We are foolish to pay CEO's so much of our money, almost as foolish as we are to hand over our tax dollars to incompetent bureaucrats. You probably never thought you would read a JAM Views post that claims someone makes too much money, but let me explain how this CEO pay is totalitarianism, not capitalism.
Recently, Larry Culp was installed as the new CEO for General Electric (GE). JAM Views has previously covered the GE disaster of replacing Jack Welch's meritocracy with redistribution personnel policies, as well as the embarrassing removal of GE stock from the Dow Jones Industrial Average (DJIA)("America is a Meritocracy" 7/29/2018). Larry's base pay is set at $2.5 million with bonuses of $3.75 million which he will also definitely receive. He also receives $15 million per year in stock, which we call "performance share units" so that we can manipulate the tax treatment of this income. Now, follow me on how the math works. GE stock has been crushed to $12 per share due to the above-noted failures plus 1,000 more. GE stock will rebound to $18, or even $30, if Larry just stabilizes the company, stops making more mistakes, and turns on the GE Public Relations Department to claim the worst is over. When the stock recovers to $18, just $6 higher, at any time over the next four years, Larry will receive $45 million extra. When the stock recovers to $30 at any time over the next four years, Larry gets $227 million. If by chance Larry fails at this task, we still have to pay him $12 million to leave, for failing!
I keep saying "we" because GE is a public company. Larry is not the entrepreneur founder of GE. Larry doesn't even own 1% of the company's stock. Larry has no risk, no skin in the game. Larry didn't mortgage his house, pledge his kid's college fund as bank collateral, or sell the golden retriever to pay for the first company brochure printing. Larry did not design and patent the titanium turbine blades which revolutionized the industry. If he did any of these, he deserves to make "more money than God." But, Larry is a technocrat working as an employee, and he is paid with Other People's Money (OPM).
So, how does this happen? Let me explain. Larry was represented by an executive headhunter who gets paid one-third of Larry's first year pay. I have been pitched by recruiters to accept executive jobs (not for $227 million unfortunately!), and I have also paid these recruiters for executives I have hired in our company. Headhunting is a small, specialized community similar to sports agents who obtain ridiculous $300 million Major League Baseball contracts. Just as the team owner has been brainwashed to believe he needs that player to win and he needs to appease his fan base, the corporate directors believe this is just the necessary price to get the "good" CEO. They believe that if they do not pay this extortion then an activist hedge fund will have them all replaced, and their own gravy train will end.
But, it is actually more insidious than just the blind leading the blind with other people's money. Larry most assuredly comes from the schools of Price Waterhouse Coopers (PWC), KPMG and other consulting groups who advise and run companies once the founders with the brains and the guts have long since left because they couldn't deal with the inevitable bureaucracy. Larry was already on the Board of Directors for GE. He was already in the club. The Directors and the Executive Inner-Circle all have a tremendous number of stock options, or performance share units, and their self-interests drive them to make decisions for short-term share price movements.
The Board of Directors and the Executives all grant each other stock options and then implement the financial engineering, mainly stock buyback programs, which move the shares past the option strike prices. The repurchases shrink the number of shares outstanding and therefore simply increase the earnings per share, which then triggers bonuses which were based on this metric. Between 2007 and 2016, the S&P 500 companies spent over $7 trillion, 96% of their total corporate income, on these programs instead of spending it on research & development, infrastructure, and cash acquisitions which create a healthier and more valuable company long-term (after these guys retire with their parachutes).
Just as with government secret economic decisions, the problem here is that no one ever clearly explains to us how this terrible economic behavior occurs inside public corporations. Their misdirection causes us to focus on how much beer someone drank at a high school party 30-years ago, while they are writing each other $227 million checks. But, all of us can calculate how Larry's pay is, literally, 500-times the pay of the factory line worker who makes the GE titanium turbine blade which must meet incredible torque and fatigue standards or someone dies. Most importantly, the worker himself can calculate it, and this is why he votes for unions, higher taxes on people like Larry, and more government control which inevitably causes him to lose his own job. It's Larry's fault. It's GE's Board of Directors' fault for not leading by example, for not living by the ideals of free market capitalism, themselves. Larry and his gang are robbing the future of GE and making it impossible for others to teach and persuade the masses on the benefits of capitalism.
Republicans recently saved the country with lower taxes and less regulation but then blew it by raising spending and increasing debt just like all the politicians who came before them. Therefore, educated people know that everything the establishment says, regardless of the party, is simply designed to promote their own self-interests and likely has no relevance to the truth. The GE Board stated, "Larry is a proven executive with a long track record of superior execution, and the Board's package to attract Larry is overwhelmingly tied to performance."
Have you ever heard of the "dead cat bounce?" In investing, we refer to the inevitable stock rises after a company's share price has taken a dramatic beating as, "If we threw a dead cat off the top of a building, even the cat would bounce a little." Without question, Larry's GE stock price will at least have a dead cat bounce, and he will collect hundreds of millions of dollars from a public company in which he carries no risk. How can we teach people proper economics when this type of behavior is going on out there? The people will rightly reply, "I can't hear what you're saying, because I'm too busy watching what you're doing."
"I will dress him in your royal robes, and I will give him your title and your authority...He will bring honor to his family name, for I will drive him firmly in place like a nail in the wall...the time will come when I pull out the nail that seemed so firm. It will come out and fall to the ground. Everything it supports will fall with it." - Isaiah 22:21-25