|
INTRODUCTION :
In looking to invest in stocks, I find it helpful to gain an overview
of the 'data properties' of companies in which to invest.
Price-to-earnings ratios, price-to-sales ratios, price-to-book,
debt-to-cash-flow, and other such 'properties' play an important part.
In addition, dividends and executive-compensation are factors
that I consider.
There is a 'pool' of over 6,000 stocks to invest in. I generally look
for stocks that pay a dividend for many years, while being profitable
for many years.
For example, I would favor Apple (which pays a dividend) over
Google-alias-Alphabet and Berkshire-Hathaway (which do not pay a dividend).
I have been burned several times with companies that eventually went
backrupt, as their yearly profits turned to yearly losses.
Almost without exception,
those companies have been ones that did not pay a dividend. In almost
no cases have I experienced a company going bankrupt when the company
has been paying a dividend for many years and continues to do so,
while remaining profitable.
I do not think a company with a strong profit margin and cash-flow
(like Google-Alphabet) is going to go bankrupt, BUT when I am deciding
between two companies to invest in, I am going to favor the one that
pays a dividend --- because, by doing so, that company is paying
attention to its stock investors, not just its bond holders.
On CEO compensation:
I am 'turned off' by companies who seem to pay their CEO
(or CEO-and-Chairman) huge 'compensation' (salary
and 'awards' - the latter in cash and stock).
'Huge', to me, is over 10 million U.S. dollars per year
(circa 2017).
The company should be making profits 'out the wazoo' (CONSISTENTLY,
year after year) if the CEO is making more than 10 million per year.
Otherwise, I would not consider the stock a good investment.
I would not have trust in the board and the CEO.
In many large companies, the 'CEO Pay Ratio' is such that the CEO
is being compensated on the order of 300 times the annual compensation
to the 'median employee'.
I find such high pay-ratios outlandish because, even though a CEO may be
extremely talented in leading a company, he is not doing it alone.
He has a small army of lawyers, accountants, vice presidents,
operating officers, board members -- and so on -- to help him
perform his daily duties.
Once a company is paying the CEO at more than 30 times the compensation
of the 'median employee', I start getting concerned that there is
a 'you-scratch-my-back-and-I'll-scratch-yours' situation going on
between the CEO and the board of directors.
Namely, the board of directors give huge pay packages to the CEO (or
CEO-and-Chairman-of-the-Board) and the CEO rubber-stamps nice
pay packages for the board members, out of the profits of the company.
In addition to the magnitude of the current CEO compensation, the
'rate of increase' of CEO compensation is of concern to me.
Note that if a CEO is making $10 million per year and he/she gets
a 5% increase the next year --- that is an increase of $500,000 ---
an award that is much more than the ENTIRE YEARLY INCOME of several
of his employees added together --- ADDED ONTO his/her
$10 million per year income.
So if I see that a company is increasing CEO compensation on the
order of 5% (or more) per year --- even in years when the
company performance (revenues and/or 'net income') did not budge upward
appreciably, I am sorely tempted to cease investing any more money
in that stock --- and look to divest myself of that stock.
It is amazing to me that media outlets, for decades, have let
'conservative' politicians get away with loudly crying out
about how 'progressive' politicians are trying to
'redistribute wealth' away from the rich by doing things like
'raising the minimum wage' or 'closing tax loopholes'.
Meanwhile the federal-minimum-wage stays frozen for ten-or-more years
at a time --- while CEO compensation goes up at a far higher rate that
the Consumer Price Index.
If anything, many (not all) CEO's and corporations are redistributing
wealth --- to themselves --- while their employees fall rapidly behind.
Even middle-class salary-earners find their compensation going up at
only 3 percent (or less) per year --- while CEO (and vice-presidents
and board members) compensation is going up at 10 percent (more or less)
per year at many companies.
Over a ten-year period, this means that middle-class compensation is
barely keeping up with inflation, while CEO-and-VicePrez compensation has
gone up about 1.10 to the tenth power (= 160%) over 10 years ---
more than doubled.
Meanwhile, the typical middle-class salary-earner finds his/her
compensation has gone up about 1.03 to the tenth power (= 34%)
in 10 years time.
In 'absolute' terms (rather than percentages), the picture is even
more impactful. If a CEO making $10 million per year gets an increase
of 3%, that is $300,000. If an employee, making $100,000 per year
gets an increase of 3%, that is 100 times less --- $3,000.
