Sunday , 1 October 2023

Compensation of Highest Paid US Chief Executives Is Excessive

The New York Times just published its annual report on executive pay and…a summary of their results are presented in first table below.

This version of the original article from Elliott Morss has been edited for length (…) and clarity ([ ]) by to provide a fast & easy read

Compensation of Highest Paid US Chief Executives

Source: New York Times, May 27, 2018

…Overall, US Chief Executives get an average annual compensation of $183,000. For those in the Equilar study, the average was $15.7 million but some get paid a lot more than any of those covered above. I quote from the New York Times piece referenced earlier:

“David T. Hamamoto, a former C.E.O. who until January was the executive vice chairman of Colony Northstar, a real estate company, was awarded $53 million last year. Larry Ellison, the founder, chairman and chief technology officer of Oracle, was awarded $41.3 million, adding to his net worth of some $57 billion.

Financiers at hedge funds, which are generally private and not included in the Equilar study, can earn billions of dollars a year. Michael Platt, the founder of BlueCrest Capital Management, earned $2 billion last year, according to Forbes. James Simons, a founder of Renaissance Technologies, earned $1.8 billion.

 And two technology entrepreneurs who last year took their companies public were awarded generous pay packages, but were not included on the list because they did not file proxy statements, which is part of Equilar’s methodology.

 Evan Spiegel, a co-founder and the chief executive of Snap, received a stock award worth $636.6 million in connection with the company’s initial public offering. And the Dropbox co-founder and chief executive Drew Houston was awarded a performance-based grant worth about $110 million.”

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The next section looks more closely at the market for the highly paid CEOs.

Mark Farmer has reviewed the literature on executive compensation and found that there is a negative correlation between the change in compensation and the stock market performance of their companies(Correlation Coefficient -0.148) meaning that, on average for the entire group, better stock market performance will result in lower compensation. This does not make sense!

The table below lists CEOs whose pay has increased when stock market performance has been negative.

CEOs Whose Pay Increased Market Performance Declined (2016-17)

Source: Equilar

I quote further from Dean Baker, writing in the LA Times:

“Last year, we asked whether pay packages given to U.S. chief executive officers reflected long-term shareholder returns and found they did not.1 The bottom fifth of companies by equity incentive award outperformed the top fifth by nearly 39% on average on a 10-year cumulative basis.”

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Why has the market broken down?  There two primary reasons.

  1. First, there are certain “assets” one must have to be considered for the senior executive “club” by large corporations and the “headhunter” firms that work for them. They like people who have already been CEOs and the “compensation tables” developed by these firms are very difficult to challenge.
  2. Second, collusion between the senior executive and the firm’s board of directors occurs.  Board members remain loyal to the CEO because they make good money by being a Board member. Back in 1990, Business Week reported that in a survey by Korn/Ferry International of 352 companies, the average director of these companies collected retainer and meeting fees of $32,352.  In 2006, the New York Times reported on a survey indicating that directors got paid between $52, 000 and $165,000 and in 2017, Tower Watson estimated that a typical Fortune 500 director now earns $250,000. In theory, these directors represent the interests of shareholders. In fact, these directors are normally selected by the Chief Executive and are likely to support his or her recommendations on most matters. It is reasonable to think that Board members serving with the approval of CEOs getting paid $250,000 annually will make quite generous offers on CEO pay and other issues the CEO favors.

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In light of the questionable “rewards” information presented in the table above, I would think carefully before investing in the companies listed in said table, namely:

  • Apache (APA),
  • TripAdvisor (TRIP),
  • United Natural Foods (UNFI),
  • Allergan (AGN),
  • CenturyLink (CTL),
  • Discovery Communications (DISCA), 
  • Schlumberger (SLB),
  • Patterson-UTI Energy (PTEN),
  • Cleveland-Cliffs (CLF),
  • Archer Daniels Midland (ADM),
  • Tempur Sealy International (TPX),
  • Incyte (INCY),
  • Time Warner (TWX), and
  • AT&T (T)

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