There is a game played by CEOs with the corporate issuance of lottery tickets. Otherwise known as stock. Stock can be issued in any number of ways, shapes or forms. Warrants, options, restricted or unrestricted stock. No matter what you call it, every CEO hired, is asking for equity knowing that their only goal is to hit the jackpot and create a pool of wealth that puts them in the “fuck you” wealth category. Thats enough money to buy or rent just about anything you can think of and put you in position to never have to work again. You just live off the cash in the bank.
Put another way, every hired CEO is looking to be in a position to look in the mirror , smile and tell themselves they have made it. They are living the American dream. The only way to do that is to grab as much equity equivalents as you can and do everything you can to get that stock price up as high as you can while periodically liquidating the stock and stuffing the cash in your bank account.
There is absolutely nothing wrong with doing so. Any CEO who doesnt take advantage of this golden ticket opportunity is an idiot. In fact, although I don’t have actual numbers, I would hazard a guess that more than 95pct of CEOs hired to run companies with a billion dollar plus public market caps probably do get themselves to the position of having more than 10mm dollars in equity very quickly. While those who manage to hold on to their jobs a while and not screw up too bad, can relatively quickly get past the 25mm dollar in equity mark and reach the 50mm dollar mark with in 10 years. Its actually pretty tough to screw up and not get there if you have any brains at all.
Why ?
Because you have the entire Mutual Fund, Hedge Fun and Brokerage industry doing everything they can to get you there. Think about it.
You can’t turn on CNBC or Fox Business without them cheerleading the market to go up. Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher. They don’t really care how you run the company and they care less about the results of the company than they do about the performance of the stock. Heck, even if they did care, shareholders dont really own anything and have zero say in the company. If you really dig into it, its the ultimate in social networking. Everyone who owns the stock belongs to the fan page or group for the stock and they are telling everyone they can how wonderful the company is and why the stock will go up, all while praying it does so.
Its the American way and it works ! Hundreds of millions of dollars are spent every year by brokerages telling every American that the stock market over time will go up 7pct per year. All you have to do is diversify and hold onto your stock long enough. For better or worse, everyone believes it.
With all of that social networking power, call it stocksourcing behind stocks, how can CEOs not get rich ?
The problem with all of this is that there is a huge disconnect between the CEO and shareholders doing well and those who work for the company doing well
Yes, its true, particularly in markets like we are experiencing now, stocks can hit 52 week, or even multi-year lows.(although more often than not, in spite of low stock prices, market caps have increased).
Yes, its true that CEOs see the value of their holdings shrink. However, unlike lottery tickets whose value goes to zero when you dont hit the number, the CEO equity positions retain their upside and history has shown us that if they go far enough underwater, they will get repriced and /or reissued. All in the name of keeping the CEO happy. So while CEOs may get “less rich” for awhile, the game is stacked so that a downturn gets them happy real fast when the upturn comes.
The disconnect is that there is a big difference between not making Wall Street happy and not making money.
The pressure from Wall Street is to grow earnings forever. Not matter what it takes. This isnt a problem when a company is doing well. EVeryone is happy. But when the economy hits a bump like it has now, when the market is hitting a bump and stock prices are declining, like it is now, the pressure comes. Everyone owning the stock reacts and whats to know what the CEO will do to get the price back up. This, as they say “is where the CEO earns their pay” Unfortunately, what this really means is that everyone who works for that company is at risk. At risk of losing their jobs, benefits, raises, you name it. Its at risk.
All of which is a long winded way of saying that employees live in the corporate cash zone, CEOs and the top few in management live in the equity/lottery ticket zone.
Those in the cash zone always take the first hit. People,places and things that consume cash are the first things to go because cash expenses immediately reduce earnings. If you or anyone like you consumes cash, unless someone upstairs thinks you generate a straight to the bottom line return on the cash expenditure, you are about to become a corporate ghost. Your person, place and thing will be memorialized as a cut to increase earnings mentioned in a press release that wall street will cheer and use to push up the stock price.
What makes me sad about all of this is that I really think that in this country if there truly was a connection between shareholders and management, that if given a choice by profitable companies, most of us would choose to hold on to our shares and accept an expanded PE for some period of time in exchange for people keeping their jobs.
I would love to receive an email from a company I own saying something to the effect of:
Dear Shareholder,
We are facing a very difficult decision that we would like your feedback on . Our earnings per share last quarter were 20 cents, and for the entire last year, 80 cents. Because of a downturn in business caused by XYZ factors, we face the choice of making 10 pct less, or cutting headcount and related expenses in order to maintain our earnings and possibly even grow our earnings a couple cents this year.
As a shareholder, we would like to ask you whether you would consider allowing us to retain these valued employees. We recognize that it would require you accepting a PE multiple 10 pct higher than the current market. We hope you would be willing to make this concession. We think that the jobs this will save will return far greater value to shareholders over the long run.
We look forward to your vote.
Personally, Im willing to give a higher multiple in exchange for saving people’s jobs. At least once.
