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CEO Greed Still Abounds

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September 30, 2013 – Comments (38) | RELATED TICKERS: FOR , SH , AME

How does the CEO of Cisco John Chambers justify an EIGHTY percent raise in salary to $21 million?  $11 million isn't enough for him?  Would he reward all the CISCO employees with an 80% raise?  The greed just continues.  And who had to have supported it?  Yup a bunch of other CEOs from other companies, to wit:

 

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&ved=0CEEQFjAE&url=http%3A%2F%2Fquotes.wsj.com%2FCSCO%2Fcompany-people&ei=jwZKUoypJ4Hl4AOn9IDwCw&usg=AFQjCNHiGXNQP4knR4aOY3WWWCd5l1-sqQ

The "Club" where nearly everyone in the Country is excluded from.

38 Comments – Post Your Own

#1) On September 30, 2013 at 8:28 PM, HarryCarysGhost (99.75) wrote:

How can you argue with this type of performance-

http://finance.yahoo.com/q/bc?s=CSCO+Basic+Chart&t=5y

$14- $25 range for the past 5 yrs, during one of the most likely best buying opportunities of our lifetimes. What's not to love?

I wrote a blog about similar greed regarding my GE investment-

http://caps.fool.com/Blogs/let-them-soil-themselves/585059

Honestly if any of us had put up similar results at our jobs we would have been fired long ago.

 

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#2) On September 30, 2013 at 8:43 PM, awallejr (82.99) wrote:

But what gets me is it really is a club.  A bunch of CEOs of other companies on the Board so of course t*t for tat.  Why this is allowed without being considered a breach of fiduciary duty is beyond me.  CEO's are so incentivized to grant raises to other CEOs because as I said they want t*t for tat.

* profanity filter heheh.

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#3) On October 01, 2013 at 2:48 PM, JohnCLeven (80.46) wrote:

I think paying a Chief Executive less than 1/10th of 1% of the companies free cash flow is ridiculously cheap. I'd ask for a raise too, if I were him.

If you gave him the raise to $21 million , that would still only be about 0.179% of last years free cash flow.

That's a friggin' BARGAIN!

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#4) On October 01, 2013 at 3:26 PM, JohnCLeven (80.46) wrote:

Personally, if I owned a business of some type, i'd probably pay my top manager 1% of that businesses average free cash flow from the previous 5 years (assuming he was there fore those years, ofcourse).

I would have no problem is Fortune 500 CEO's made 1% of 5 yr avg FCF either, even if that means the CEO's of the Exxon's and the IBM's would make $150 million to $200 million per year.

I once calculated the sum of the compensation of the top 25 highest paid executives, and divided it by the net income of those 25 companies, and it was unbelievably low. Probably around that 1/10th of 1% mark.

This is just my opinion, but I don't see how people can cite a CEO getting paid less than 1% of his businesses profit as an example of corporate greed.

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#5) On October 01, 2013 at 3:58 PM, JohnCLeven (80.46) wrote:

Sorry to hijack this post, but I have one last comment.

Forbes values the Green Bay Packers at $1.09 Billion

If we value the Packers similar to a business, at say it's worth about 15x earnings, then we could hypothetically estimate the Packers 2013 net income to be around $75 million.

Drew Brees has a guaranteed $40 million salary for 2013, which would be over 50% of our estimated net income for the Packers. (and almost 4 times higher than this "greedy" CEO)

If those estimated numbers are anywhere near correct, than you should probably make another article called " Professional Athlete Greed Still Abounds."

Awallejr, sorry for the hijacking, I want you to know that I really enjoy about 98% of your commentary.

I just think CEO greed is not nearly as bad as many people assume.

Have a great day!

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#6) On October 01, 2013 at 4:07 PM, JohnCLeven (80.46) wrote:

Approximately only 12 out of 500 Fortune 500 CEO's will make more $ than Brees this year. (and that's only his $40 million salary for playing 0-20 football games.)

Including endorsements, only 5 CEOs in all of America, will out earn Kobe Bryant this year.

The End.

