The fact is, CEO compensation has gone completely haywire.
Over the past four decades, as executive salaries — adjusted for inflation — have ballooned by nearly 1,000%, the average worker has seen their compensation increase by a relatively meager 11% over the same period.
The resulting imbalance is striking.
In 2015, the country’s top CEOs were paid a staggering 276 times more than the typical American worker, according to the Economic Policy Institute. Are these CEOs being rewarded for top-notch performance? Not really. In fact, some of the highest paid business chiefs are leading companies in massive decline.
Take IBM for instance. At the start of 2016, the board of the embattled Armonk, New York-based tech icon awarded its CEO Ginni Rometty a $4.5 million bonus for her work in 2015 — $900,000 more than her bonus a year prior — bringing her total compensation to $19.5 million. And all that despite the fact that, as Fortune reported at the time, Big Blue’s revenues had tumbled for 15 straight quarters on Rometty’s watch and IBM shares dropped 15% over the course of 2015.
So, of course the question you are asking yourself — or should be asking yourself — is: how?
How did Rometty, the CEO of a tech company with a growing laundry list of sizable problems (many of which I have previously documented) manage to pocket nearly $20 million, despite IBM’s substandard performance in 2015?
The answer: Stock buybacks and screwy incentives for corporate executives.
Multi-million Dollar Carrots
At IBM, net operating earnings account for 70% percent of the senior executives’ performance-based incentives, with the remaining 30% based on free cash flow, according to the company’s proxy statement. This is a juicy, multimillion dollar carrot dangling in front of the top brass at IBM, galvanizing them to focus on boosting earnings per share — for which there is a shortcut: buying back company stock. When a company repurchases its own stock, it is reducing the number of outstanding shares in the market, artificially boosting earnings per share and, in turn, padding executives’ pockets.
But one party arguably loses out in this scenario: Shareholders.
Every $1 injected back into the market for buybacks boosts shareholder risk, because a company is trading a tangible asset (cash) for an intangible asset (stock) and increasing leverage for shareholders in each and every case. But despite this less-than-ideal scenario, corporate executives are pouring billions back into the market to buy back company stock as their salaries bloat.
Let’s return to IBM for a minute. The metrics outside of Rometty’s fat paychecks tell a darker story of the state of IBM, in my view. Facing a dying mainframe business, the erstwhile tech leader is struggling to stay relevant as it cuts jobs and faces flagging revenues and earnings.
Bloomberg reports that in 2014, 40% of Rometty’s $11.4 million compensation was tied to earnings per share — so it is no wonder she and her fellow C-suite members went hog wild over stock buybacks. Since 2005, IBM has only invested $111 billion in capital spending and R&D but spent $125 billion on share repurchases over the same period.
And IBM isn’t the only company to go on rampant buyback sprees.
Pharmaceutical giant Pfizer and 3M have shelled out $139 billion and $48 billion, respectively, on buybacks and dividends over the past decade. And American Airlines, less than five years out of bankruptcy, has spent $9 billion on share purchases over the past two years alone. Meanwhile, the executives at the top have pocketed millions. In 2015, Pfizer C.E.O. Ian Read made $14.4 million; 3M C.E.O. Inge Thulin raked in $15.5 million; and W. Douglas Parker, the head of American Airlines, made $11.4 million.
So How Do We Fix This?
Well, for starters: overhaul executive incentives and demand shareholder votes on all share repurchases. Second, pay executives on the actual performance of the business, correlated to gross profit and revenue.
There is an alignment problem at hand, but to change it, shareholders need to take their rightful place as owners and assert their authority. There are a number of ways to look at it, but it boils down to this: shareholders are getting stepped on, because they are letting themselves get stepped on.
How we do fix this? Overhaul executive incentives and demand shareholder votes on all share repurchases.
As an investor, you are buying a share of a company’s net assets. That is all a stock certificate is — a legal claim on the net assets of a corporation. And when CEOs issue stock buybacks, they are gambling with your property — and in the majority of cases, you have no say. That is preposterous.
