CEO Salaries Have Gone Too Far...

So if you've been paying attention to CNBC lately, you probably would have noticed this article: Alphabet CEO Sundar Pichai's compensation topped 200 million dollars in 2022. In total, it was actually 226 million, consisting of a 2 million dollar base salary, with 218 million dollars worth of stock awards, and six million dollars for personal security. While this figure is certainly a standout, it's certainly not the first time we've seen big name CEOs making mega bucks. In 2022 alone, Tim Cook earned 99 million dollars over at Apple; Microsoft CEO Satya Nadella earned 55 million; Reid Hastings made 51 million over at Netflix. The list goes on.

While there's always been a strong debate over what constitutes appropriate executive compensation, considering many executives make hundreds of times more than their average employees, the debate has really hit it up in 2022 specifically. In recent times, we've also seen, in many cases, these CEOs make the decision to lay off significant percentages of their workforce. So in this video, I want to take a deep dive into the controversial topic of CEO compensation to see what's the root of this problem and what can we do about it.

Thank you. So why is there so much debate around the topic of CEO compensation? Well, at its core, it comes down to a battle between two perspectives: you have the perspective of the shareholders and the perspective of the workers. You see, from the workers' perspective, this debate seems absolutely ridiculous. According to the Economic Policy Institute, in 2021, the ratio of CEO to typical worker compensation was 399-1, up from 366 to 1 in 2020, and a big increase from 59 to 1 in 1989 and 20 to 1 in 1965. But it doesn't stop there. They also note that CEO pay has grown even faster than the stock prices of the companies that they run. From 1978 to 2021, CEO pay grew by 1460%, outstripping S&P stock market growth at 1063%. An argument from workers has always been that this kind of income taken up in the boardroom is very excessive, considering workers' wages have only grown 18.1 percent across that same time period.

That's one point that understandably gets people a little disgruntled. But in the last year or so, it's fair to say that this frustration has hit new all-time highs. Because while these CEOs have pocketed tens of millions, if not hundreds of millions of dollars in compensation—much of which being bonuses or stock awards—many of these high-flying tech CEOs have also been firing significant percentages of their workforce. As I said at the start of the video, Google CEO Sundar Pichai took home 200 million dollars for his work in 2022. While in January of this year, he wrote a blog post detailing how 12,000 workers at Google would be losing their jobs. While he noted these changes weighed heavily on him and he takes full responsibility for the decisions that led them there, it doesn't really change the fact that maybe if Google didn't pay their executives exorbitant amounts of money, they might have been able to keep a few of their on-the-ground workers.

Well, how about this one? Ruth Porat, Google's CFO, said in a company-wide email in April that the tech giant would need to cut back on things like employee fitness classes, staplers, tape, and laptop replacements, while she herself took home 24.5 million dollars in 2022. It's understandably a very frustrating situation for workers because it comes across as extremely hypocritical. Now, I've picked on Google here because it's their compensation packages that are making headlines at the moment, but I should note that this is happening not just at Google but across the board. Meta, Apple, Disney, Amazon, Microsoft, Twitter, and PayPal have all announced rounds of layoffs, some more extensive than others.

Here is a table showing what their respective CEOs took home across 2022—in most cases, tens of millions of dollars while workers lost their jobs. And just to rub salt into the wounds, in most cases, these CEO paychecks didn't even take much of a hit in 2022 compared to what they earned during the boom times of 2021. Did you know Simply Wall Street is actually a really amazing resource to help you track CEO compensation? They're also the sponsor of today's video. For example, here I've typed in Meta, and you can see their CEO Mark Zuckerberg took home 27.1 million dollars in total compensation last year. You can also see their tenure, their stock ownership, and if you scroll down, you can track how their compensation has fared over time versus the earnings per share of the company.

But even better, if you scroll down a little bit further, you can actually get all of these stats for the entire leadership team as well. This is just one of the many tabs you can explore on Simply Wall Street, so check it out using my referral code down below, and you can also score a massive 40% off their Premium plan or sign up for an extended 14-day free trial and explore things like valuation, future growth expectations, past performance, financial health, dividends, and a whole lot more. So remember to use that referral code, but with that said, let's get back to the video.

So that's one side of the argument, but then you have the perspective of the shareholders. In their eyes, the number one job of the CEO is to keep the business humming as efficiently and as profitably as they can so that shareholder returns are maximized over time. Yes, obviously paying employees fairly is very important, but it seems more in the grander context of creating the most productive workforce possible to keep profits rising. Long story short, in the eyes of the shareholder, the CEO could make literally five decisions a year and be worth 200 million dollars easily if those five decisions generated really strong long-term shareholder returns.