$300,000 per year for CEO versus $3,000 per year for
a '$100K/year' employee.
And only $1,500 per year for a '$50K/year' employee.
If you add up increases like that over a period of 10 years,
the CEO increase is more than $3 million (with compounding),
while the employee increase is on the order of $30,000.
Roughly $3 million per decade for CEO versus $30,000 per decade
for a '100K' employee.
And for the employee making $50,000 per year, the result is about
half those figures.
$300,000 per year for CEO versus $1,500 per year for the '50K' employee.
300,000 / 1,500 = 200 times more dollars per year for the CEO.
Roughly $3 million per decade for CEO versus $15,000 per decade
for the '50K' employee.
NOW *THAT* IS RE-DISTRIBUTION OF WEALTH!
And it has been going on for more than 50 years --- from the 1960's
accelerating into the 2020's.
Components of Executive Compensation
Note that nowadays (circa 2017) the compensation of the CEO and NEO's
(Named Executive Officers) usually is composed of
multiple components, such as:
-
base salary
(usually on the order of one-million dollars per year)
-
stock awards
(often several million per year)
-
stock-option awards
(often several million per year)
-
'non-equity incentive plan compensation', i.e. cash bonuses
(often several million per year)
-
'change in pension value and non-qualified deferred compensation earnings'
(awards to be reaped in the future)
-
termination agreements under various conditions
('golden parachute')
-
'other compensation'
(such as company plane, home security system, etc.)
These 'components' can usually be seen in a 'Summary Executive Compensation Table'
in the annual
'Proxy' statements (Wikipedia link) mailed to holders (and voters) of stock
in the company.
Note that, when a CEO says he/she is going to forego their 'salary'
in a tough year, that salary is typically only about 10 percent
of their total annual compensation. (They usually do not give up
their stock awards, stock options, and cash bonuses.) What con-men
these CEO's are!
Original CEO's versus Current CEO's
In my view, many of the 'long-established' companies were started by
people who took a big risk and who worked through many years of
'lean times' in order to build their company.
Then, many years later, CEO's are 'recruited' to run their company
--- at ridiculously huge compensation levels. These new executives
are NOT taking the tremendous risks that the founders took ---
and they are, generally, not going to put in the super-strenuous hours
that the founders put in week-after-week and year-after-year.
To me, it is a travesty that 'later'-CEO's are paid outlandish
salaries that are an insult to the sacrifices that the original founders made.
When does CEO (and Board) compensation 'hit the fan'?
The modern rate of CEO compensation increases
is 'unsustainable'. Given the leaps-and-bounds that compensation packages
are taking year by year --- too-frequently more than 20-percent per year ---
it is likely that CEO compensation will soon be making significant
in-roads into the dividends (and profit-margins and cash-flow)
that stockholders can expect.
One problem, as I see it, is that the Boards of Directors are often
in a 'you-scratch-my-back-and-I-will-scratch-yours' relationship with
the CEO --- who is often also the Chairman of the Board.
In other words, the Board is awarding the CEO huge compensation while
the CEO is also seeing that the 'part-timer' Board is awarded nice compensation
(often more than $250,000 per year, circa 2017 --- a compensation
level that even full-time employees will never see).
This 'compensation feedback mechanism' is leading to an exponential
growth in Board member compensation as well as in CEO (and executive
vice presidents) compensation --- far beyond the growth rate in
compensation of the lower-level employees of the company ---
both percentage-wise and, especially, absolute-dollars-wise.
When CEO compensation is increasing about $1 million (or more) per year
while worker compensation is increasing at about $2 thousand per year,
no wonder there is worsening inequity of wealth (and much living
from paycheck to paycheck) in the overall population of the USA.
Eventually, even the stockholders will be feeling the pain --- as
executive compensation becomes a burden on the bottom-line (profit margin,
net income, cash flow) of the company each year.
These 'NEO compensation pressures' will lead to slower and slower
increases in dividends --- and even lowering of dividends ---
or elimination of dividends, even in good times.
The stock price (stock value) appreciation rate will also be negatively
affected, eventually --- thus providing another 'hit' to the stockholders.
Probable Expectations of CEO's
No doubt, CEO's see that 'celebrities' such as highly-paid football players,
basketball players, and baseball players are getting contracts
for about $25 million per year.