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#7) On October 01, 2013 at 4:26 PM, somrh (84.66) wrote:

@JohnCLeven

I'm not sure why you're comparing this to sports players. Like CEO pay, sports player pay has grown at a much faster rate than productivity growth. Meanwhile, the rest of the population has lagged behind. 

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#8) On October 01, 2013 at 4:40 PM, somrh (84.66) wrote:

@awallejr

There is a less nefarious explanation for CEO pay. See the article I linked in my blog here.

Essentially they argue for a "leapfrog" effect. CEO pay is determined partly by the CEO pay of other similar organizations. Raise one CEO's pay and you get a feedback loop since that CEO is in the basket of CEOs looked at to determine the pay of some other CEO.

In either case, you get excessive CEO pay growth.

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#9) On October 01, 2013 at 4:41 PM, JohnCLeven (80.46) wrote:

@somrh

Perhaps your right. Let's ignore all my sports comments and concentrate on this one question:

Do you think that paying a CEO less than 1/10th of 1% of his companies annual free cash flow is an unacceptably high amount?

If so, how much should a CEO be paid?

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#10) On October 01, 2013 at 4:51 PM, somrh (84.66) wrote:

Quick example regarding sports players: NFL salaries. 

In 1981, (per this NYT article) average NFL salaries were $90,102. By 2012 (per this Forbes article), the average salary was $1.9 million, quite low compared to the other players in other sports.

In spite of that, pay growth was a factor of  21x the 1981 figure for a annual growth rate of 10.3%

Meanwhile GDP Per capita went from $13,960 in 1981 to $51,689 in 2012 or a factor of 3.7x the 1981 figure. Nominal income growth was 4.3% per year.

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#11) On October 01, 2013 at 4:58 PM, somrh (84.66) wrote:

Sorry @JohnCLeven, I didn't see your most recent comment until now.

I have no idea what standard we ought to use to judge CEO pay. What I do know is why pay CEOs much more now than we did, say, 20 or 30 years ago. I'm not convinced the value they contribute is worth it. 

While it doesn't directly deal with CEO pay, this addresses the disproprotionate growth of the top income earnings (a good portion of whom are made up of executives and finance professionals): Income Inequality in the US

While I didn't  look to see where the data comes from, it's an interesting chart comparison: Executive Pay: A Matter of Perspective.

Apparently, not only has CEO pay growth outpaced worker pay, it's outpaced stock market growth, and corporate profits growth. 

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#12) On October 01, 2013 at 5:10 PM, JohnCLeven (80.46) wrote:

Thanks for the article!

Is it possible that this could just be supply and demand? Maybe the consumer demand for watching professional athletes has grown, explosively,  while the supply of world class athletes hasn't really changed all that much?

Maybe the demand for middle skill American workers wanting 65k+ salaries has dropped, while the supply of equally skilled workers willing to take the same job for 1/3 the price has skyrocketed?

The Fool is a website about markets right? Why would any rational business owner employee a middle skilled American for X dollars per year, when they could hire two or three overseas workers for the price of one American?

I'm not trying to start a fight or anything, and I know these statements won't be popular...but I think the average human worker is simply catching up to the average U.S. worker in terms of skill. Therefore, the outsized salaries that middle skilled U.S. workers have enjoyed, compared to middle skilled people overseas,  cannot be sustained in a competitive market. They must drop until more of an equilibrium is reached.

I know those views are not going to be popular on a forum dominated by American's, but it seems to like a rational explanation to me.

But who knows, there's a fair chance that I have no idea what the heck i'm talking about.

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#13) On October 01, 2013 at 5:13 PM, drgroup (69.10) wrote:

This is a capitalist society. If you want more socialism, move to france,sweden or any other bastion of socialism. If you want to litmit salaries, I suggest you start in hollywood with the actors.