Have a listen to Elon Musk talking about this point. Last year, he said, "You know, every good hour or even minute of thinking about Tesla and SpaceX has such a big effect on the company that I really try to work as much as possible. You know, Tesla's getting to the point where every high-quality minute of thinking is a million dollars in impact on Tesla. I mean, there are many, many instances where I was able to improve the financial outcome of the company by a hundred million dollars in a half-hour meeting." If Elon is able to save Tesla that much money through just a few minutes of decision-making, there's obviously a strong argument from shareholders that it is worth every penny.

So there are definitely two perspectives to consider around this argument of CEO pay, but it certainly doesn't stop the fact that it's very annoying for most people to see corporate executives earning tens of millions of dollars in stock awards or bonuses while hard-working citizens get fired in cost-cutting efforts. So what needs to be done? Well, recently Mr. Warren Buffett, CEO of Berkshire Hathaway and one of, if not the most honest capitalists you could find, has some very wise words on the topic.

Now here, he's talking specifically about bank CEOs, but his line of thinking can easily be applied across all businesses. "They've got to have something to lose themselves. I mean, in 2008, all kinds of trouble was caused by the banks, but no bank executive—the CEOs that made those decisions—they all continued fine. You know, they may have lost their job, but they get their pensions. I had some friends in banking; I may not have any by the time this program is over. But I would suggest that anybody, the CEO—anybody that's CEO of a bank that screws up and causes shareholders a lot of money—that they, in effect, you know, they've got no pension from the bank. They go back to living, you know, like a person that works on the production line of Ford or something like that. I would suggest to the directors of the bank that sat there for five years and listened to people come in and give reports and all that sort of thing that they get back all their directors' fees, and I mean, there’s got to be consequences to the people who make the decisions."

The answer is to have the board of directors seal. "I got it, this guy screws things up; I've got to give back all this money that I've gotten—300,000 a year or whatever it may be—and pre-stock." And that's kind of the trick: to put terms and conditions in the compensation package that reward the CEO with bonuses when the company thrives, but also ensure there are clauses that lower their pay if the company suffers.

Now, many will argue that this already exists in the business world, and it does. In fact, many of the companies I've listed in the video already have performance-based compensation packages. But the problem with these is that the CEO never really feels the pinch if the company suffers. Yes, they might miss a tranche or two of their annual bonus, but it's not like any of them are eating microwave mac and cheese every night—unless, of course, it's by choice.

For example, in that clip, Warren referenced the 2008 global financial crisis, which was brought on by catastrophic mismanagement at the banks. Now, while these bank CEOs lost their jobs and ruined their reputations, it's true that none of them really suffered financially when all was said and done. In fact, as I noted in a recent video, many of these CEOs actually walked away with handsome bonuses for destroying America's financial system. Lehman CEO Dick Fuld walked away with 34 million in 2007; John Thain at Merrill Lynch spent 1.2 million on office renovations at that time. Charles Prince at Citigroup resigned as CEO in late 2007 and received 10.4 million dollars in bonuses. Joseph Cassano of AIG owned 34 million dollars in bonuses in 2008.

Now, that was obviously an extreme case where Warren's ideas would have worked wonders, but that general compensation structure could still definitely be applied to any company today. The question, however, is whether there's enough willingness to change the way CEO compensation gets drawn up. You see, at the current time, CEO compensation is decided by the board of directors or an external compensation committee, but that game essentially just helps CEOs earn more and more every year.

As a result of what happened in 2008, in the last 10 years or so, around the world, more and more countries have introduced laws that give shareholders a say on CEO pay. But unfortunately, it's very easy to argue that these laws really aren't going to change much, at least not in their current form. For example, in the United States, a say-on-pay provision was ushered in when the Dodd-Frank Act, Wall Street Reform, and Consumer Protection Act were passed in 2010. Section 951 of the Dodd-Frank Act, which deals with executive compensation, requires that at least once every three years, shareholders have a non-binding say-on-pay vote on executive compensation.

While it's frustratingly non-binding, this does at least give shareholders a bit of a voice in what they would like to see as a compensation package, and it's also handy because if the company decides not to listen to their shareholders, at least that stands as public knowledge and could influence whether a board member gets voted back in later down the track. But despite these pros, I think most would come to the conclusion that a non-binding vote by shareholders on whether they approve a pre-prepared compensation plan is probably not enough to change the way CEOs are being compensated more broadly.

At the end of the day, it will likely take hefty legislation to give shareholders more power to decide how the management of each company is compensated and whether they are properly penalized if the business performs poorly under their leadership. But with that said, please let me know your thoughts and opinions on CEO compensation and what, if anything, should be done about it. Leave a comment down below. Please leave a like in the video if you enjoyed, subscribe if you'd like to see more, and with that said, I'll see you guys in the next video.