
57. Cuban for president!
Posted at 12:25PM on Apr 21st 2008 by Justin
58. Mark I think some of your fellow billionaires would think you show a lot of chutzpah with this type of populist sermonizing. How can you bash mere CEO's when Hedgefund managers like your kindred spirit George Soros have ruined national currencies and plunged entire countries into economic meltdown for their own financial gain? Joe
Posted at 5:49PM on Apr 21st 2008 by Joe- The Million Dollar Listing
59. Good point Jack #18, I agree with what you are saying entirely.
Posted at 5:59PM on Apr 21st 2008 by Robert, los angeles pc repair
60. Hey Mark, A really smart guy , an older gentleman with a lot of integrity and quite wealthy in his own right once told me, "Don't yell when you want people to really listen, talk soft, almost whisper if you can, they will naturally lean to listen." Of course thats not counting beer guzzling sportsfans at a bar or party. Thanks for the thoughts.
Posted at 6:22PM on Apr 21st 2008 by Frankie from Lawnside
41. Mark - use your vote/influence to Save the Sonics - don't kill basketball in Seattle. It's a terrible move for the NBA and as a business man, I'm sure you can appreciate that the best thing for the NBA to do is to protect its fans - fans who feel stood up for are willing to spend money.
Thanks for your support,
James
Posted at 11:51AM on Apr 17th 2008 by James