What I don't get about CEO compensations is, do they even work?
Like I get that you're a high impact person and you should have the proper incentives to lead the company in the right direction, but do the crazy compensations actually achieve that? Like is there any difference between $100M and $200M? Both of those numbers are way higher than anyone and their children can use in their entire lifetimes, why do you even care which sum you get? Does Sundar Pichai actually look at his paycheck and say "Oh boy, I got $226M instead of the measly $150M [0] I got last year, hard work sure is paying off, I better keep at it."
There’s been a bunch of studies that track CEO performance when the CEO has gone on to lead multiple orgs.
No surprise, CEO performance has no persistence and is statistically random. Also higher compensation does not lead to faster EPS growth for investors over time.
Average comp for execs has skyrocketed 10x the past few decades due to equity compensation - yet companies aren’t growing 10x faster than they were before equity comp became so en-vogue.
My personal opinion: all execs should be paid in cash and incentivized purely with fixed cash bonuses. That’s basically how corporate America worked pre-1980s.
Gifting a big percentage of a company to someone who was employee #3076 is just plain theft from public investors.
There's a "rachet effect" - BigCorp needs a new CEO, the committee looks for a replacement. Are they looking for an "average" CEO or an above average CEO? Compensation gets decided by a separate committee who use consultants who want to get re-hired. Buffett wrote about this in his 2005 letter to shareholders:
"Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.
Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these – let’s say enough to give him an option on 1% of the company – his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to repurchase stock.
Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 158% by the end of the option period. That’s because repurchases would reduce the number of shares to 38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings had declined by 20% during the ten-year period.
Fred can also get a splendid result for himself by paying no dividends and deploying the earnings he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically – with Stagnant’s p/e ratio remaining unchanged at ten – Fred’s option will deliver him $63 million. Meanwhile, his shareholders will wonder what happened to the “alignment of interests"
Really nice buffet selection, a perhaps more notably because he mostly seems to defend stock repurchases (presumably baring some outlandish ceo grant like in the quote) due to the tax deferred accumulation.
This hypothesis is testable in the market, and there are any number of investors—including private equity firms and activist investors—on the lookout for feathered-nest C-suites and other misaligned executive incentives.
There was a great little aside a couple months ago on the Odd Lots podcast[1] about investors forcing a radical change in oil company executive incentive compensation that had been draining shareholder value for decades.
It's about status, not money. If the CEO of a $T company like google doesn't get a lot of money AND doesn't have a charitable reason not to, he's going to lose respect and it's likely he won't be able to make the deals he should've otherwise been able to. When you're in upper management your salary and perks make your position and are responsible for effective output.
At least, this is how people that make all that money think. Yes, it's a huge waste, but who's instituting the other kind of social structure that doesn't reward socio / psychopathy anyway?
The paragraph above is an easy way to discount any and all criticisms. It could be worse, ya kno?
Like I get that you're a high impact person and you should have the proper incentives to lead the company in the right direction, but do the crazy compensations actually achieve that? Like is there any difference between $100M and $200M? Both of those numbers are way higher than anyone and their children can use in their entire lifetimes, why do you even care which sum you get? Does Sundar Pichai actually look at his paycheck and say "Oh boy, I got $226M instead of the measly $150M [0] I got last year, hard work sure is paying off, I better keep at it."
[0] I made that number up