Seattle Seahawks owner Paul Allen would never let someone else sell off bits of his NFL team without his consent. So why then are shareholders letting executive boards pour their assets into the stock market without consent?
Shareholders are getting nicked. Over and over. And the problem is the incentive structure. As Bloomberg noted, 11 of the 15 non-financial companies that shelled out the greatest amount of money on share repurchases in 2014 had executive compensation packages tied to earnings per share or total shareholder return. This illustrates the scope of the problem associated with linking executive salaries to an easily manipulated metric.
Executive incentives need to be realigned with shareholder incentives.
At Nightview Capital, our objective is to build our pile of assets. It’s as simple as that. And in our view, the best way to incentivize CEOs to focus on building assets is to reward them purely on the basis of a company’s success.
Pay Execs on Business — Not Stock — Performance
Executives should reach their full compensation targets by hitting gross profit and revenue goals — not earnings per share. Why? Executives can’t manipulate and exploit these metrics.
In the case of IBM, revenue and gross profit have been declining for years, but due to the company’s screwy incentives (in my view), management is focused on earnings per share and gotten rich off of it. They say that is what is most important. But I’m saying, no.
It’s not the most important. To protect your business, you have to protect your assets, and you have to protect your value proposition. And you can’t sacrifice those for quarterly earnings per share. The way to fix that is just better design of incentives that more accurately, which means tying them to gross profit and revenue.
Executives should reach their full compensation targets by hitting gross profit and revenue goals — not earnings per share.
In April 2015, Blackrock head Larry Fink wrote a letter to the CEOs of the companies that make up Standard & Poor’s 500 index, wherein he urged the business leaders to push back on pressure from investors seeking short term returns — namely, dividends and greater earnings per share.
“Corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners,” Fink wrote — offering up a piece of advice that still holds true today.
—
Got a question? Contact us: info@nightviewcapital.com.
Disclosures:
The opinions expressed herein are those of Nightview Capital, LLC and are subject to change without notice. The company (or companies) identified or referenced herein is an example of a current or potential holding or investment target and is subject to change without notice. This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. Past performance is no guarantee of future results. Nightview Capital reserves the right to modify its current investment views, strategies, techniques, and market views based on changing market dynamics. This article contains links to 3rd part websites and is used for informational purposes only. This does not constitute as an endorsement of any kind.
Arne Alsin and Nightview Capital clients own options positions in IBM and stand to benefit if the trading price of IBM decreases.
Nightview Capital, LLC does not accept any responsibility or liability arising from the use of this document. No document or warranty, express or implied, is being given or made that the information presented herein is accurate, current or complete, and such information is always subject to change without notice. Shareholders and other potential investors should conduct their own independent investigations of the relevant issues and companies involved in this article. This document may not be copied, reproduced or distributed without prior written consent of Nightview Capital.
Nightview Capital, LLC is an independent investment adviser registered in the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. WRC-17–04.
Disclosure: This has been prepared for information purposes only. This information is con dential and for the use of the intended recipients only. It may not be reproduced, redistributed, or copied in whole or in part for any purpose without the prior written consent of Nightview Capital. The opinions expressed herein are those of Nightview Capital and are subject to change without notice. The opinions referenced are as of the date of publication, may be modi ed due to changes in the market or economic conditions, and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This is not an offer to sell, or a solicitation of an offer to purchase any fund managed by Nightview Capital. This is not a recommendation to buy, sell, or hold any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be pro table, or that the investment recommendations or decisions Nightview Capital makes in the future will be profitable or equal the performance of the securities discussed herein. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. Nightview Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations made in the last 12 months are available upon request. Nightview Capital and clients are currently long Spotify (SPOT), and stand to bene t if the trading price of SPOT increases
Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about NightviewCapital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request. WRC-20-03
Articles
How to Fix Executive Compensation and CEO Pay in Corporate America
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The fact is, CEO compensation has gone completely haywire.