Unfortunately, this of course is a fantasy that can’t happen in this country.
Which brings us back to CEO Pay.
As long as CEOs live in the equity/lottery ticket zone and employees in the cash zone, CEO pay is going to be outrageous relative to everyone else.
The only possible way to change this is to put CEOs in the cash zone. Make companies generate 100pct of their compensation in cash that is 100pct expensable in the quarter paid. Thats not to say they cant own stock. Hell yes they can own stock. But make them buy it either on the open market, or as part of the programs that make stock available to every company employee, on the same terms. They are getting paid enough in cash and if they believe in their ability to run the company, they can put their money where their mouth is. Eliminate all the free lottery tickets. Make them buy stock, options, warrants, whatever, on the same terms as everyone else can.
Shareholders tend to ignore how much stock is given to management, they don’t ignore cash. Companies will always be a lot more stringent with their cash, whether its paid to the CEO or anyone else. CEO cash compensation will go way up, but total compensation will come way down. More importantly , CEOs getting paid huge sums in
cash will stand out like a sore thumb when things arent going so well. They will be treated like everyone else in the cash zone and held far more accountable for their work.
Of course this is all just my opinion, but to me its a good thing for all involved. The rich can still get richer, but everyone shares in the risk.
Hi,
In my opinion CEO salaries should be based on stock/company performance.
A CEO comes in and and the company tanks then he doesn’t deserve to make
millions of $$ in compensation. If the company is public then the shareholders
need to see some returns on their investment. Paying out millions to a
CEO who has not performed is ridiculous.
Any company who is put in the position of needing a bailout should have their
top executives fired. I’m usually playing the micro cap stocks and nothing
upsets me more than the stock going into the tank and the CEO issuing himself
a bonus. They wonder why institutions won’t finance them.
Set a base salary, some options at market value when he is hired, and thats it.
If the stock goes up he makes on his options. I know its hard to do because
executive compensation is out of control and the talent will go to the highest
bidder.
My 2 cents.
Warren
Editor: Stockjunction.com
Comment by Warren -
Here’s an interesting way how the system works. A company is bought
for 5 billion by people that are now the company owners. They then
decide to go public with their company to recover what they paid for
it. They release or issue about 25% of all the stock into the market
and they manage to get the 5 billion for selling off 25% of the
company but they still own 75% and control most of it but now they
also have stock worth 15 billion. So that’s a clever way to go.
Comment by John Gilbert -
Very insightful post. Like the part about CEO\’s making decisions based on how it will effect their net worth versus the company\’s performance.
Comment by Justin Voccola -
I think this environment of a company\’s fundamentals dictating the decisions of CEOs makes it very difficult for an American publicly traded company to be \”cutting edge\”. CEOs are afraid that any risk taking (whatever that may be) will result in a perception by the investment community that the company is weak. Look at hybrid/electric cars – Asian and startup companies lead the way in this technology since the perceived risk for this technology was very high several years ago. It wasn\’t until the American public embraced hybrid/electric vehicles, that the American auto mfgs began to produce alternative fuel/hybrids. This is just one of many examples that come to mind.
Comment by Austin -
Mark,
Thanks for an informative treatise on CEO income. There is one issue that needs clarification. That is the make-up of the cororate boards.
The CEO\’s power base is the board. The only way they can garner a sweeheart deal is with the beard votes. My question is, to what extent does the CEO control the board population and, subsequently, the decision making process?
Earl Stubbs
Richardson, Texas
Comment by Earl Stubbs -
read this blog;
Mark Cuban is Not a Counterfeiter & What To Do if a Russian Oligarch Moves into Your Neighborhood
http://www.huffingtonpost.com/max-keiser/mark-cuban-is-not-a-count_b_97621.html
…the blogger responds to this post in an informative way I think.
Comment by maxriot -
Mark,
You make some very good points. Large corporations should model the compensation of their CEO\’s after most of the startups out there. You only get paid if you deliver results. I think investors would react very favorably to a change like this.
Comment by PartnerUp Bill -
Check out the Bear exec at the video at the following site:
http://bigpicture.typepad.com/comments/2008/04/real-scoop.html
Comment by n -
I just want to say that Mark Cuban ios the best owner in the NBA. Dallas is so lucky to have Mark Cuban. Please let me know what businesses he owns or is associated with so I can help this wonderful man out in anyway I can. Go Dallas!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Go Mavericks!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Thank you Mark Cuban. You are a true hero of the NBA and of all the fans!!! A rarity these days!!!!!!!!!!!!!!!!!!!!!
Comment by Karl Hallesy -
marc…
How did that go for Ed Zander at Motorola? Wall Street isn\’t run for the benefit of the retail investor and it certainly doesn\’t listen to them. You nailed the game right on the head though…
IT\’S THE WORLD\’S GREATEST PONZI SCHEME!
