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(Related: Warren Buffett’s 10 Nuggets of Investing Wisdom: 2019)
Even if you’re an advisor that doesn’t invest client funds in ESG, SRI or impact assets, you might want to consider these key findings from a new report, The 100 Most Overpaid CEOs 2019. The stock price of the companies with the top 10 overpaid CEOs underperformed the S&P 500 by 15.6 percentage points in 2018.
Over the past four years, companies headed by the top 10 overpaid CEOs lagged the S&P 500 by by an average 14.3 percentage points, posting an overall loss of 11% while the S&P 500 gained 3.3%.
Pay vs. Performance
The report, published by As You Sow, a nonprofit organization focused on shareholder advocacy, bases its calculations on the assumption that executive pay should be closely linked to corporate performance.
Using regression analysis, it predicts a level of CEO pay based on total return (capital gains and dividends) and return on invested capital (cash flow, adjusted for taxes, divided by the total value of capital), then compares that prediction to the actual amount paid, including bonuses, stock options and other compensation listed in proxy statements.
The report also compares CEO compensation to the median pay for employees — a ratio that averaged roughly 273:1, and like executive pay, does not necessarily reflect corporate performance. (The median employee pay calculation may include workers outside the U.S.)
‘Nothing to Show for It’
Walmart, ranked 43 among the top 100 companies with overpaid CEOs, pays its CEO 1,188 times the median pay for workers. Costco’s CEO, in contrast, earns less than 200 times the median pay of its workers and doesn’t even make the top 100 overpaid list. Costco’s stock, however, gained just over 12% last year while Walmart stock sank almost 7%.
“Shareholders are getting shafted by CEO and executives’ pay,” says Robert Reich, former secretary of Labor under President Bill Clinton, who spoke on a conference call about the CEO Pay report.
The share of corporate income devoted to compensating the five highest paid executives of large corporations has ballooned from an average 5% in the mid-1990s to 18% currently, said Reich.
In addition, CEOs have an incentive to boost share prices in the short run, employing massive stock buyback programs, for example, since many are paid in part with stock options and companies aren’t required to announce the timing of buybacks or CEO stock sales, said Reich. The Dodd-Frank Act Wall Street Reform and Consumer Protection Act, which took effect in 2010, included several provisions to provide investors more information about CEOs exercising and cashing out of stock options but regulations about such disclosures have not been finalized.
Regarding excessive CEO pay, “The public has nothing to show for it and companies have nothing to show for it,” said Reich.
Since January 2017, publicly traded companies have had to disclose annually CEO compensation, median employee total annual compensation, and the ratio of CEO pay to median employee pay, which the Most Overpaid CEO report also includes. The requirement, issued by the Securities and Exchange Commission, was mandated by Dodd-Frank.
The top 15 companies in the S&P 500 with the most overpaid CEOs, which you can view in the slide show above, include three financial firms: AIG, Ameriprise and Ventas, a REIT company specializing in health care facilities.
— More slideshows on ThinkAdvisor:
- Warren Buffett’s 10 Nuggets of Investing Wisdom: 2019
- 6 Top Tax Issues for Investors: Andy Friedman
- 10 Riskiest States for Seniors
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