And CEO's see similar compensation for musicians and actors and
TV interviewers (Oprah Winfrey, Ellen Degeneres, Jimmy Kimmel,
Trevor Noah, Stephen Colbert, Seth Meyers, Jimmy Fallon, etc.).
Any CEO who thinks a lot about himself/herself must feel
that they deserve AT LEAST $25 million per year ---
considering their college degrees and management experience.
However, CEO's who think that way should consider that they
cannot drain a 3-point shot about 40 percent of the time.
Since these CEO's cannot consistently 'drain' 3-pointers,
these CEO's do not perform in venues drawing tens of thousands
of people paying more than $100 per ticket --- at least
10,000 x $100 = $1 million per game in ticket money.
In addition, these athletes bring in millions in income for
TV broadcasts of their games --- thus justifying the
$25 million per year 'compensation' to top-level athletes.
Neither are these CEO's performing their management duties
in TV series or movies --- like actors who are earning
millions of dollars per series or per movie.
The audience would be bored to death watching those CEO's in
their meetings (although it might be interesting to see one or two).
Further-furthermore:
These CEO's are being supported by a cast of lawyers,
senior vice presidents, accountants, and a large cast
of 'back office' employees.
And, in some cases, the CEO's get the benefit of
inventions and software created by engineers and
scientists that work for the company --- and many
of those income-producing inventions and improvements
did not come-to-be by anything that the CEO did.
Bottom-line:
These CEO's generally do not deserve compensation on the
order of $25 million per year --- because they cannot
repeatedly connect with a spiral to a tight end running
a cross-field pattern (like a star quarterback can)
--- AND the CEO's have a supporting cast of many fellow
employees who are making the CEO 'look good'.
The data in the following spreadsheet (& data-tables):
The following data is intended to give me an overview of the kinds of
companies that I may wish to invest in --- and some that I do not
want to invest in.
To help 'smooth out' the increases and decreases seen from year-to-year
(in CEO compensation and in Revenues),
the data is collected over a period of multiple years (preferably
at least 6 to 8 years).
So data is presented for a 'Later Year' and an 'Earlier Year'.
You might notice that there are some 'always in the news'
companies missing from this data --- such as
auto-makers like General Motors and Ford (periodically
needing a government bailout) --- and
financial institutions like Wells Fargo and Goldman Sachs
(constantly getting Federal Reserve & Congress handouts)
--- and sugar-sellers like Coca-Cola --- and tobacco companies.
These are companies that I will probably never invest in
--- for one reason or another.
The data consists of (spreadsheet) columns for:
-
A - Company Name
-
B - Stock Symbol
-
C - a 'Later Year'
-
D - Revenues in the 'Later Year'
(in billions)
-
E - CEO compensation in the 'Later Year'
(in millions)
-
F - an 'Earlier Year'
-
G - Revenues in the 'Earlier Year'
(in billions)
-
H - CEO compensation in the 'Earlier Year'
(in millions)
Then there are (spreadsheet) columns calculated from
the data above:
-
I - Years Difference
('Later Year' minus 'Earlier Year')
Col-C - Col-F
-
J - CEO Compensation Difference (in millions)
Col-E - Col-H
-
K - CEO Compensation Difference Per Year
(in percent per year)
(100 * Col-J / Col-H) / Col-I
-
L - Revenue Difference (in billions)
Col-D - Col-G
-
M - Revenue Difference Per Year
(in percent per year)
(100 * Col-L / Col-G) / Col-I
CEO compensation is ROUGHLY correlated to
the annual revenues (company size), in many cases.
I considered using another measure of company size or performance
--- such as number of employees or net revenue figures (such as
'net income', EBITDA, or 'profit margin').
But some companies use lots of contract labor that is not
considered employees. And employee figures are complicated
by the fact that part-time, seasonal, or temporary workers
may be counted or not counted.
Furthermore, the volatility of profit (and net income)
figures from year to year led me to use a less volatile
measure of company performance and size --- the
Revenues for the year.
My data collection (and updates) may occur for some companies
and not others, as I collect the data at various times for
some of the several hundred companies.
So the years-range (Later-Year to Earlier-Year) may vary
from company-to-company.
To calculate an 'average-annual-rate-of-change'
(columns K and M), I divide
CEO-Comp-Diff (column-J) and Revenues-Diff (column-L)
by LaterYear-minus-EarlierYear (column-C minus column-F).
