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CEO Salaries: A Disturbing Trend for Minority Shareholders

Aug 8, 2016

In this issue:
» How did the seven Sensex survivors perform over 25 years?
» Vivek Kaul's report on GST
» An inspiring interview with Vicki Saunders
» ...and more!
00:00
Richa Agarwal, Research analyst

Executive compensation is always controversial. But ultimately, there are no clear answers to how much a CEO should be paid.

For the average employee, salary and appraisals are linked to performance. Do the so-called leaders follow this model and lead by example?

Doesn't seem so. As per an article in Firstpost, the average CEO salary at the top listed private sector firms has doubled in the last two years. In comparison, the bottom-line of these companies has grown merely 11%.

Now, we're far from being anti-capitalists. But with such a large gulf between a firm's performance and executive compensation, questions need to be raised.

And here is another interesting fact: The average CEO of a private listed company is paid almost 70 times the CEO of a public listed firm! Further, the gap between median employee salaries and CEO compensation is widening.

These are disturbing statistics. The trend does not bode well for minority shareholders. Lack of shareholder activism and clear regulations are partly to blame. But so far, no serious concerns have been raised. And it may take a long time for the system to address these issues.

Until then, a minority shareholder could take his stock selection skills a notch higher by analyzing the trend in management compensation versus the company's performance (and long-term value creation).

As an analyst who regularly meets with managements, I can safely say that management quality is almost always better when austerity and cost consciousness are obvious. Apart from the company's financials, the office set up, the car the management drives, and the analyst meetings (ostentatious or economical) can provide insights here.

This reminds me of a meeting my team and I had last year. We were looking for Hidden Treasure probables and met the promoter of a niche small-cap company. His office was a simple room in the house where the chairman resides with his family. This wasn't the basis of our recommendation, but management frugality is certainly a quality we appreciate.

A few months after we recommended the stock, the chairman treated us to another impressive gesture. He forewent the commission part of his remuneration, which was a significant percentage of net profit.

In response to a thank you note from a very well-known value investor, the promoter responded that he leads a simple life, which can be more than met by the dividends he receives. He further suggested that he ought to live up to the expectations of the company's shareholders who have shown faith in him by investing in his company. And as they receive only dividends, it should be the same for him.

Investing with such promoters and managements is not the sole key to successful investing. But awareness about these matters could go a long way in protecting downside risks.

Do you think management compensation should be in sync with corporate profitability? Let us know your comments or share your views in the Equitymaster Club.

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------------------------------

03:00 Chart of the day

Recently, my colleague Tanushree asked a potent question in a recent edition of The 5 Minute WrapUp:

When Will You Start Owning Sensex 2030 Stocks?

Now, why is this an important question? I have two reasons...

One, many investors do not take a very long term view of stock investing. They invest based on tips, stories, themes...the ideas that are most talked about in friend circles, newspapers and television.

Two, many investors believe that investing in index stocks is the safest way to invest in equities. They believe that stocks that are part of the benchmark Sensex or Nifty index are always safe bluechips. But that's not the case.

Tanushree and her StockSelect team have carefully studied the history of Sensex companies. In fact, a few years ago they examined companies that were part of the Sensex in 1992...particularly the ones that later dropped out of the index. I would highly recommend you read 1992 batch of Sensex stocks Series. If you had invested in these stocks banking purely on the big-bang economic reforms that took place then, you would have had a pretty bumpy ride.

Here's what Tanushree wrote...

  • Now, in August 2016, we saw the passage of another landmark reform. Experts call the Goods and Services Tax (GST) the most important reform since '91. The bill could be a driver for the economy for a very long time. And one may assume that fundamentally well-placed stocks today could go on to unleash the big gains expected from a post-GST market. The sentiments today are reminiscent of Sensex '92.

    Unfortunately, not every Sensex '92 stock went on to create shareholder wealth. Many faded into oblivion. In fact, only seven Sensex '92 companies remain on the index today. And we can expect many Sensex '16 stocks to go the way of Premier, Hindustan Motors, and Century Textiles. Indeed, few are likely to feature on the Sensex of, say, 2030. The blue chips of today may not be the blue chips of tomorrow.

    Of course that does not mean one should not be investing in any Sensex stock today. We see steep earnings upside in few big blue chips over next three to four years. Hence, these could be amongst the safest investments for the medium term.

If you are interested to know more about the companies that have caught the StockSelect team's attention, do read this special report - Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave that is still available for download.

