June 4, 2021
“CEO Confidence Index Falls on Worries over Inflation” Chief Executive magazine warned earlier this week.
As it happens, CEOs themselves – those intimidating guys in the corner offices – know a thing or two about inflation… because they’ve seen a lot of it in their own paychecks.
(But – as I’ll get to below – their confidence might soon be even more shaken, because… well, as Apple used to say, there’s an app for that.)
The pay of big public American company chief executive officers last year rose by 16%, to $21.4 million, according to the Economic Policy Institute (“EPI”). Actual inflation (that is, how much prices rise, as measured by a basket of goods gauged by the Consumer Price Index, or CPI) – that cause of crumbling CEO confidence was up just 1.4%.
In 2019, CEO pay rose 14% (inflation: 2.3%). And it’s unlikely that (compensation) inflation hasn’t shaken Average Joe Six-pack’s confidence, as his wages rose just 1.6% in 2019.
CEOs Know Inflation
As it turns out, CEOs have long and intimate personal insight on inflation. From 1978 to 2019, CEO pay at the 350 biggest U.S. companies increased by 1,167%, including all stock options and awards… That’s nearly four times more than inflation. Joe Six-pack’s wages over the period rose by a total of 14%, according to EPI.
After all that CEO compensation inflation, it’s become somehow almost normal to talk about the head of online stuff-auctioneer eBay collecting $57.2 million for a year’s work (that’s $219,000 per workday)… ketchup king Miguel Patricio, the CEO of Kraft Heinz, making $43.3 million… and Brian Niccol, who runs Chipotle, taking home $32.1 million (that’s 4.6 million carnitas burritos, no guac, before tax).
The highest-paid CEO last year, according to a New York Times study, was Chad Richison, the CEO of Paycom, at $211.1 million. (For those of you in the cheap seats – I’m next to you, shotgunning a tall boy PBR – Paycom is an online human resources and payroll technology “solutions” technology provider.)
According to CGLytics, a corporate governance data provider that applies different criteria to calculate compensation, the most overpaid accolade for 2020 belongs to Sundar Pichai, the head of Alphabet (formerly Google… a company that at least has bought some name recognition, along with a platinum-plated CEO) – who made $276.9 million.
That’s more than a quarter of a billion dollars… more than seven times what even basketball icon LeBron James is earning this season at the Los Angeles Lakers… and as much as our friend Joe Six-pack would make in 4,758 years (add another 594 years to his sentence if Mr. Six-pack isn’t paid for lunch breaks).
An Average CEO Versus a Pet Rock
Last year the average CEO in the EPI’s analysis was paid $21 million. That’s how much John Stankey, the CEO of AT&T, took home. He was responsible – as chief strategy officer, and now CEO – for some of the most financially disastrous financial decisions in modern corporate America, as I explained recently, like the $85 billion acquisition in 2018 of Time Warner.
The kind of value destruction spearheaded by Stankey is good if you’re Attila the Hun charging through present-day Germany (“There, where I have passed, the grass will never grow again”)… but bad if you’re, say, an executive of a big publicly traded telecom company. And the ultimate corporate middle finger to those of us in the nosebleeds? Stankey received a $2 million merger bonus when that deal closed.
If AT&T had hired an inanimate object – let’s say a pet rock – to sit in the corner office, the results couldn’t have been worse. The Economist last week even called for Stankey to be fired, explaining that “Failure on such a grand scale should at least carry a price tag.” And in this case, that price would be Stankey not earning $21 million.
The pet rock could have even done double duty at aerospace company Boeing. In the words of the New York Times…
Boeing had a historically bad 2020. Its 737 Max was grounded for most of the year after two deadly crashes, the pandemic decimated its business, and the company announced plans to lay off 30,000 workers and reported a $12 billion loss.
CEO David Calhoun, though, made $21.1 million as well… That’s average. And, he also still has his job.
One unassuming bunch of 80 tech stocks has slain every other comparable group — for 17 years. And one rogue analyst is naming names right here.
CEOs: Do They Deserve It?
Being the CEO of a company that’s valued at tens or hundreds of billions of dollars is probably a difficult and stressful job. A CEO has to manage thousands of employees… stay on top of sales and marketing and messaging… keep an eye on the competition… keep regulators at bay… ensure that customers are happy… massage revenues and earnings… assuage investors… and stock the board with rubber stampers.
Oh, and – most importantly – make sure the share price goes up. Around three-quarters of total CEO pay is made up of stock-related components. If it goes up, shareholders are happy… and the CEO is doing a Scrooge McDuck-style backstroke in his gold-coin vault.
But often the movement of a share price has nothing to do with the CEO. Share prices rise for many reasons – low global interest rates, investors confusing ticker symbols, the expectation that what goes up will eventually come down (and vice versa), sector rotation, kamikaze capital speculators deciding they like a stock, or COVID-19 stimulus cash… for starters.
However, those factors would affect a company’s share price the same way if the pet rock was sitting in the CEO’s chair. So why should a CEO be paid – exorbitantly – for dumb blind luck?
Conversely, even Captain America-class CEOs might face-plant fail by the share price performance barometer for reasons that are beyond their managerial or strategic control. The fanciest America’s Cup-winning yacht won’t slice through the deep blue sea if there’s no wind… Even the granddaddy oil baron of them all, John D. Rockefeller, wouldn’t be able to goose his shares in the face of a flaccid oil price.
Investment index and analysis data company MSCI confirmed in a 2016 study that CEO pay and share price performance are ships passing in the night. It found that there was little correlation between the two. “Has CEO pay reflected long-term stock performance? In a word, ‘no.'”
