First let’s define excess pay. Excess pay is when you pay for something that you do not receive. When hiring executives to run your company, you are right to expect a certain level of performance excellence. When you don’t receive that performance excellence you might feel cheated.
When you get the performance you expect you may be very happy to pay absolutely large compensation if it is a small percentage of the value created.
Elon Musk who led the development of a $500 billion company, Tesla, may rightly deserve his $56 billion USD compensation package while another CEO who generated no value in 10 years is not worth his $600k annual compensation package. We can debate how much value Elon actually oversaw and when that value was created. But the basic premise of shareholders earning $1.00 and offering a slice to the top dog in the organization seems reasonable.
If the $1.00 is followed by a billion zeros then I expect the captain of the ship to have earned a princely sum for guiding the enterprise to safe lucrative shores.
How do these pay packages affect workers and shareholders?
1. Extreme excess pay changes CEO decision making – perpetuates losing businesses which over-compensate the CEO and under-compensate everyone else such as employees and shareholders.
2. Dilutes shareholders’ position – if the executives issue themselves 1% of the company every year it starts to add up over 10 years. I have seen small companies issue 4% of shares annually.
3. Reduces cash that otherwise could be used to fund growth and enterprise development. 4. Demoralizes workers and investors and can create envy.
5. Motivates other executives and middle managers to request more and create a new escalation of unnecessary expense.
The effects of over-paying become dramatic over a lifetime for any company trying to create a sustainable business of any kind. Real effects include reduction in workers wages compounding into lower savings compounding into lower investment levels and compounding into generating lower income from investments.
Ouch that all hurts the common man, woman, and their children. And what can we do to change this inequality as individual investors looking to create prosperity for all? We can attempt to cap the run away compensation packages, but the resistance will be relentless.
Or we can learn to leverage our knowledge and profit by it. That is my approach. I supply information so people can invest in companies that will last 100 years or more.
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About investment researcher Michael Cooper
A contrarian with an even temperament. These characteristics are useful in investment markets when coupled with a Western University (Canada) economics degree, CFA designation, years of finance and investment industry experience and most importantly, access to the teachings of Warren Buffett and Charlie Munger.
My career started in 1990 working with a couple second rate Toronto-based finance boutiques and a couple first rate investment firms. I was involved in private equity and venture capital, financing approximately $50 million worth of transactions, finding target companies, performing valuation analysis and documentation, negotiating terms and pitching deals to institutional investors.
In 2015 Cooper Financial Research was refocused toward the DIY investor. A successful track record based on my personal portfolio was developed. New investors were provided with access to replicate my allocations through a weekly newsletter service.