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#14) On October 01, 2013 at 5:17 PM, drgroup (69.10) wrote:

Sorry rec's button not working: +1

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#15) On October 01, 2013 at 8:42 PM, awallejr (82.99) wrote:

John you might want to look at these charts:

http://www.businessinsider.com/what-wall-street-protesters-are-so-angry-about-2011-10

Somrh's argument in comment #8 can be further explained by the fact that Boards of Directors tend to be CEOs of other large caps, so there really is a "you scratch my back I scratch yours" reasoning.  Personally I think if you are a CEO you should not be moonlighting as a board of directors on a bunch of other corporations.  As CEO devote full time at your job if you want $21 million.

I don't accept a 1% of free cash flow rule.  Actually I've made my argument elsewhere but it will take a grass roots revolution to get us back to the Eisenhower tax table years.

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#16) On October 01, 2013 at 9:45 PM, JohnCLeven (80.46) wrote:

So what's the best way to solve this problem?

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#17) On October 01, 2013 at 10:49 PM, HarryCarysGhost (99.75) wrote:

Here's my solution-.

Everyone on the board is voted a raise based on proxy results. No one on the board has voting power. You wan't the monies buy a lot of what your selling and make that stock soar.

(Stock options are also acceptable)

Who would you rather reward the CEO of GE or the CEO of V?

Sorry, I researched CISCO long ago, and found it to be a widows and orphans...

I do have a few stories to tell of me working in the local corporate bathrooms. 

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#18) On October 01, 2013 at 11:17 PM, awallejr (82.99) wrote:

So what's the best way to solve this problem?

I told you, go back to the Eisenhower tax tables.  Doing so forces these greedy CEOs to share the wealth with the employees which happened back then leading to what is considered to be the glory years of the middle class. But without a grass roots movement as OWS tried people will continue to be exploited.

Here is a fun link which illustrates my argument:

http://caps.fool.com/Blogs/for-devoish-and-awallejr/786086

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#19) On October 01, 2013 at 11:47 PM, awallejr (82.99) wrote:

Ya know Harry I think both of us are transforming into Alstry lol.

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#20) On October 02, 2013 at 1:38 AM, somrh (84.66) wrote:

@JohnCLeven

I'm currently reading Moneyball by Michael Lewis (finally got around to it... already watched the movie). I've read a few of his other books. While the book is about baseball, it's moreso about investing.

Here's a question for you though. What do you get when you invest in one of these superstar CEOs? 

While I think one should be cautious dealing with correlations, the evidence actually supports the idea that overpaid CEOs are actually worse for your stock returns than better. 

See the chart here on CEO incentive compensation and stock returns.

Regarding supply/demand, I've never seen supply/demand explained well for labor markets. The neoclassical model is just silly for a good number of reasons (and it's an example of the proverbial hammer looking for nails.)

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#21) On October 02, 2013 at 9:07 AM, drgroup (69.10) wrote:

I hope all of you are employed. Did you ever stop to think about the envy the guy lower on the pay scale holds for you? He is just not whining about it on MF. When these big shot ceo's receive their pay, they spend it. As such money is put back into the system through many channels. One day you might be at the top of the heap being the envy of people like yourself..... 

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#22) On October 02, 2013 at 9:55 AM, JohnCLeven (80.46) wrote:

@somrh

Your graph suggests that high paid CEOs don't bring in high returns.

So what should we do then? Institute wage controls on CEO's?

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#23) On October 02, 2013 at 12:43 PM, awallejr (82.99) wrote:

@drgroup

Actually those big CEOs don't spent it.  GDP is 70% spending and the bulk of that is from the 99%.  The 1% spends but the bulk winds up in family trusts created to avoid estate tax so the accumulated wealth can remain in the family for generations presumeably.  The Waltons combined $135 Billion is staying with them.

@JohnCleven

Actually if you looked at the charts in the link in #15 you will see one that shows CEO pay prior to 1985 tended to be about 50x average worker income.  Now it is over 350 times.  

There are several things that can be done.  The Sec should first make it a violation for a CEO to be on the Board of Directors of any other company.  The justification for the rule is to prevent what can be perceived as an appearance of impropriety. Since the Board determines CEO salary motive for any raises are suspect when it is done by other CEOs.

Next, while the SEC can't wage cap they can create "guidelines"  going back to the 50 times average worker salary.