And to facilitate comparing companies no matter their size,
I divide CEO-Comp-Diff and Revenues-Diff
by the EarlierYear CEO-Comp-Diff (column-H) and
EarlierYear Revenues-Diff (column-G),
respectively --- to get a PERCENT-Per-Year rate-of-change.
Note that there is generally a compounding effect in the
CEO compensation increases, and these simple arithmetic
operations do not yield percentages that take into account
a compounding effect.
I could have used calculations involving logarithms to
get percentages that take into account compounding effects
--- but, in order to keep the math simple, I decided to
use simple arithmetic (subraction, multiplication, division).
These 'simplified' (average) Percent-Per-Year numbers are sufficient to allow
me to (admittedly, somewhat roughly) compare one company to another ---
in terms of their rates-of-change of CEO-compensation and
of Revenues.
AND, for any given company, the 'simplified' Percent-Per-Year
numbers allow me to compare the company's rate-of-change of
CEO-compensation to its rate-of-change of Revenues.
Note that it is 'unsustainable' for a company to keep raising
the CEO compensation at a rate faster than the rate of
Revenue increase.
Any company typically has a profit margin that is an
essentially fixed (or limited) percent of its Revenues ---
whether that company is a grocery company with low profit
margins of about 3 percent or a technology company with
a high profit margin of about 25 percent.
Hence, if a company keeps raising the CEO (and NEO and board)
compensation at a rate faster than the Revenue rate of increase,
those 'compensation' increases will eventually significantly
'eat into' the company's profit margin and cash flow.
So I tend to downgrade companies for whom the CEO compensation
growth-rate (column-K) is greater than the Revenue growth rate
(Column-M).
That is, I do not 'buy into' such companies. And, if I already
own stock in such a company, I do not buy further stock in
that company --- and I look to 'unload' such companies,
especially if it looks like their Revenues are taking a
downturn for the forseeable future.
Sources of data in the following spreadsheet (& data tables):
The annual revenues are usually seen in two sections of the
company's annual report (the
Form 10-K filed with the
SEC):
AND
The CEO compensation is usually seen in the 'Summary
Executive Compensation Table' in the
Proxy statement that is mailed each year to voting stockholders.
The compensation of other NEO's (Named Executive Officers) is
typically about a third of the CEO compensation.
Most of this data has been sourced from 'annual reports' and
'proxy statements'--- for years as indicated.
Note that the revenue and/or CEO compensation data for
various years may be 'fiscal' years of each company ---
not 'calendar' years. And the start and end months
of 'fiscal' years may not be the same from
company to company.
For any given company in the spreadsheet (and data-table below),
its total Revenues for a fiscal-year are shown
along with the total Chief Executive Officer (CEO)
compensation for that fiscal-year.
Note that declines in revenues may sometimes result in lower
CEO compensation --- but typically not to the same extent
as the revenue decline --- and sometimes CEO compensation
actually goes up while revenues go down.
HUGE / HIDDEN CEO Compensation:
There are some companies for which the reported CEO compensation
is definitely not reflective of the income (or wealth) of the CEO
--- because they report a 'minimal' annual
salary-&-stock-awards-&-bonuses-etc
in the Proxy statements.
Examples are huge companies such as:
- Tesla (Elon Musk)
- Facebook/'Meta' (Mark Zuckerberg)
- Amazon (Jeff Bezos)
- Apple (Tim Cook)
- Berkshire-Hathaway (Buffet & Munger)
For these companies, I typically used the compensation
(in Later and Earlier years) of a highest-paid NEO,
such as a Chief-Financial-Officer or Cheif-Operating-Officer.
I leave it as an exercise for the reader to figure out why the
CEO's are 'playing these games'. Hint: taxes
Precision of the data:
The data (revenues in billions and CEO compensation in millions)
are generally presented to at least three (3)
'significant digit' accuracy.
For some small companies, with low compensation and/or low revenues,
some figures may be shown with 2 significant digits.
Three digits are sufficient to express the reported values to within
one percent accuracy (or better).
For the 'rough comparison' purposes of this data, presenting more digits
would be 'over-kill'.
Accuracy of the data:
The accuracy of the data depends on how accurately the companies
report the CEO compensation data in their Proxy statements and
how accurately they report the Revenues data in their annual reports.
Enough of this Introduction.
The 'Data' follows --- with info on its format(s)
and how to access it.
|
