By Thomas Kostigen
The average chief executive of a large, publicly traded company earns 320 times more than their average employee. The rationale for paying C-suite execs phenomenal amounts of money is that he or she will earn higher profits for shareholders and the salary is a form of retention.
If that’s the case, then investors should have an easy time picking investment winners: choose those companies that pay their CEOs the most. But is that a fact? Not according to the data.
For example, “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. Nonetheless, its chief executive, David Calhoun, was rewarded with some $21.1 million in compensation,” reports The New York Times. The paper also cites Norwegian Cruise Line, which lost $4 billion and furloughed 20 percent of its staff. Still, its chief executive made $36.4 million last year.
To be sure, CEOs are paid more when their companies do well. Elon Musk, for example, has a $55 billion performance package of which he is on his way to obtaining because Tesla’s stock price has risen so much. CEOs like Musk are compensated with stock options, so when share prices zoom the values of their options zoom as well.
A thumbnail view may be to scrutinize which company CEOs made the most and then dig deeper into business fundamentals. That could leave a lot of good companies out of the mix, however. Jack Dorsey, Twitter’s CEO, made just $1 in 2018 yet Twitter’s share price grew 20 percent. Or take Copart’s CEO A. Jayson Adair who made $200,000 that same year and grew his company’s share price more than 82 percent.
A better indicator may be to look at the stock option package a CEO receives and at what price his options “strike price” is figured. A financial advisor can do this type of analysis to better understand how much of an incentive is on the books for a CEO to perform. Options often come with an exercise date, which means there is a set timetable for stock price to improve. That along with a company’s financial performance can mean bullish times for share prices.
Executive compensation and fundamentals are all available via a company’s public filings.
Yet, incentives only go so far. A company can still lag no matter how big of a carrot is dangled in front of a CEO. As The Wall Street Journal notes in a recent story, “The mechanics of chief-executive pay have grown ever more complex, but the rules remain simple: Strong performers get a raise. So do most of the rest.”
As part of a thorough financial analysis, executive compensation packages should absolutely be vetted. Whether a rich package means riches for investors, or just CEOs is what needs to be figured. The biggest earners don’t simply equate to the best opportunities for investors. What needs to be gauged is whether CEOs are simply in it for themselves or for shareholders, too.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.