Next get rid of the carry interest tax treatment.  Treat it as ordinary income.

Next go back to the Eisenhower tax table (though negotiable as to income subject to higher rates).  If top bracket is 95% of income over say $20 million, then once a person exceeds that it is doubtful he would be that greedy to squeeze out that 5%. Instead he would be encouraged to use that excess back in the business through higher worker wages or bonuses; he would be encouraged to spend it for business purposes (with reasonable limitations).  End result everyone is sharing the wealth.  

When we did that this Country and the middle class thrived.  This is a historical fact.

When we cut down the top tax rate to basically capital gains and even lower, the employers were now incentivized to actually squeeze every dime out they could because now they got to keep most of it.  End result jobs were shipped overseas, middle class continued to get squeezed and is shrinking, poverty has increased. This is a historical fact.

But what I suggest won't happen in my lifetime.  It takes the masses to finally wake the heck up and boot out all the incumbents.

 

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#24) On October 02, 2013 at 12:44 PM, awallejr (82.99) wrote:

@drgroup

Actually those big CEOs don't spent it.  GDP is 70% spending and the bulk of that is from the 99%.  The 1% spends but the bulk winds up in family trusts created to avoid estate tax so the accumulated wealth can remain in the family for generations presumeably.  The Waltons combined $135 Billion is staying with them.

@JohnCleven

Actually if you looked at the charts in the link in #15 you will see one that shows CEO pay prior to 1985 tended to be about 50x average worker income.  Now it is over 350 times.  

There are several things that can be done.  The Sec should first make it a violation for a CEO to be on the Board of Directors of any other company.  The justification for the rule is to prevent what can be perceived as an appearance of impropriety. Since the Board determines CEO salary motive for any raises are suspect when it is done by other CEOs.

Next, while the SEC can't wage cap they can create "guidelines"  going back to the 50 times average worker salary.

Next get rid of the carry interest tax treatment.  Treat it as ordinary income.

Next go back to the Eisenhower tax table (though negotiable as to income subject to higher rates).  If top bracket is 95% of income over say $20 million, then once a person exceeds that it is doubtful he would be that greedy to squeeze out that 5%. Instead he would be encouraged to use that excess back in the business through higher worker wages or bonuses; he would be encouraged to spend it for business purposes (with reasonable limitations).  End result everyone is sharing the wealth.  

When we did that this Country and the middle class thrived.  This is a historical fact.

When we cut down the top tax rate to basically capital gains and even lower, the employers were now incentivized to actually squeeze every dime out they could because now they got to keep most of it.  End result jobs were shipped overseas, middle class continued to get squeezed and is shrinking, poverty has increased. This is a historical fact.

But what I suggest won't happen in my lifetime.  It takes the masses to finally wake the heck up and boot out all the incumbents.

 

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#25) On October 02, 2013 at 12:45 PM, awallejr (82.99) wrote:

I don't know why it double posted sorry about that.

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#26) On October 02, 2013 at 12:48 PM, awallejr (82.99) wrote:

Oh one other point.  Stock options should be treated as ordinary income during the year it was exercised.

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#27) On October 02, 2013 at 2:45 PM, somrh (84.66) wrote:

@drgroup

To add to what @awallejr said, what happens with increasing income inequality is that it results in the top lending more to the bottom. So effectively, it's still the bottom that are spending the money but they don't "own it". See this article:

Income Inequality and Current Account Imbalances

This also disproves the myth that the rich will invest it in productive channels. (I think the argument is silly regardless; why aren't the power folks allowed to invest)

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#28) On October 02, 2013 at 2:49 PM, somrh (84.66) wrote:

@JohnCLevin

I don't know what solutions will be good. @awallejr has some interesting ideas that might be worth trying. 

Part of the problem is that there are several layers of principal-agent problems. On the one hand you've got Board-managment. Then you have shareholders-Board since the Board are agents acting on the shareholders' behalf. Then in many cases the shareholders are actually institutional managers managing peoples' retirement account.

Some combination of complacency and backscratching (amongst corporate execs on each others boards) allows excessive pay packages. 