In March 2021, another MSCI analysis of 235 CEOs during 2006 to 2020, concluded that companies “pay up for mediocrity”…
The best-performing CEOs (the top fifth of our sample, based on annual average total shareholder return) earned 70% more in realized pay than the worst-performing CEOs… [but the best-performing CEOs]… earned only 4% more than CEOs who oversaw average corporate stock performance…
And, strangely, MSCI found that the CEOs that were the worst paid oversaw the best share price returns.
CEO Pay Packages: Do They Matter?
For the most part then, paying CEOs tens of millions of dollars is a waste of money. But if most of their compensation is in the form of stock options and stock awards, it’s as close as financial statements come to a victimless crime… So it’s a bit of wink-wink nudge-nudge at the stacked-by-the-CEO compensation committee board meeting. And CEO Biff Forrest Digby III really deserves that Gulfstream G650ER to get to the Cape every weekend, no?
But massive CEO pay packages are, first of all, tacky and tasteless. Paying workers – you know, the folks actually creating value – $15 an hour, and the CEO the equivalent of $10,057 an hour (that’s the average U.S. CEO compensation divided by 261 eight-hour days), is a look of breathtaking arrogance. It’s an insult to workers, shareholders, customers, and service providers – especially during the historic economic contraction of COVID-19.
“For all their fine words, CEOs aren’t sharing the pain,” the Financial Times commented in late April.
As average CEO compensation has risen, the ratio of CEO-to-Joe-Six-pack compensation (that is, how much more the average CEO earns than the average worker) increased from 21 in 1965 to 118 in 1995. In 2019, the wages of 320 Joe Six-packs summed up to what the average CEO took home.
Stock market gyrations – and, thus, stock compensation for CEOs – has created some peaks and valleys in pay, but the clear trend is toward greater compensation discrepancies. That fuels rising inequality more broadly. As the EPI explains…
This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or were taxed more).
Austrian historian Walter Scheidel reminds us that there is an endpoint to a tiny minority earning so much absurdly more (and increasingly more) than the people who are actually doing the work. He theorizes that economic inequality has historically been addressed by one of what he calls the “Four Horsemen of leveling” – warfare, revolution, state collapse, and plague.
We’ve experienced one of those lately… maybe it’s time to move on to the first three.
No Longer Like the Weather
Crazy CEO pay isn’t anything new. In 2003, the Harvard Business Review – probably the closest thing to a CEO handbook – ruminated…
A good number of senior executives treated their companies like ATMs, awarding themselves millions of dollars in company loans and corporate perks… So what’s wrong with executive compensation, and what can we do about it?
The short answer: Nothing that’s worked. It’s been like the weather: Everyone talks about it… but no one ever does anything about it.
Until recently, that is. As the Financial Times explained 10 days ago…
Investor protests over executive pay have hit an all-time high as ire deepens for packages that were rewritten during the pandemic to make it easier for chief executives to earn tens of millions of dollars…
… As companies shut operations and furloughed workers last year, hundreds of company boards reset bonus plans to exclude the worst months of the pandemic’s economic hit from bonus criteria or add new bonus metrics to lessen the blow of a company’s battered share price.
So far this year already, 13 companies in the S&P 500 – including Halliburton, IBM, Starbucks, and Walgreens Boots Alliance – have seen proposed executive pay arrangements receive less than 50% of shareholder approval at annual general meetings. That’s the most ever and compares to 12 in all of 2020.
Shareholders also rejected a proposed $230 million payout to General Electric head Larry Culp… who in January told the FT that “I think we all sacrificed” during the pandemic. Culp didn’t draw his $2.5 million salary but locked in a $47 million bonus, as the conglomerate cut total headcount by 20% in 2020.
Shareholder votes on executive pay were mandated in 2010, as part of the wide-ranging Dodd-Frank financial reform law. But they’re not binding. A company’s board can ignore the will of the company’s owners.
But as big shareholders – including the world’s largest asset managers, like BlackRock, Vanguard, and State Street – pump up the volume on their disgust at CEO pay, at some point company executives and their boards might have to listen.
Here Comes Kamikaze Capital
That’s also because people who have even less tolerance for overpaid CEOs might start shouting too. Retail investors – often through ETF and funds, and also in their own brokerage accounts – own 36% of the overall U.S. stock market. Stock trading by normal people represents a quarter of all trading volume, according to Goldman Sachs. That’s up from 10% just two years ago.
Importantly, it’s easier than ever for those small investors to vote on issues like executive compensation, via investment and finance apps that use the technology of say, a platform for investor communication. Free online brokerage service Robinhood uses Mediant, a third-party shareholder communications firm, to permit shareholders to vote on company proposals with just a few taps.
And new-era amateurs of kamikaze capital that gather on message-board websites to orchestrate massive squeezes on short-selling hedge funds might take note as well. Robinhood warriors on sites like Reddit could similarly rally their forces to (for example) prevent a clause in the proposed compensation plan of General Electric’s Culp – whereby if the share price of GE remains above a certain threshold for 30 days running, he’d stand to earn stock worth $124 million – from being triggered? Culp and his CEO ilk are, at least, as dislikable and easy targets as Melvin Capital, the hedge fund caught on the wrong side of shorting GameStop shares earlier this year.
That sort of effort – as well voting on executive pay measures, and attending company shareholder meetings where issues like compensation are discussed – is very much on-brand for the “stick it to the man” attitude of kamikaze capital. If even big institutional shareholders are sticking it to the likes of Stankey and Culp, it might be just a matter of time before they join in.
It’s enough to wreck the confidence of the hyperinflated CEOs everywhere.
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June 4, 2021