It is what it is folks, but in every ponzi scheme someone makes out. Align yourself with \”their\” ends and you too can profit in \”THE WORLD\’S GREATEST PONZI SCHEME!\”
Marc, I know you are a \”collar\” guy…here\’s what banks cooked up to work around 144 regs:
http://file.sunshinepress.org:54445/barry-diller.pdf
This is the big game boys, and you are getting the straight story from someone on the inside…bring your \”A\” game or don\’t show up!
Marc – I trust your lawyers will deny anyone who wants my email address!
🙂
Comment by D -
very interresting post
Comment by helmut -
Hey Mark, A really smart guy , an older gentleman with a lot of integrity and quite wealthy in his own right once told me, \”Don\’t yell when you want people to really listen, talk soft, almost whisper if you can, they will naturally lean to listen.\” Of course thats not counting beer guzzling sportsfans at a bar or party. Thanks for the thoughts.
Comment by Frankie from Lawnside -
Good point Jack #18, I agree with what you are saying entirely.
Comment by Robert, los angeles pc repair -
Mark I think some of your fellow billionaires would think you show a lot of chutzpah with this type of populist sermonizing. How can you bash mere CEO\’s when Hedgefund managers like your kindred spirit George Soros have ruined national currencies and plunged entire countries into economic meltdown for their own financial gain? Joe
Comment by Joe- The Million Dollar Listing -
Cuban for president!
Comment by Justin -
Thank you for your vote \”No\” at the NBA BofG Meeting. All of us Sonics fans up here really appreciate the voice. You seem to be in the minority with respect to true vision of the NBA. Seattle will be a big loss no mater what Stern says. My only hope is that the litigation will hold the team here until the end of the lease. If it does, I\’m confident that the political leaders will be able to come up with a plan to help fund a major renovation which at the very least would attract another team. I hope the fans in Dallas realize how lucky they are to have such a passionate, dynamic individual running things. Best of luck in the playoffs, you are going to be my adopted team! We all love Jason Terry up here!
Comment by Todd -
Some great thoughts Mark. Honestly, it is frustrating to me that the machine runs this way, and ironic since many of us who live in the \”cash zone\” are also the same who hold stocks in companies – calling for them to rise ever higher. Perhaps not even recognizing it we push for our own dismissal as we create a nationwide focus on ever rising profits.
Comment by David Mackey -
Mr. Cuban,
I want to echo the sentiments of the above posters, and sincerely thank you for your vote today against the Sonics move to Oklahoma City. It took a lot of courage to stand up to David Stern on what he considers such an important issue. You warmed the hearts of a lot of Seattleites on what was otherwise a very difficult day.
I have been a fan of the Sonics for over 20 years, and have too many fond memories to count. One thing that professional sports has given me is a closer relationship with my father and brother, because we were able to share so many of those moments together. Professional sports has a special power to forge and enhance the bonds of family, friendship, and city pride that no other means of entertainment can match. Unfortunately, if the NBA succeeds in relocating the Sonics, many families and friends here in the Northwest will miss out on the opportunities I enjoyed growing up in Seattle. I know you understand what I am saying, because you consistently show the same love for your team that many of us here feel for the Sonics.
We suffered a big blow today, but we are not done fighting. Again, thank you so much for your support.
Save Our Sonics,
Steve Johnson, Seattle
Comment by Steve Johnson -
Mr. Cuban
I just want to sincerelly thank you for voting against the move of the Seattle Supersonics. It is nice to see someone with money, power and balls. Much appreciated!
thanks!
Scott
Comment by ScottNYC -
Thank you for voting to keep the Sonics in Seattle. Clay Bennett is a jackass, and Stern is holding his buddy\’s hand while they rob Seattle in the middle of the night.
Shame on Stern, shame on Bennett, but big ups to you Mark.
/threadjack
Comment by Sam -
Mark – Sorry I\’m posting basketball stuff in response to an excellent blog about CEO pay. I stumbled across your blog trying to find an email address for you in order to extend my (and Sonics fans in Seattle) gratitude for your vote against Sonics relocation to Oklahoma. Ya we lost 28-2 but hey, we\’re on the ropes here so every bit helps. I know you\’ve always been considered the \”maverick\” NBA owner (no pun intended) but thanks for stepping up and doing the right thing.
I always thought it was pretty gutsy of you to absorb those huge fines for criticizing the refs. (even though you can obviously afford it, not alot of people, even rich guys would do the same thing), so it\’s cool that once again you stand up for what\’s right. The NBA, and professional sports in general need more owners such as yourself. Guys that are passionate about the well being of the game and not only the business aspect of it.
But hey, the game in Seattle isn\’t over yet, we still have some pending litigation to hang on to. It\’s admittedly not much, but miracles can happen. After the Sonics, the Mavs. are my new 2nd fave team. Go Mavs in this years playoffs!!
Once again, sorry about the basketball stuff. But I\’ve now set your blog up for RSS. Thx.
Comment by Mike-Seattle -
The small investor may have no direct influence on management, but large investors can, and market forces can. \”going green\” is a good example. Perhaps \”going socially responsible\” could be the next big thing.
