We’re going to do a little Q&A today. Some people asked questions on Facebook so I’m going to answer one of them for you.
Herbert from Facebook asked:
How do you recognize whether a CEO is being overcompensated or compensation is conflicting with shareholder interests?
How CEO Salaries Increased
Back in 1980 the average CEO salary was about 44 times the amount of money that their average employee was making. So, let’s say that the average employee was making $50,000, that means the CEO was making about $2,000,000 a year.
That’s a pretty big executive pay gap, but still, theoretically these guys are responsible for running the entire company and we think it’s really important that we have a great CEO. That’s why management is one of the 3Ms that we look at to determine if the company is wonderful.
But, something has happened in the last 30 years. The CEOs of public companies realized that they could have a consultant come and tell the company’s board of directors what the CEO pay should be. This consultant would go out and look at similar companies and would determine the CEOs pay.
You can image how this has worked out, right? You have a consultant who goes out and looks at all of the similar companies and comes back to the CEO and tells him,
“Well, the CEOs of similar companies are making $2,000,000, BUT your company is slightly larger, AND you’re a better CEO, so you really should be paid $2.5 million dollars. It’s only a little step above, but you’re worth it.”
The consultant gets a big pat on the shoulder and the board says, “Sure, $2.5 million, what’s the difference?” Now the CEOs pay is 2.5 million, but the employees are still making 50,000.
The next year, another company hires a consultant and they go through the same cycle!
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I don't believe there is any reasoning to justify a CEO making anywhere near that percentage.
Thank you sir
good stuff , even today, Thanks for the advise Mr Town
Hey Phil Town / Is the CEO salary tax exempt in a non for profit organization?
Great video
With businesses staying home creating jobs and massive rollback of regulation, looks more like an economic boom and an upward trend in the stock market not seen in 8 years of Obama! SMH
As of 2008 average CEO salary in America was 8 million not 25 million.
Thank you!
How does cash flow relate to whether the CEO is being overcompensated or not? I always thought the best metric was ROIC?
Google Finance is a good free site to do some digging on CEO. Insidercow.com is another and Glassdoor.com might be the best one of all. On Glassdoor, you'll get employees feedback on how management is doing. Admittedly though, none of this gives you a direct look at CEO compensation. Morningstar and 10-K's are about the only places I've found good info on how much these guys are paying themselves. Good video, thanks.
Thanks for covering this topic. It gives me some clarity in reading proxy statements.