Streetwise

Lauren Rudd

Sunday, November 17, 2013

Deference to Shareholders and Employees is Key

A key element in the analysis of any company’s investment potential is the deference it has for its shareholders. Corporations that rank high on your investment list should respect their obligation to place the well-being of shareholders and employees above that of its executives. Unfortunately, executive compensation often points to a shirking of this responsibility.

For example, for the first time ever the 10 highest-paid chief executives in the US received more than $100 million in compensation last year, and two took home billion-dollar paychecks, according to a survey of executive pay by GMI Ratings.

Moreover, the median pay of a CEO at a company in the Standard & Poor's 500-stock index rose by nearly 20 percent from 2011 to 2012, according to the latest report by GMI. In contrast, the median weekly earnings of full-time wage and salary workers rose by just 1.4 percent in the same period, according to data from the Bureau of Labor Statistics.

While no one wants to stifle initiative, hard work and the associated monetary rewards, consider the ramifications to corporate morale when rising executive compensation collides head-on with layoffs and pay reductions, all layered on a mantra of necessary cost cutting - despite rising profits.

The previously mentioned 20 percent increase comes at a time when stubbornly high unemployment and declining wealth remain uppermost in the minds of those on Main Street. And we are only talking about the CEOs of public companies, not the many billions of compensation doled out to those who run hedge funds and private-equity firms.

This is the first time in the 11-year history of GMI's survey that all of the top 10 CEOs made at least $100 million. The biggest payday went to Facebook CEO Mark Zuckerberg, who topped the list with $2.28 billion.

Yes, Zuckerberg’s salary was based primarily on stock options. In fact, the CEO pay explosion is largely due to executives exercising their massive stock options as stock prices climb, which has helped executive pay grow 127 times faster than that of workers over the past three decades.

The U.S. leads the developed world in income inequality. Since 1970, the top 1 percent of Americans practically doubled their share of the nation's total earned income. Last year the income of the top 5 percent of Americans rose, while median household income fell, keeping inequality at a record high, according to Census Bureau data.

So what happens when corporate management pays more attention to their personal piggy banks than the corporate cash box? The late John DeLorean, a 17 year veteran of General Motors stated it quite succinctly back in 1979 in his book, “On a Clear Day You Can See General Motors.”

“Our inability to compete with the foreign manufacturers is more due to management failure than anything else. Past management spent our lush advantage extravagantly...the system and management are stifling initiative. Leadership and innovation are impossible...Not only is management of no help, most of what they do is wrong...Isolated executives find their markets taken away by competitors attuned to the wants and needs of the public.”

To which I would add, “And the needs of the company’s employees and shareholders.”

Keep in mind that DeLorean wrote those words over 33 years ago, well before the current level of lavishness set in. Therefore, try to seek out those companies that demonstrate a fair and efficient management style that extends deep into the executive suite, while avoiding those where management is more self-serving.

An excellent example was set by Apple’s former CEO, the late Steve Jobs. In his book titled, “Steve Jobs,” Walter Isaacson recounts how upon seeing the menu for a dinner with President Obama, Jobs responded that some of the dishes proposed by the caterer – shrimp, cod and lentil salad – were way too fancy.