Comment by DWM -
Changing subjects for a minute:
Mark, please help, please say something to the other owners about the Sonics leaving Seattle. I\’ve always respected you as an owner and hope you and other owners can lead the NBA into the right vote.
The Oklahoma group has swindled Seattle on the change of ownership from the start, never intended to keep the team in Seattle regardless of the agreement with prior ownership that they would work hard to make it work in Seattle. The other NBA owners best interest isn\’t to have a team in OK, Seattle is a great NBA city. 41 years of history being flushed if you and other owners don\’t help stop this.
Also, Dallas also doesn\’t need another team \”poaching\” its fans.
What would you do if Dallas was being moved to Oklahoma if you had sold the team thinking they would remain in Dallas??
Comment by Ed -
Maybe, it should be tied into performance. High performance, high compensation, low performance, low compensation. I know this will stir up the hornet\’s nest and meet with alot of objections, but why should someone get paid who isn\’t doing anything? Why should someone be guaranteed a certain salary, when his company and stock are tanking? If you\’re good, you\’re good, and if you\’re just lucky, you\’re just lucky. Completely different things. I KNOW I\’m good. 🙂
Comment by anothermark -
Hooters girl, that was the best post of all… and the others were pretty good.
Comment by Jake -
Mark, do you fall into the Fuck You Wealth Category?
If so, drop by the Dallas Hooters for complementary wings and a jug of beer 🙂
Comment by Hooters girl -
The issue of CEO pay has been always been a controversial subject. Would it be any different if you or I, labored endless hours to build a company from the ground up, made significant personal sacrifices to amass a fortune and in the process created jobs for thousands of people ? How is this different from the $50 million salary for a sports star or Hollywood actor who barely made it through high school and contributes what to society ? We are all capable of deciding if we want to buy stock in a company that pays it CEO a high salary, just as we are capable deciding not patronize the sports game, or watch the TV show or movie of a particular, overpaid star. Perhaps it\’s human nature to complain about it rather than do something about it. We certainly cry louder when the stock is going down, as opposed to going up.
I\’m no CEO but I am reminded of what Thomas Sowell was credited with writing on the Carpe Diem website;
Many people who have never run one business for one day are nevertheless confident that they know corporate CEOs are not worth as much as they are paid.
I am a big fan of Mr. Cuban and first saw him on Mad Money and Dancing with the Stars. I have few heroes in the world today and count him as one of them. He has presented a potential solution to the problem. I would add the \”Board of Directors\” must also be called on the carpet, as many of them are \”aiding and abetting\” the \”crime.\”
Comment by Paul Perez -
Let\’s go one step further. In the startup world, we hire CEOs because we expect them to be passionately committed to the idea, to the industry, and to the company. We can\’t afford to pay them millions and they realize that the stock is a risky bet.
The idea that we have to pay millions for a dedicated, committed CEO who takes the same risk as the shareholders and employees is hogwash. They\’re STILL doing studies to justify linking CEO pay to performance. Get real, people: if the link is STILL unclear in an era of nine-digit salaries, then guess what? It\’s not strong enough to justify anything. So let\’s go for CEOs who don\’t demand a multimillion dollar payout just to take the job.
There are only 4,000 chances in America to be the CEO of a public company. Just 4,000. That\’s called \”a scarce commodity.\” Rather than paying CEOs *anything*, let them bid on the job. Only 4,000 people will ever get the chance to play in that arena, try things on that scale, and have that kind of impact. I want the people who are so committed to the job, company, and industry that they\’d pay for the privilege. And let\’s let them pay.
(And yes, there are some people in the F500 driven by non-monetary considerations. I\’ve met and talked with two Fortune 500 CEOs extensively. Both had companies doing extraordinarily well. Both were so committed to and in love with the job that they told me the money was completely beside the point. \”Where else could I learn this much, try this much, and have so much fun learning?\” one said.)
Comment by Stever Robbins -
I think this is a great idea. To really make this fly I think the US government would have to pass a law making it illegal to grant options and stock to executives unless all the employees at the rest of the company were offered the same percentage of stock and/or options. Share the success!
Comment by jmb -
So, uh, where do I send my two cents to Cuban?
Comment by A. Vitale -
Mark – use your vote/influence to Save the Sonics – don\’t kill basketball in Seattle. It\’s a terrible move for the NBA and as a business man, I\’m sure you can appreciate that the best thing for the NBA to do is to protect its fans – fans who feel stood up for are willing to spend money.
Thanks for your support,
James
Comment by James -
posts like this are what I love to read the most from you, Mark! muahahahahahahaha
Comment by eddie -
I\’m all for a CEO getting the big bucks when they have earned it, not just because they know the world of finance and can play a numbers game. I have been in large and small VC funded companies and in the end the numbers get cooked to show a different story to the rest of the world.
The problem is nobody wants to tell it like it is because too much is riding on telling the truth, The system is built around playing games.