Over the past four decades, as executive salaries — adjusted for inflation — have ballooned by nearly 1,000%, the average worker has seen their compensation increase by a relatively meager 11% over the same period.
The resulting imbalance is striking.
In 2015, the country’s top CEOs were paid a staggering 276 times more than the typical American worker, according to the Economic Policy Institute. Are these CEOs being rewarded for top-notch performance? Not really. In fact, some of the highest paid business chiefs are leading companies in massive decline.
Take IBM for instance. At the start of 2016, the board of the embattled Armonk, New York-based tech icon awarded its CEO Ginni Rometty a $4.5 million bonus for her work in 2015 — $900,000 more than her bonus a year prior — bringing her total compensation to $19.5 million. And all that despite the fact that, as Fortune reported at the time, Big Blue’s revenues had tumbled for 15 straight quarters on Rometty’s watch and IBM shares dropped 15% over the course of 2015.
So, of course the question you are asking yourself — or should be asking yourself — is: how?
How did Rometty, the CEO of a tech company with a growing laundry list of sizable problems (many of which I have previously documented) manage to pocket nearly $20 million, despite IBM’s substandard performance in 2015?
The answer: Stock buybacks and screwy incentives for corporate executives.
Multi-million Dollar Carrots
At IBM, net operating earnings account for 70% percent of the senior executives’ performance-based incentives, with the remaining 30% based on free cash flow, according to the company’s proxy statement. This is a juicy, multimillion dollar carrot dangling in front of the top brass at IBM, galvanizing them to focus on boosting earnings per share — for which there is a shortcut: buying back company stock. When a company repurchases its own stock, it is reducing the number of outstanding shares in the market, artificially boosting earnings per share and, in turn, padding executives’ pockets.
But one party arguably loses out in this scenario: Shareholders.
Every $1 injected back into the market for buybacks boosts shareholder risk, because a company is trading a tangible asset (cash) for an intangible asset (stock) and increasing leverage for shareholders in each and every case. But despite this less-than-ideal scenario, corporate executives are pouring billions back into the market to buy back company stock as their salaries bloat.
Let’s return to IBM for a minute. The metrics outside of Rometty’s fat paychecks tell a darker story of the state of IBM, in my view. Facing a dying mainframe business, the erstwhile tech leader is struggling to stay relevant as it cuts jobs and faces flagging revenues and earnings.
Bloomberg reports that in 2014, 40% of Rometty’s $11.4 million compensation was tied to earnings per share — so it is no wonder she and her fellow C-suite members went hog wild over stock buybacks. Since 2005, IBM has only invested $111 billion in capital spending and R&D but spent $125 billion on share repurchases over the same period.
And IBM isn’t the only company to go on rampant buyback sprees.
Pharmaceutical giant Pfizer and 3M have shelled out $139 billion and $48 billion, respectively, on buybacks and dividends over the past decade. And American Airlines, less than five years out of bankruptcy, has spent $9 billion on share purchases over the past two years alone. Meanwhile, the executives at the top have pocketed millions. In 2015, Pfizer C.E.O. Ian Read made $14.4 million; 3M C.E.O. Inge Thulin raked in $15.5 million; and W. Douglas Parker, the head of American Airlines, made $11.4 million.
So How Do We Fix This?
Well, for starters: overhaul executive incentives and demand shareholder votes on all share repurchases. Second, pay executives on the actual performance of the business, correlated to gross profit and revenue.
There is an alignment problem at hand, but to change it, shareholders need to take their rightful place as owners and assert their authority. There are a number of ways to look at it, but it boils down to this: shareholders are getting stepped on, because they are letting themselves get stepped on.
As an investor, you are buying a share of a company’s net assets. That is all a stock certificate is — a legal claim on the net assets of a corporation. And when CEOs issue stock buybacks, they are gambling with your property — and in the majority of cases, you have no say. That is preposterous.
Seattle Seahawks owner Paul Allen would never let someone else sell off bits of his NFL team without his consent. So why then are shareholders letting executive boards pour their assets into the stock market without consent?
