Good answer idc115. This is a non-sequitur.
Because various huge and successful companies disagree with you (and me), it does not therefore follow that they are correct!
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It sounds logical enough but I wonder if any serious study has done to verify the effect.
It has. The “effect” is not only not verified, it seems there is a negative correlation:
Highest-Paid CEOs Actually Run Some of the Worst-Performing Companies
A new study sheds fresh light on the correlation between CEO pay and total shareholder return. Critics of exorbitant CEO pay got some new ammo Monday. New analysis found that some of the highest-paid CEOs oversee some of the worst-performing companies when pay and performance are tracked over several years.
Corporate-governance research firm MSCI summarizes its new study this way: “Has CEO pay reflected long-term stock performance? In a word, ‘no.’”
Equity incentive awards now comprise 70% or more of total summary CEO pay in the United States, according to MSCI
http://fortune.com/2016/07/25/ceo-pay-total-shareholder-retu…
Of course “CEO pay” is not the entirety of this thread, but in my experience where the CEO is “overpaid” (usually in equity compensation) the rest of the management team is too.
I don’t now what the answer is, but frankly I don’t want an executive team focused on the stock price, I want them focused on the business. If the business is healthy, the stock price will take care of itself. The reverse is not true, as we have seen in myriad examples from Enron and MCI to Countrywide Mortgages and WaMu.
When I was at Westinghouse I had two bonus structures: one for the performance of my particular business unit based on yearly defined criteria*, and a stock based performance that vested over several years. I can honestly say that the stock bonus was so abstruse and “far off” that it had zero impact on my performance of my job. The BU target bonus was far more meaningful, because it was something that I felt I had some control over. The stock price? Of Westinghouse Electric? Please.
[*Those criteria could be as varied as YoY sales gains, YoY profit gains, success in hitting EEO targets, percentage of new business developed and others, often a combination of two, possibly three of those metrics. Those changed year by year, depending on the goals of our division, and were more or less invisible to the parent company.]
I may or may not want employees “thinking like an owner.” Sometimes I just want them to accept the mission they’re given and execute it professionally, not game the system with short term fixes, and not try to jack around the stock market.
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Of course “CEO pay” is not the entirety of this thread, but in my experience where the CEO is “overpaid” (usually in equity compensation) the rest of the management team is too.
There is a big difference between overpaying a CEO and giving key personnel a long-term stake in the success of the company as part of their compensation.
I just read the report referenced above, and I’m a bit concerned about the methodology:
- It only looks at companies with at least 10 years of full disclosure history. So, that cuts out many young fast-growing companies.
- They made it a point to exclude companies that did really well! The list, in Appendix a, include many TMF recommendations, such as Gilead, Celgene, Salesforce, Priceline, Netflix, Keurig Green Mountain, LKQ, and Apple.
- They actually disclaim that they haven’t completed the statistical analysis, and say only that the findings are “a basis for further review and discussion.”
- The SEC changed reporting requirements in 2006. The definition of “Reported Compensation” is, ironically, not the actual amount the people earned - it’s the amount they could get. For instance, Marissa Mayer and Yahoo have been beat up over her Reported Compensation of $35million, but she actually was paid $14million, since not all performance goals were met (stock price did go up, though).
I view many of the complaints about SBC as short-sighted. I think some of the discussions above about measuring how well the company is doing against SBC is valid and interesting. But simply complaining that you as a shareholder is being diluted is to me the same kind of behavior as companies that don’t pay well enough to attract the kind of employees that would make them truly successful. A smaller piece of a large pie is often the better deal in the long run.
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I view many of the complaints about SBC as short-sighted.
I am sure you already know this but if not bought back share based compensation is not just a cost to shareholders the day it is issued. SBC is actually a cost to shareholders every single year now into eternity due to the “pie” being cut into smaller pieces. Remember subway getting into trouble for serving only a 5 inch sandwich but advertising it as 6 inches? That seems somewhat similar to this. I have accepted that for now SBC is a part of investing in certain types of companies. Though my biggest complaint is how companies account for it. Right now there seems to be no accountability for how many shares are issued. Most companies who issue meaningful amounts of SBC focus almost exclusively on non-GAAP earnings which conveniently excludes SBC costs. That effectively gives management a blank check to print as many shares as they want at shareholders expense.