I agree with your thoughts let them take it all on cash basis, very few are worth the money.
Comment by Martin -
If you are in an industry that is going through a contraction and you don\’t cut costs (like laying off employees) you will most likely go out of business. The P/E tolerance of shareholders won\’t make any difference.
Comment by Jon -
I\’m 50 pages into Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill), by David Cay Johnston. One of the interesting points is that the US, along w/ Russia, Brazil, and Mexico, have very similar ratios of the percentage of all the country\’s wealth owned by a small percentage of the population. In Asian and European countries, the wealth is spread around the entire population much more evenly.
Enjoyed the post and look forward to more like it, Mr. Cuban!
Comment by David -
Wicked article Mark, incentive management is key when reforming expected outcomes!
Comment by The Business Student -
The incentives to acquire stock as an incentive vs. pay are a great advantage to the stock holders to force CEO\’s to drive profits. The problems arise with shady book keeping and dishonest CEOs. Large cooperations need a more checks and balances to get the current system to work. I know when I make money online the reinvestment portion goes into retirement and stocks. I am my own CEO.
Comment by Make Money online with HomebizSEO.com -
You were once a CEO of a company. What did you do? Business can cause bruises, don\’t be a whimp Mark and don\’t forget where you came from.
Comment by jeff -
Company:We want to put our leadership on the same side as our employees, so our compensation is cash based. We also require management to take a equity position in the company to show they are serving the stockholders.
Prospect: Hmmm. Okay, to be on par with my colleagues, in similar sized companies…(mumble present value of… for 3 years)…I\’d require a salary of $10 million a year.
Company: Whoa, that\’s pretty expensive! We want to keep management pay around 10 times our average pay, so employees still feel like their in the same reality as management.
Prospect: Well, how about paying me $500K a year, and the rest in stock? That way we\’ll meet both requirements.
Company: Hmmm. Buying that stock outright each year will cost us quite a bit…
Prospect: Well, I could take options instead. But they might go underwater due to economic situations beyond my control, plus I couldn\’t exercise them for a while. So…(mumbling…black-scholes…)…you\’ll have to give me around $20 million in stock options.
Company: Okay! We have a deal!
Comment by mikeh -
This sounds incredibly dangerous to long term shareholder interests. The value of a share of stock is supposed to represent the net present value of all future earnings. The market is inefficient enough at estimating that, but I think you\’d agree with this: it is possible to take actions which greatly boost short term earnings but damage long term value. For example, burning bridges with customers you have a near lock-in with by soaking them can drive up earnings in the short term, but drive them to your competitors long term. Cutting R&D could boost short term and kill long term.
The net result could be a few incredible 99th-percentile quarters of performance, followed by disaster. Then the CEO is replaced, but he already has his cash.
Even without the extreme examples, there could be a distinct reluctance to make long-term decisions that impact 3, 5, 10+ years down the road.
What would make more sense would be to tie CEO performance to options with deferred exercise dates. So, for example, you start vesting shares immediately – and not initially priced underwater – but your exercise (or at least sale) of those shares must be deferred in a large part for many years. So for example, you may vest an initial grant over 5 years, but your first year\’s vesting will not be salable until the 11th year of your tenure, or what would have been the 11th year. If your shares have improved over that time, great.
Upsides: aligns the long term interest of CEOs with shareholders. Probably helps retain GOOD CEOs; since any CEO will be putting their future net worth at risk.
Downsides: probably deters some talented CEOs from signing on if more competitive deals are offered.
One thing I can say that\’s great about your plan is the cash acknowledgment of the compensation, but I think shifting the focus to the short term isn\’t good for the long term competitiveness of the company or the value of the shares.
Comment by Matt Wallace -
The way that stock options are awarded to top company executives is, and has always been, a complete sham. 80%, or more, of the appreciation in stock price that occurs under most CEOs watch is due to 1. a good economy and 2. a good industry, neither of which they have any control over. The way that these options SHOULD be granted is to be awarded not based on the appreciation of the stock but on HOW MUCH THE STOCK OUTPERFORMED ITS INDUSTRY PEERS…period. CEOs and top company executives should not be rewarded by stock appreciation that occurs just because they happened to be lucky enough to be \”present\” when good things happened that they had absolutely NOTHING to do with.
Peter Lynch said it best years ago when he advised people to only buy stocks that were in markets that were so good that they became so easy to manage that even a monkey could manage them…because, he said, one day a monkey really would. The problem, though, with the way stock options policy is applied today, is that it makes the monkeys rich for, well, being monkeys…and often not even very bright or efficient monkeys.
Comment by Joseph -
Mark, what do you think of a company going through rounds of small layoffs, no more than 2% of their domestic workforce, and electing not to publicize the cuts, even within the company, as a way to boost the bottom line without the reverberations of lost confidence?
Comment by Matt -
Pay them in S&P Futures, since the broader market influences their general success -or- failure, half of the time. Takes the day-to-day share price pressure off, and still rewards the executive with equity-based asset.