By the way, here is an interesting bit. Out of the 30 companies that were part of the Sensex 25 years ago, only seven have managed to still be part of the Sensex - ITC, Hindustan Unilever, Reliance Industries, Tata Motors, Tata Steel, Mahindra & Mahindra, and Larsen & Toubro.

We did some data crunching on these companies. If you had invested in these companies in 1991 and held them for 25 years, your returns on each of the stocks would be as shown in the chart. The important thing to look at is not the size of the company's turnover, but its profitability and return on capital.

How Did Sensex Survivors Perform over 25 Years?

*Based on stock price performance from 5 Aug 1991 to 5 Aug 2016. Dividends not included.


04:00

Speaking of GST, my colleague Vivek Kaul, has brilliantly explained what you probably did not hear about GST from the mainstream media. I strongly recommend that you download Vivek's free report on the GST, 'What the Mainstream Media DID NOT TELL YOU About GST.'

04:10

Now for something very inspiring...

Our friend Ritika Bajaj at Common Sense Living recently met one of the world's most influential leaders - Vicki Saunders. For those who haven't heard of her, Vicki Saunders is an author, entrepreneur, award-winning mentor, advocate of entrepreneurship, and founder of SheEO. In 2015, she was included on a roster of the world's 100 most remarkable women along with Hillary Clinton, Michelle Obama, Oprah, and Malala by Empowering a Billion Women Worldwide (EBW 2020).

In this engaging interview, Vicki Saunders talks about being a woman, starting a business and changing the world. This is a must, must read. Read the full interview here: Meet the SheEO - Vicki Saunders

4:30

Indian stock indices are trading in the positive territory today. Barring telecom and capital goods, all sectoral indices are trading on a firm note with stocks from the oil & gas and realty sectors leading the gains.

The BSE Sensex is trading higher by 82 points (up 0.3%) and the NSE Nifty is trading higher 24 points (up 0.3%). The BSE Mid Cap and BSE Small Cap indices are trading higher by 0.8% each.

04:50 Investing mantra

"You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst) and Ankit Shah (Research Analyst).

Today's Premium Edition.

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The government announced an extension of the specified minimum import price (MIP) on 66 steel products for another two months. Will the Extension of MIP help the Steel Industry?
Read On...Get Access

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6 Responses to "CEO Salaries: A Disturbing Trend for Minority Shareholders"

Prakash

Aug 11, 2016

This reminds me of one company who bought helicopter. I think it was Crompton greaves. CEO's should get fair share of profit but at the same time salary cut must be enforced if company is is making loss.
Please give name of the chairman and the company who voluntarily took a cut. Such promoters are rare and must be respected.

Like 

Ranjit

Aug 9, 2016

the salary & perks must be in direct variation with the Company's quarterly profit/Loss.

Like 

Sharad Singhvi

Aug 9, 2016

The growing chasm between average employee salary and C-suite salaries is indeed a matter of concern. In my opinion the Base Salary for the highest paid employee should at best be less than 10 times the median salary and a significant part, maybe 50% of overall compensation should be linked to business deliverables

Like 

SJ

Aug 9, 2016

Is this something to debate on? Who would come out and say, "You see, CEOs need to be treated specially especially when it is about compensation."

Like 

Vipul Jasani

Aug 9, 2016

Hello,

I do not agree with you completely. There are mainly 2 parameters that needs to be considered before deciding salary of CEO such as

1. Profits earned by company.
2. Return to shareholders.

Salary should be linked and should be capped if company is not giving returns to shareholder for ex. recently I read in news paper that all PSUs are expected to give 30% of NP as dividend. That should be made compulsory for all public limited companies.
why anyone should allow to use public money if he is not giving return to shareholder, is it not crime??
Secondly managemnet should not be alloed to take fat salaries which they are earning beacuse of the support of shareholder money.
There should be cap of max 20 times the lowest salary of the employee of the company.

In my opinion Govt. policies (Globally) are creating criminal and unethical society in long run. and that is the reason crimes are on rise in various forms!!!
Root cause of all the problems in society is due to favourism to rich and policies that increases the difference between poor and rich.

Thanks

Like 

R.Sathyanarayan

Aug 9, 2016

The overall performance of a company happens as a conjunction of efforts of personnel working at various platforms in the corporate structure. The CEO no doubt plays (or supposed to!) a key role in leading in terms of setting clear policies and goals and driving his team to achieve the same.

However blanket linking of remuneration or commission/ incentive to profits is not a very welcome policy.
There could be an internal barometer in order to assess his or her individual performance through certain means as deigned by the top management. This could decide the quantum or percentage or whatever that could be paid to a CEO.

Regards
sathyanarayan

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