You're not going to find laborers willing or able to do the same job for a grand a year. Likewise, you might be able to find a decent manager trainee or two straight out of college willing to start at 10k or 20k a year, but not anyone with experience and they won't hang around long at that pay rate. Without labor there is no product, no sales, no revenues. A similar albeit weaker argument could be made for managers. So unless demand for the product has dropped quite a bit, mass layoffs don't make a lot of sense.
But I'll bet the line of qualified applicants for CEO willing to work for a half a million a year will stretch around the building. Bingo, there's your savings, immediate savings, megabucks a year straight to your bottom line overnight. There's a stock that can suddenly pay much larger dividends, or at least continue paying a dividend at all. That's a stock that commands my attention.
So what's that CEO doing that would possibly persuade us to keep them on the payroll? What's the downside of replacing them for a lot less or just eliminating their entire job? As a former investment manager, I've asked this question often of clients and colleagues. Below the fold are the most common answers I get and some fictional, possible responses to consider.
The CEO founded the company and therefore owns it.
First of all, if it's public then by definition they've sold it to shareholders and the CEO no more owns that company than Toyota owns your Prius or Home Depot owns the shingles on your roof. Second, for the vast majority of familiar firms, the CEO had nothing to do with starting the company. Unless that CEO owns more than 50 percent of the outstanding stock, he's serving solely at the pleasure of the actual owners, the stockholders. If we as owners make it a practice to pay our employee[s] twenty or thirty or a hundred times more than we need to, we might be admirable, generous people, but probably not the sharpest, most successful investors.
Ten million or twenty million dollars sounds like a lot, but it's just a drop in the bucket.
It's only a drop in the bucket when we're talking about one employee, i.e., the CEO. When it's the exact same ten million that goes to 500 people in labor or 50 in management, suddenly it's excessive spending that cannot be justified to shareholders and everyone, especially those who make the least, has to pitch in and sacrifice. It's also often bullshit: ten million dollars plus or minus can indeed affect a quarterly or yearly earnings report enough to have an exponential effect on both the stock price and any dividends paid.
The CEO works really, really hard and therefore earns it.
Wow! The CEO works a hundred times harder than any other employee we have or can find? Good grief, the man must be a world-class athlete. Or maybe he has a time machine in his office that allows him to put in hundreds of hours a day?
The CEO is critical to the company, without him it fails and he is the only one willing and/or able to perform as required.
Umm ... are we sure about that? If the CEO-employee happens to be one of a tiny few people who can make the last minute jumpshot or TD, if the CEO happens to be the golden voice that sells a million albums, or if the CEO is the one personally making the majority of every sale and no one else can do it, maybe, just maybe. So the obvious question would be ... is he?
Hey, I'm making money so I'm OK with his guy.
At least that beats the other lame excuses but there's still two big problems. Assuming we don't want to make way more money and our employee is delivering, by all means let's keep him on our payroll. But if there's a single losing quarter or a bad year, wouldn't that render this rationale false, especially if we can turn things around overnight by simply letting one multimillionaire go? And if that's true for the CEO making ten million, it's true for labor, too.
OK, you got me, the CEO got a fat contract from the existing stockholders before I came along and he's sucking them dry.
Bummer, sucks to be one of those stockholders then. But tell me, outside of a rare, near certain sure thing or a huge potential payoff for a small risk, why would we want to be one of them?
Now the real answer to my hypothetical is most folks shrug their shoulders, say that's the way it's generally been done and what is the alternative? As a pragmatic, steely eyed investment advisor, I don't have a great answer either. So maybe it's time to challenge that convention.
Obviously the numbers above are made up to keep things simple. In many cases the CEO's pay really is a drop in the bucket compared to labor. But if we add in the pay for other big wigs that usually changes the equation quite a bit. I can think of several examples right off the top of my head where a single CEO or a tiny group of senior execs made enough money to substantially change the earnings report, during a period when the stock went sideways or down, and in which the lowest paid employees suffered layoffs and all kinds of erosions in wages and benefits.
If a company justifies layoffs and other cuts to the lowest paid employees for economic reasons, while awarding enormous bonuses and other perks to the CEO saying they somehow earned it, it's pretty clear what's going on: the CEO isn't just fucking over the employees, he's fucking over the owners of the company. Why an owner would put up with that remains a mystery.