Comment by Chris -
Mark, I enjoyed your thoughts.
It was my understanding that the principle behind reporting equity compensation as an expense was designed to put more transparency and cash equivalency into stock-based compensation and its reporting.
I recognize the importance of cash but larger companies are managed through the P&L. And jobs are at risk when expenses become too out of balance in relation to revenues if the expense is properly flowing through the P&L, one would expect a similar result to be attained or perhaps I missed something.
I couldnt agree with you more on the option reset/repricing issue. Boards should not allow this. I have never seen an employees cash bond reset in the way stock is repriced.
Comment by Scott -
I wonder if really no company has ever send out a message to their shareholders like this.
On the otherside, I think the problem is not firing the people when things go bad. I think a lot of companies acquire a lot of \”fat\”, when things are going great. (That is they are afraid to fire people who are not doing great.)
If they would fire the bad apples when things are goog good, they would really be great instead of good
Comment by YvesHanoulle -
For a lot of companies, the CEO you want would be qualified to start his or her own company and end up with a lot more equity as a founder than he or she would get as a hired CEO of an existing company. Why are founders better at thinking long-term?
If you made your compensation for a hired CEO similar to the stock ownership patterns of company founders, would you get more founder-like decisions?
Comment by Don Marti -
I don\’t think the problem is so much that CEO\’s are getting the bulk of their compensation via stock options but the fact that the boards typically set the strike price so low that any uptick at all leads to a reward for the CEO that has no relation to how well the company actually did. Not to mention those sweet golden parachutes that are awarded to even the screwups like Bob Nardelli.
Stock options should be awarded based on how well a company does in relation to it\’s peers in several areas (not just stock price), instead of the broader market. That will minimize the \”rising tide lifts all boats\” effect that rewards CEO\’s for things they didn\’t do and avoid the temptation to use cheap tricks like a round of layoffs to artifically, and temporarily, boost the stock so they can cash in.
Comment by Jason -
I think you hit the ball out of the park on this one. Its obvious the problem with American companies is the \”short-sighted\” approach we have towards maximizing earnings in the near-term. It seems most CEOs plan for the quick and easy jolts that things like layoffs, or a complete lack of diversification.
Unfortunately layoffs and a non-diversified approach bring higher risk to the entity. If their core-competency is challenged, or market forces diverge from their niche the company is now in a weakened position to defend itself.
Looking at Ford, WAMU, Chrysler, Bear Sterns , Countrywide, or many other companies we can see the disasterous impact this management style offers.
Most disheartening of all though is the fact that these people do not operate in a vacuum and as such have now threatened the very fabric of our Economy.
Comment by Nick Brackney -
I think CEOs should have a cap on the amount of stock they can receive as part of their compensation, say 50% of their cash salary. So if a CEO makes 2 million, the total market value of the stock given to him can\’t exceed 1 million dollars.
Most of my career, I have worked for small family businesses or non-profits, so I have been pretty immune to big business stock prices. Our company is actually doing well right now due to the increase of Canadian and foreign tourism in our area. I laugh all the time about how well the business could be doing if the owners actually knew what they were doing though.
Comment by Mike -
The shareholders that drive these companies are rarely you and me – it\’s the Carl Icahns, the hedge funds, etc. – groups that are rarely in the stock for long term profits or for encouraging companies to be productive employers but are in it to make short term gains. Getting the stock price up is the name of the game – and the way \”the street\” keeps score. You will almost never see CEOs selling stock (maybe cashing in some options as they expire) because they get crucified for doing so. It\’s easy to throw stones at those guys – and sometime they need it – but it\’s not easy being \”the big guy\”.
Comment by Ann Y. -
Great analysis, and terrific suggestion. Just one problem:
With the same fox in charge of the same hen-house, wouldn\’t we end up seeing the same tricks, but with cash accounting? I guess it\’s marginally harder to hide how much the company is spending with stock options.
And another thing. I love it that some company reports make it so hard to figure out how much the CEO is getting paid, exactly. It\’s a useful signal to me about how much that management cares about its shareholders.
Comment by Michael Martin -
I notice many of your posts take on the task of challenging the status quo. I like it – it\’s the main reason I read.
Comment by JB -
there is an interesting chapter in \”The logic of life\” from Tim Harford that says \”Why your boss is overpaid\”. It explores all the logical and rational reasons why CEO compensations are not necessarely linked to performance. It\’s a bit of a provocation, but extremely interesting and would suggest to read the whole book. It is funny and very interesting.
I reviewed it on my blog: http://www.think-through.com/2008/03/26/the-logic-of-life/
in case you want to know a bit more about the book.
Comment by gianluca carrera -
Welcome to a free market society. CEO\’s get paid what the market deems worthy. No more, no less. You think its easy trying to steer a large corporate multinational like GE, or Citigroup?
These CEOs you are bashing, are some of the most talented, intelligent, individuals on the planet. If you were as talented, maybe you would have a chance to be CEO.
