Wasting Money on CEOs

Last weekend McDonald’s dismissed CEO Steve Easterbrook for having a consensual relationship with a subordinate. The relationship broke the rules, which Easterbrook admits. The company obviously fired him for cause. For his troubles, he walks out the door with $700,000 in severance, plus a potential $70 million in stock and options.

It must be terrible to hang your head in shame while driving a Ferrari, eating in nice restaurants, and vacationing in Davos.

The pot of gold Easterbrook inherited upon his exit brings up the wealth at the other end of the rainbow, when CEOs are hired. If you want to find an example of compensation inequality run amok, look no further than the corporate boardroom.

For a bunch of people who are supposedly good at math, corporate boards of directors follow a logic that contains a serious flaw. Wanting to hire “great talent,” or “visionary leaders,” or whatever buzzwords they use that day, the boards appoint compensation committees to create pay packages for CEOs. The committees probably hire consulting firms, which survey similar companies to determine the going rate.

McDonald’s Wasted Money

But no one wants to pay the going rate. It would get you a run-of-the-mill, same-as-the-other-guy executive. So they set the compensation just above the average.

Seems reasonable, until you realize that every time this happens it moves the average higher because each company sets the bar a little higher, driving up the overall number.

And for what?

Did McDonald’s really need to pay Steve Easterbrook $1.3 million in salary last year, plus another $15 million in stock and options? Is there no one qualified to run the company who would work for less? Did Easterbrook bring some incredible knowledge of hamburgers and fast food service that no one else possessed?

I’m not picking on Easterbrook, I’m just pointing out that most large companies are ongoing concernrns with many functioning parts run by division heads with exceptional knowledge of their areas. They aren’t Apple relying on Steve Jobs to bless the next iPod or iPhone. Tomorrow, McDonald’s will still makes fast food. It might try out meatless burgers. It might tweak the breakfast menu. But, surely, there’s someone who would take the management helm for a wee bit less than $16 million.

And What About General Motors?

Mary Barra earnrned $21 million last year, with more than $2 million in salary. This is a car company that was able to jettison its debt in 2009 and then have the U.S. governrnment create demand by offering the cash-for-clunkers program. The “new” GM went public almost exactly nine years ago at $34. Today it trades just over $38, a whopping 12% gain when the S&P 500 gained more than 120%. Why are General Motors shareholders paying millions for that?

Why do companies treat CEOs different from every other employee, where they try to get the most work for the lowest amount of compensation? I’d imagine there’s a person or two at GM – or Ford or Fiat Chrysler, for that matter – who would take the helm of GM for, say, $1 million. Maybe throw in a company car. But $20 million in stock? Not a chance.

In the 1950s, the typical CEO made about 20 times what the worker on the line made. Last year, that number was 287 times. It’s hard to argue that we’re almost 15 times better off for paying these people that much money.

Accountability Is the Hard Part

No one wants to rain on the compensation parade. Why would board members, many of whom run other companies, want to kill the goose that laid the golden egg? And stockholders? The largest stockholders are institutions run by some of the very same people who benefit from the circular system.

But this is where we need to be careful. In an election year with the word inequality thrown around, we’re likely to get a governrnment solution to a private sector problem. The only thing worse than effectively letting CEOs set each others’ compensation would be to require governrnment approval. If that happened, we’d likely see many companies go private and IPOs dry up as managers and owners did their best to avoid the bright lights of big governrnment.

We wouldn’t be able to complain anymore but was also wouldn’t have many stocks in which to invest.

Maybe I’ll just fill out my corporate voting ballots as they come in over the next year. I’ll cast my vote to throw out as much of the board as possible. It won’t help, but it will make me feel better.

Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.