One of my stocks is tanking. It’s dropped by about 90% from when I bought.
Actually, more than one is tanking but fortunately I have a limit on more speculative investments and it’s not very high – I think of it like a roulette wheel sometimes. Hmm… almost ALL my more speculative stocks are tanking. Maybe I shouldn’t do that anymore.
Out of the 33 pages of blah blah in this management proxy circular, over 50% of it is related to executive and director compensation. The company even paid a couple hundred grand to a consulting company to figure out what the compensation scheme should be for 5 people (hint – about 10% of net income and 100% of last year’s cashflow). I’d like to get a job doing that but they might not like the results. 
My son bought a very interesting economics book (not an oxymoron) that I read recently:
23 Things They Don’t Tell You About Capitalism
Thing 14 is: U.S. managers are over-priced.
From the book…
“In relative terms (that is, as a proportion of average worker compensation), American CEOs today are paid around ten times more than their predecessors of the 1960s, despite the fact that the latter ran companies that were much more successful, in relative terms, than today’s American companies.”
“The average CEO compensation (salaries, bonuses, pensions and stock options) in the US is 300-400 times the average worker compensation (wages and benefits).
A multiple of 300 to 400 TIMES!!! That’s a lot.
Here’s some articles on excessive CEO pay that are making me even more pissed off:
http://www.guardian.co.uk/business/2005/aug/04/executivesalaries.executivepay2
http://www.guardian.co.uk/business/2011/jun/22/vince-cable-executive-pay
http://news.ufl.edu/2009/12/17/ceo-pay-2/
http://www.footnoted.com/on-the-lighter-side/our-top-ten-perks-of-the-2011-proxy-season/
There’s also a not-so-secret union of CEO’s and board directors – who at this particular tanking company made $80k/year apiece for just showing up to 15 meetings.
Management guru Peter Drucker said years ago that top management compensation should generally not be a multiple of over 20 times the average worker compensation. And look at that article he wrote back in the ’70′s – he saw it as a problem then, and would probably be shocked at how bad it’s gotten since.
That multiple of 20 seems about right depending on the industry. Unfortunately, that also means that the CEO in my tanking company isn’t really that over-paid since he’s making just over $1.4 Million and the average salary for the company employees is probably around $60k or so.
Maybe I’m just pissy because I’ve lost a few thousand bucks, which in the grand scheme of things is a pretty minor lesson – to be more wary of junior O&G companies that might have good properties but are carrying too much debt.
Note and reminder to self: debt is bad, even corporate debt.
To be honest, I feel kind of overpaid when I work. When I look at my kid going off to work, working much harder than I do sitting on my butt all day playing on computers – yet earning less than 20% of what I do, it does seem like something really is broken with the system.
For further reading and lots of cool graphs, charts and discussion, check out the Washington Post report:
And Ritholz has a post on it today too – which reminded me that I wrote this post a few months ago and never finished it. The stock price has fallen even more since then. Here’s his (much better) post:
http://www.ritholtz.com/blog/2011/09/wp-report-on-breakaway-wealth/
I always thought Drucker was on to something. I agree that there’s more stress and scrutiny at the top that justifies being paid more than the average worker below them, but 300 – 400 times more is just ludicrous.
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I hear you – depends on the industry too. Maybe the CEO of McDonalds would be paid as much as the CEO of Shell, yet the multiple is likely different. It’s still out of control and just plain crazy.
Those stats–plus the stats on increasing income inequality–make my blood boil. What can we do? Wish I knew…
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FS – I think that’s part and parcel of the whole tax reform discussions that are going on down in your country. I’m not one for regulation in every arena, but if the shareholders aren’t doing anything (because they’re mutual fund companies by and large), the boards aren’t doing anything because that would hurt their income, basically everyone’s hands are tied – except the government’s. (And I won’t get into how their hands are tied because they are the investors or the business people or need money from these people for campaigning.) Pure selfish narcissism and greed I say.
You know, salary aside, I never understood why stocks were rewarded by using other people’s money to generate cash vs their own. It never really made sense to me. I remember playing this game for a financial training class I took and that was the takeaway. We got to compare fedex to UPS and the more highly leveraged firm performed better in the stock market because they appeared to have more free cash flow.
Well if your sales dry up, then who’s going to pay those mortgage bills? It seems like people are looking more closely at debt/equity ratios than they have in the past but I think it’s just nuts. I know a customer who expands on a cash only basis. They are privately owned but I know they have revenues in the tens of millions of dollars just based on their sales to us.
During the 2004 downturn they lost their top 2 customers and still managed to stay afloat…because they had no debt. There is no way they could have remained in business otherwise. A lot of others sadly went under when manufacturing moved overseas. Today they are thriving and pride themselves on their debt free balance sheet and their customers care too. They like to have someone that gives them surety of supply.
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I know what you mean Sandy, but I can still see the value of having some debt depending on the hard assets. It’s kind of a toss up – more debt or more equity? Maybe there’s some greed there as well…
I had to do some research on executive compensation when I was a graduate assistant, and not only are the CEOs paid a ridiculous amount more than the average worker, they are also paid a ridiculous amount more than the other officers of the company.
The research I did had me looking at the top 5 most highly compensated individuals at the firms – when you got down to 4 and 5, they were often making much more “reasonable” salaries than the top three. I’m not sure if this is a good thing or not, but I assume that in a big organization, those officers have almost as much influence on performance as the top person. Maybe not.
I think part of the difference in compensation has got to be making up for some kind of risks that CEOs in the 1960′s didn’t have. Maybe more threats of lawsuits and jail time. That would be interesting to study closer.
Also, CEOs switch jobs all the time. And when you switch to a new company, it typically comes with a pay increase. And the company you left probably finds itself having to pay the new CEO more than they paid you. My impression of management in the 1960′s is that they tended to stay put more, and not switch jobs every year.
But overall, I agree that managers are way over compensated, but I also don’t think that some kind of government salary cap would be the the answer – and what else can be done, unless companies realize they can take the “worse” CEO who is willing to be paid less?
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Kellen – I agree with you that a government “cap” isn’t a good strategy. If there is a cap, it has to come from the owners of the company – the shareholders. Ideally, the board of directors would keep things in line since their fiduciary duty is to the shareholders, but I don’t see that happening any time soon.
I worked in audit for quite a few years from the 1980′s onwards and have noticed that striking upwards trend in (some) salaries for a long time. I think we’re seeing a trend away from operations / “on the ground” people getting paid what they’re worth – they’re the nuts and bolts of the business. I also think that the prevalence of shares owned through mutual fund companies vs. individual shareholders is a major driver in this exponential curve.
I’m also a little jaded in my mentality since a couple of companies that I’ve worked for doing consulting in the recent past had presidents that were total slackers that got MASSIVE bonuses. Maybe part of it is due to the general feeling years ago that greed really was kind of a bad thing whereas for the last 20 odd years we’ve seen a move away from that mentality?