Sure, there are some obvious perks to being a CEO, but a lot of these guys bust their butts day in and day out, trying to boost corporate profits, so all shareholders can win. Think about the amount of stress they must endure on a daily basis.
Remember, corporate execuctives are also human beings, who, like everyone else, need to put food on the table to feed their families. Food and shelter are things we ALL should consider necessities.
Comment by Jack -
What about putting employees into the equity zone also? I prefer this approach, because we still have an incentive for performance and opportunities to get rich, but we\’re giving those opportunities to _all_ the players, not just the stars.
Comment by Patrick from Weston MA -
Mark B:
payout relative to what?
a $500,000 a year salary is still higher than 90% of people make. I imagine the larger corporations would be shelling out 5-10 million a year in CEO compensation.
relative to a fund manager it might be on the low side.
The good of the CEO being paid on the \”Cash Side\” is that it takes away the mercenary aspect of the system. We get back to \”good CEO\’s\” that know how to run a business and less of the PR CEO who the markets like.
Of course, we will keep going down this road, companies will continue lowjacking their employees with GPS in order to provide \”cause\” when the next round of layoffs come through, automating functions to get rid of entire levels of management, and we can become a nation of entry-level employees that can\’t afford the products and services their company produces.
Comment by James -
Maybe I don\’t understand what you are suggesting. Are you suggesting that CEOs get paid a higher salary and receive less compensation from shares in the company? If so, that is ridiculous. I think it should be the exact opposite. CEO\’s should receive a much lower base salary. Their base salary should be X times higher than the average salary at the company; maybe, 10 times. Whatever that number is, it should be published so all investors and employees are clearly aware of that CEO\’s pay. If the average salary at a company is $65k and the ratio is 10:1, then the CEO\’s salary should be a simple $650k. Any remaining compensation should be strictly tied to the share price for the company. This way, CEOs don\’t get grossly over-compensated even when the stock goes down. In other words, the CEO should not continue to earn millions of $ in regular salary ($3-4 million salaries are not uncommon) during times when all the other shareholders and employees are suffering because their shares have taken a significant cut in value or are completely worthless. Warren Buffet\’s salary is in the $100-$200 thousand range. But, his net worth ($40 billion +) is closely tied to how well Berkshire Hathaway performs on the open market. I believe this model should be the norm, not the exception.
Comment by Prentice -
But then wouldn\’t it make the job of CEO one that less people would want to take? It seems to me that making it a cash game would attract less interested parties into the CEO position since the payout wouldn\’t be as high.
Comment by Mark B -
Mark,
I\’m curious what you think of Jeff Immelt\’s stance that he won\’t cash in any of his equity pay until his retirement and live completely on his cash accumulation. Granted, he\’s running GE (the mother load of a divested corporation), been doing it longer than the normal CEO (I\’m guessing that normal lifespan is less than 5 years) and he\’s doing pretty good in the minds of shareholders and the Street.
Comment by Cliff -
There were so many good points that were brought between this article and posts I really don\’t have much else to add. However, one thing I do notice that was briefly touched on was employees being let go, being nervous, and becoming completely dependent on those above them. First things first, you should never make your only investments be a car and a house that are supported by one source of income. Diversifying your sources for profit, take a risk and put yourself out there. If you are smart enough to make somebody else rich (CEO) than you can certainly do it for yourself. I feel I know so many people who don\’t invest their money are worried during this \”fragile\” time in our economy, but they don\’t have to be.This is the right time to start buying and building yourself a place to fall back on or even \”depend on\”. I guarantee that once the cash starts to flow in (which does take time and a little effort) the jitters of being let go will not be so severe. I agree with the points made before me about CEO and their sources for income, but its time people start making the money they earn work for them. This was a great topic and a lot of great points made by others. I must say it made my morning.
Comment by mary -
We\’ll call it 52cent
Comment by Jake -
i\’ll see your 2 bits and raise you a BLATANT SEC Violation & the next Ted Turner.
1) You know as well as i do that you can have the most honest, hardest working, best prepared, most leveraged corporate CEO ever, and all it takes is 1 subordinate to screw it all up for everyone. As an auditor, even i know you can\’t keep an eye on everyone all the time. But yes, even the union worker looses everything he has b/c s/he didn\’t know s/he could put his 30yrs of 401k contributions into something other than, \’just the company\’s stock\’
2) SEC Violation
\”Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher.\”
Does anyone remember the kid whose parents gave him $10k for a birthday present (or something) just over 10yrs ago. Probably not. Anyway, the \’kid\’ put the $ into 1 stock. He then turned around and over the next 2weeks signed-in to every yahoo chatroom he could find and told people about how this company had just developed some new invention/drug type thing that hadn\’t even hit the open news just yet… the stock shot up, and in 2 weeks the kid turned $10k into over $200k.