I just caution all shareholders reading to pay attention to the amount of shares being issued and value the company accordingly.
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Just one more thought i had…
Notice how companies seem to make such a big deal whenever they authorize a share buyback? The way some companies make such a big deal about it you would think they discovered a cure for cancer or something. Ya maybe not quite but you get the idea…
Well why is it fair that the reverse is not also publicized just as much? Is it fair to us shareholders to be diluted to death and not even be notified then the management turns around and announces a share buyback and they never let you forget? I wouldn’t have as hard of a time with SBC if management was forced to do a press release announcing x amount of shares issued over y number of years just like they do with buybacks.
This would at least keep management accountable and would clearly let all shareholders know it was happening. I am not as sure SBC is the issue but rather the fact that they do it in such a covert way as if they were trying to hide it.
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Pay people in cash for what they’re worth. Playing games with compensation only distracts from running the business.
Dr. W. Edwards Deming, the father of modern quality & systems thinking, was emphatic on that point.
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I can’t resist adding another post to this thread in view of the radical pro and con positions taken by many Fools.
Stock based compensation is not a zero sum game where investors lose what optionees make. If the options help increase the size of the pie more than cash compensation would then investors gain along with optionees. This is not always the case but it often is.
A personal story: In mid 1980s I imagined a piece of Mac Software (a desk accessory) that would revolutionize the online help for all Mac applications. It was quite ingenious if I say so myself. My problem was that by 1985 I was no longer in a position to write the code, I needed a couple of young and hungry professionals to do that part. In addition to designing the software I would be selling it to Apple (never happened). But I had a second problem, I didn’t have the capital to pay them. Stock options were the solution. They would code for free and in exchange they would get 1/3 each of the company. Unfortunately we didn’t succeed even though we did sell a few hundred copies of “Help for Excel.”
Help Documentation System Review
By Denny Schlesinger, President, Help Software, Inc.
The Importance of Documentation
Note: Unfortunately the images are no longer there, this is almost 30 years old.
http://www.mactech.com/articles/mactech/Vol.03/03.11/HelpSys…
My point is that one shouldn’t take a dogmatic “good/bad” approach to stock options. Be a smart investor, check it out to see if you gain or lose from them and act accordingly. You would have missed Microsoft’s wild ride if you took a dogmatic “bad” view of stock options. Siebel, by contrast, was stock option abuse on steroids (my opinion) but you could still make market beating return on the stock while it was going up. Siebel was bought out by Oracle.
Denny Schlesinger
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1) It only looks at companies with at least 10 years of full disclosure history. So, that cuts out many young fast-growing companies.
2) They made it a point to exclude companies that did really well! The list, in Appendix a, include many TMF recommendations, such as Gilead, Celgene, Salesforce, Priceline, Netflix, Keurig Green Mountain, LKQ, and Apple.
It’s fair to say they also excluded a lot of companies that did really poorly, especially including those which went out of business over the period. Survivorship bias and all that. The “getting them aligned with shareholders” meme is not terribly persuasive to me. Mostly I view it as a helicopter drop of compensation, they’re “aligned” with me when they BUY the shares, not when they’re gifted.
I am not saying it’s a hard and fast rule, just that I have also watched several companies with SBC go in the crapper. Home Depot, for instance, where CEO Nardelli installed all his own lieutenants, handed out oodles of stock and then proceeded to nearly demolish the company. Others I have already noted like Enron and Worldcom. There are lots of them.
Denny’s example is a good one; Mrs. Goofy works for what was once a startup and yes, they used shares in lieu of compensation. That helped them back when cash was tight, and now that it’s not the availability of shares is far more tightly restricted. So there is a place for it, I just think it’s vastly over-used and over-abused, especially in companies that are cash-rich and have no such need. Seriously, does Tim Cook need to be paid in Apple stock?
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