Shareholders are getting nicked. Over and over. And the problem is the incentive structure. As Bloomberg noted, 11 of the 15 non-financial companies that shelled out the greatest amount of money on share repurchases in 2014 had executive compensation packages tied to earnings per share or total shareholder return. This illustrates the scope of the problem associated with linking executive salaries to an easily manipulated metric.
Executive incentives need to be realigned with shareholder incentives.
At Nightview Capital, our objective is to build our pile of assets. It’s as simple as that. And in our view, the best way to incentivize CEOs to focus on building assets is to reward them purely on the basis of a company’s success.
Pay Execs on Business — Not Stock — Performance
Executives should reach their full compensation targets by hitting gross profit and revenue goals — not earnings per share. Why? Executives can’t manipulate and exploit these metrics.
In the case of IBM, revenue and gross profit have been declining for years, but due to the company’s screwy incentives (in my view), management is focused on earnings per share and gotten rich off of it. They say that is what is most important. But I’m saying, no.
It’s not the most important. To protect your business, you have to protect your assets, and you have to protect your value proposition. And you can’t sacrifice those for quarterly earnings per share. The way to fix that is just better design of incentives that more accurately, which means tying them to gross profit and revenue.
In April 2015, Blackrock head Larry Fink wrote a letter to the CEOs of the companies that make up Standard & Poor’s 500 index, wherein he urged the business leaders to push back on pressure from investors seeking short term returns — namely, dividends and greater earnings per share.
“Corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners,” Fink wrote — offering up a piece of advice that still holds true today.
—
Got a question? Contact us: info@nightviewcapital.com.
Disclosures:
The opinions expressed herein are those of Nightview Capital, LLC and are subject to change without notice. The company (or companies) identified or referenced herein is an example of a current or potential holding or investment target and is subject to change without notice. This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. Past performance is no guarantee of future results. Nightview Capital reserves the right to modify its current investment views, strategies, techniques, and market views based on changing market dynamics. This article contains links to 3rd part websites and is used for informational purposes only. This does not constitute as an endorsement of any kind.
Arne Alsin and Nightview Capital clients own options positions in IBM and stand to benefit if the trading price of IBM decreases.
Nightview Capital, LLC does not accept any responsibility or liability arising from the use of this document. No document or warranty, express or implied, is being given or made that the information presented herein is accurate, current or complete, and such information is always subject to change without notice. Shareholders and other potential investors should conduct their own independent investigations of the relevant issues and companies involved in this article. This document may not be copied, reproduced or distributed without prior written consent of Nightview Capital.
Nightview Capital, LLC is an independent investment adviser registered in the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. WRC-17–04.
Disclosure: This has been prepared for information purposes only. This information is con dential and for the use of the intended recipients only. It may not be reproduced, redistributed, or copied in whole or in part for any purpose without the prior written consent of Nightview Capital. The opinions expressed herein are those of Nightview Capital and are subject to change without notice. The opinions referenced are as of the date of publication, may be modi ed due to changes in the market or economic conditions, and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This is not an offer to sell, or a solicitation of an offer to purchase any fund managed by Nightview Capital. This is not a recommendation to buy, sell, or hold any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be pro table, or that the investment recommendations or decisions Nightview Capital makes in the future will be profitable or equal the performance of the securities discussed herein. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. Nightview Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations made in the last 12 months are available upon request. Nightview Capital and clients are currently long Spotify (SPOT), and stand to bene t if the trading price of SPOT increases
Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about NightviewCapital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request. WRC-20-03
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Introducing The Nightview Fund (NYSE: NITE): A Future-Focused Equity ETF
We’re pleased to announce that our previously private investment partnership, the Long Only Equity Growth Strategy, has transitioned into a more accessible format: an Exchange-Traded Fund (ETF) named The Nightview Fund. As of June 24, 2024, The Nightview Fund trades on the New York Stock Exchange under the ticker NITE. It is available on all …