THE ONLY thing that made it illegal for the kid was that he wasn\’t on FOX or CNN. Not that he was lying. We all know they do that all the fuckin\’ time. Kramer-head gets a trip to the Virgin Islands to meat with Chuck, meanwhile he preaches how he like this one ratio imparticular of WhoTheFuckCares.com owned by Chuckie… stock price goes up. OR, Consumer Reports… HELLO. They were being paid (and everyone within reason knew it) by the car companies and everybody else to recommend their product. Probably still are.
Here you have Larry, Curly, and Moe every morning telling every retired asshole that XYZ is the place to put there $. We all know, eventually enough of them will. IT IS ILLEGAL for any news company, or individual commentator, or WHOEVER to broadcast suggestions on WHAT TO BUY, or WHAT NOT TO BUY if they have a vested interest in ANYTHING!!!
\”I like …, i don\’t like…\” If ANY of them hold $1 of ownership ANYWHERE down the line…
\”The most valuable commodity I know of is information. Wouldn\’t you agree?\” – Gordon Gecko
I wonder if it would benefit you Mr. Cuban to own a TV station that does nothing but broadcast market economics. Kind of like the NFL Network. Only, your market economics channel is called, Cubanomics.
A) you\’ll de-sensitize the nation to that ugly word = Cuba.
B) you\’ll provide advice on making money, just like Lenny Dysktra is doing now for ex-athletes.
C) you\’ll be providing the gov\’t with tax $ so the IRS can\’t get too upset.
D) you\’ll get to be on TV more than you are already = free publicity for all your sports teams.
E) you\’ll make lots and lots of $ yourself, kinda like Ted Turner.
Sorry, that might\’ve been more than 2 cents.
Comment by Jake -
This would be great, now how to get it done. It reminds me of a documentary I saw awhile back.
Comment by Toni -
I think you hit the problem dead square.
Cash compensation doesn\’t necessarily fix the CEO\’s ability to layoff people or do a quick fix, but it may help.
Nice article though.
Comment by Herschel -
Awesome post, thanks so much!
Comment by Keith Sader -
Here\’s a thought: let\’s pay CEOs and top executives only in stock. I know this goes opposite to the point of the article, but I think it has the same desired effect. By tying the earnings of the people in charge to the fortunes of the company, you force them to become accountable, as they themselves are the shareholders. I\’m reminded of the scene from \”Wall Street\” where Gordon Gecko is talking to the shareholders of Teldar Paper and remarks that the executives own less than 1% of the company. In how many corporations is that true today?
My point, and your\’s as well, is that top executives are no longer accountable to the companies they run. As a more or less entry level employee, I find myself one budget cut away from having to find another job. In this uncertain economic climate, it can be difficult at best. When a company has to boost it\’s stock price, guys like me are the first ones on the chopping block.
People wonder why the kids of my generation have no loyalty. It\’s because no one has any loyalty to us.
Comment by Adam -
You want to be the CEO for my company….please? I enjoy my job, I do it well, I am not in danger of being let go, however there are those in my company that are getting severed. At the end of every quarter we see the boxes getting packed up. What bothers me is I go to Yahoo finance and check the insider trading log. here are Directors and Officers buying stock for pennies and selling for market price. I am sure what they are selling is not the exact same stock, its probably something they bought last year for pennies and in 6 months they will sell what they are getting now. Its depressing to see friends lose jobs while the fat cats are getting fatter.
Comment by Jim K -
I like the idea of putting CEO\’s in the cash zone. As long as they are held accountable for their work in terms of what they get paid, they will devote their 100%.
Comment by navtej kohli -
A friend of mine wrote the following to me in an email yesterday:
\”Why should I bust my ass so you can fire me the second things get a little bad. And why should I work hard when most of my effort rewards the people above me. Sometimes you hear older people say our generation is lazier. I disagree. It\’s just we don\’t have the same loyality to our employers that our parents did, and they don\’t have the same loyalties towards us (good work, but since wall street says we need to cut labor costs where \”right-sizing\” and security will now escort you to the door, leave your keys with them.)\”
I agree with him.
GR-
Comment by Gregory Rueda -
I couldn\’t agree more. It has been my experience that when you don\’t align incentives in any relationship one of the parties always loses… this is particularly true with sales reps.
Comment by RMoney -
Interesting thought on cash v. stock for CEO pay. I have long thought it was bullsh#t to give the CEO tons of stock and say it\’s to make sure s/he drives up value. Well, then give a significant sum of stock to every single employee. The risk to the CEO is not buying the big house at Vail. The risk to the employee is losing his only house. Who has more risk/incentive? (The problem is the rank and file are not usually in a position to make large or strategic decisions.) Also, if you paid the CEO out of quarterly cash, no doubt the clever bastard would start monkeying around to optimize what ever financial metric for success s/he\’s paid on, and you would see some undesirable unintended consequences. BUT, it would make it very visible that the guy in the corner office extracted $2.5 million from the value of the company this quarter, on earnings of $2.5 million plus or minus some millions.
Comment by Charles -