This week, I read on The Daily Ticker that 25 of the top 100 highest paid CEOs had higher salaries than their company paid in federal income taxes. This is the most bizarre statistic I’ve ever read. I don’t know what is more ridiculous, that companies paid their CEOs so much or they paid so little in taxes. Either way, it’s a slap in the face of hard-working Americans, who shoulder a heavy burden from the bailout of failed American companies.
Are CEOs that Valuable?
CEOs made 325 times the pay of an average American worker in 2010. This is up dramatically from the 269 times in 2009. The ratio was around 24-1 in 1965, 30-1 in the 1970s and 40-1 in the 1980s. American CEOs are paid considerably more than their counterparts around the world, even though many American companies lag in performance. For example, an American CEO makes 16 times what a comparable CEO makes in Japan. The S&P 500 has been flat for a decade, while executive compensation skyrocketed. So, the high-paid CEOs aren’t returning value to the shareholders either.
In my opinion, the excessive pay for CEOs is hurting companies and investors, instead of benefiting them. Between the high pay, stock options, severance packages and outlandish perks, it is definitely hitting the bottom line. Companies who have held the line on pay have had no problems obtaining executive talent or performance. And they attract executives who are more focused on the growth of the company than their private jets and villas. It’s only a matter of time before shareholders start to revolt against excessive pay. I just wonder what is taking them so long.
Are CEOs Out-of-Touch?
One of my wife’s favorite TV shows is Undercover Boss, where the CEO goes undercover at their company to see how it is run from the bottom up. If you have ever watched this show, it quickly becomes a rerun after a couple of episodes. Every week the CEO struggles to keep up at work. They befriend a financially struggling employee and keep a promissing employee from leaving the company. The show almost seems like it was scripted by a PR firm.
Observations from watching Undercover Boss:
- CEOs have no clue how daily operations run at their company.
- CEOs fail at any job requiring technical skill, labor or hustle.
- CEOs have no idea how hard it is for their employees to survive.
This leads me to wonder out loud if CEOs are worth even a fraction of their salary. In fact, I will declare right now that most CEOs are not only grossly overpaid, they are marginal leaders and a poor value to shareholders. The facts definitely back up my opinion. There are still some great CEOs in America, but they seem to be few and far-between.
What Defines a Great CEO?
Not all CEOs are created equal. Some are visionary strategists, fearless leaders and champions of corporate culture. Some can turn a company around from failure to success. Others are like the plague to employees and a parasite to shareholders. They can run a good company into the ground in a very short time and make a fortune doing it. Here are some of the best and worst CEOs of modern times and the exploits that made them famous or infamous.
CEO Hall of Fame
- Steve Jobs, Apple Inc. – Increased stock price from $4.38 (adjusted) in 1997 to $376.187 during his second tenure. He launched products such as the iPod, iPhone and iPad. He received an annual salary of $1.
- Bill Gates, Microsoft – Increased stock from 9 cents (adjusted) in 1986 to $19.94 in 2006. He stepped down from day-to-day operations to concentrate on philanthropy.
- Jeff Bezos, Amazon – Increased stock from $1.50 (adjusted) in 1997 to $210 today. He created the world’s largest online retailer which is nearly three times the size of its nearest competitor.
- Warren Buffett, Berkshire Hathaway – Increased annual value to shareholders of 20.3% for the last 44 years. He built Berkshire into the eighth largest publicly traded company in the world.
- Sam Walton, Walmart – Increased stock from 5 cents (adjusted) in 1972 to $10.49 (adjusted) at his death in 1992. He built Walmart into the world’s largest employer, retailer and company based on revenue.
CEO Hall of Shame
- Ken Lay, Enron – Took Enron from $101 billion in revenue to bankruptcy in two years. He was convicted of securities fraud, but died before sentencing.
- Bernard Ebbers, MCI/Worldcom – Took company from the largest long distance carrier in the U.S. to chapter 11 in 5 years. He is currently serving 25 years for $3.8 billion in financial fraud.
- Angelo Mozilo, Countrywide – In mid-2000s Countrywide issued 15% of all home loans in the U.S. He profited over $300 million by selling his stock ahead of the company’s collapse.
- John Rigas, Adelphia Communications – Built Adelphia into the fifth largest cable provider in the U.S before bankruptcy in 2002. He is currently in prison after being charged with stealing $100 million from the company.
- Chuck Conway, Kmart – Brought in to turn around Kmart, which declared bankruptcy two years later. He was charged with defrauding investors and accused of spending company money on planes and houses.
- Dick Fuld, Lehman Brothers – Received nearly half a billion dollars in total compensation from 1993 – 2007, before he drove the company into bankruptcy. There is ongoing SEC litigation regarding Lehman accounting practices.
- Al Dunlap, Sunbeam – Known as “Chainsaw Al” he tried to turn around companies by laying off thousands of workers. After being fired for accounting irregularities he was sued by shareholders and the SEC.
The Bottom Line
The bottom line is that executive pay in America has radically diverged from performance. As companies search for proven leadership, they consistently overpay CEOs who under-perform. Then, they overpay to get rid of them. This has to change if America is going to remain a world leader in business.
“My administration is the only thing between you [CEO’s] and the pitchforks.”
Barack Obama – President of the United States
This post was featured on the Carnival of Personal Finance over at Canadian Dream – Free at 45. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. There are dozens of amazing posts.