One thing would be nice to see more people to become aware of that study, especially activist investors. Gradually they may be able to institute new social norms as far as pay practices go. 

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#29) On October 02, 2013 at 2:50 PM, somrh (84.66) wrote:

@JohnCLevin

I don't know what solutions will be good. @awallejr has some interesting ideas that might be worth trying. 

Part of the problem is that there are several layers of principal-agent problems. On the one hand you've got Board-managment. Then you have shareholders-Board since the Board are agents acting on the shareholders' behalf. Then in many cases the shareholders are actually institutional managers managing peoples' retirement account.

Some combination of complacency and backscratching (amongst corporate execs on each others boards) allows excessive pay packages. 

One thing would be nice to see more people to become aware of that study, especially activist investors. Gradually they may be able to institute new social norms as far as pay practices go. 

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#30) On October 02, 2013 at 2:55 PM, somrh (84.66) wrote:

lol, I just pulled an awallejr. MF must be buggy...

@awallejr

And this might deserve it's own topic and research, but I wonder what the appropriate way to incentive CEOs would be. Stock options are questionable in some respects. In some cases, shareholders would be better served receiging dividends than investing in the business. But the latter increases the likelihood of higher share price. 

I wonder how restricted stock does in comparison with stock options. Personally I think it should be restricted until some time after the CEO leaves the company (so the CEO is forced to make sure things are in order when leaving).

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#31) On October 02, 2013 at 2:56 PM, somrh (84.66) wrote:

lol, I just pulled an awallejr. MF must be buggy...

@awallejr

And this might deserve it's own topic and research, but I wonder what the appropriate way to incentive CEOs would be. Stock options are questionable in some respects. In some cases, shareholders would be better served receiging dividends than investing in the business. But the latter increases the likelihood of higher share price. 

I wonder how restricted stock does in comparison with stock options. Personally I think it should be restricted until some time after the CEO leaves the company (so the CEO is forced to make sure things are in order when leaving).

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#32) On October 02, 2013 at 3:01 PM, JohnCLeven (80.46) wrote:

@awallejr

What if an unintended consequence of the 50x average worker guidelines are companies eliminating lower income departments entirely, and outsourcing them instead, thus increasing the average salary at the company, but slashing jobs in the process?

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#33) On October 02, 2013 at 7:28 PM, awallejr (82.99) wrote:

I suppose there will always ones, but the the tax semi hard capped will still be in play.  That would be pretty sleezy for a CEO to do instead of giving them raises.

And somrh the main reason why I like Carl Icahn is for his disdain of CEOs and Directors and him trying to actually force them to take courses of action that benefit shareholders.  He isn't a Gordon Gekko who just buys and dismantles.

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#34) On October 02, 2013 at 7:29 PM, awallejr (82.99) wrote:

Hmm spell check is now making me lazy in proof reading.

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#35) On October 03, 2013 at 12:26 AM, somrh (84.66) wrote:

@awallejr

I was actually thinking about a blog post regarding Icahn and "retention pay":

Icahn on retention pay

But the strange thing in all of this should be that managers who ran the equity stake to bankruptcy think they're entitled to retention pay. 

And our backwards society thinks this is normal and acceptable behavior. 

I think it's sociopathic. (I still wonder what proportion of managers are just socially accepted sociopaths.)

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#36) On October 03, 2013 at 9:14 AM, awallejr (82.99) wrote:

Well ATPG bk still hits home to me.  At least CEO and officers were eventually booted.  And one thing I found sadly amusing regarding Corzine's MF Global bk was when the financial officers of MF "offered" their services to help recover the lost $1.6 Billion for a fee.

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#37) On October 14, 2013 at 1:34 PM, somrh (84.66) wrote:

Nakedcapitalism with an article on CEO pay:

Why CEO Pay Will Keep Rising to Even More Insanely Unjustified Levels While Ordinary Workers Get Squeezed

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#38) On October 14, 2013 at 2:31 PM, awallejr (82.99) wrote:

Well as I said before, until the Average Joe wakes the heck up salary divergence will only grow more.

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