Are these CEOs cheating investors? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are these CEOs cheating investors? 

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In this issue:
» Are SIPs the best way to beat markets?
» India should target FDI and not FII, feels Raghuram Rajan
» Why does Warren Buffett hold cash?
» A slow growth decade looms ahead for China
» ...and more!

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In a manner that is more tongue-in-cheek, a leading magazine once commented that a highly skilled CEO is hard to find. Highly paid CEOs on the other hand, are everywhere you look. So true isn't it? A recently released list of India's highest paid CEOs has demonstrated just that. It is full of names that have taken home a bounty. But in terms of adding value to their respective firms, haven't done any better than their peers. The case of Mr Naveen Jindal, easily India's highest paid CEO is an interesting one. At Rs 730 m, his package is more than 10 times greater than the head of Tata Steel, India's most efficient steel producer. Furthermore, as The Economic Times points out, it is hardly surprising to know that Mr Jindal's remuneration is decided by none other than Mr Jindal himself. We are sure that stories behind the remuneration of some other names in the list would lead to similarly shocking revelations.

To be fair to us Indians though, this CEO high handedness prevails in developed nations as well. No one can forget the hundreds of millions of dollars that were doled out as bonuses to Wall Street CEOs in spite of one of the worst episodes of wealth destruction in recent history. And even after the carnage of this magnitude, the problem is far from being solved. There are still plenty of arguments underway over the best way to reward corporate leaders.

The best insight on the subject though could be found from, who else, but Warren Buffett. And just like his views on other topics, it is pretty straightforward. He believes that compensation is not rocket science. And he has very simple systems to compensate people. The whole crux of it is the fact that he doesn't believe in paying people for things that they have nothing to do with. Thus, if crude oil goes from US$ 30 to US$ 60, there's no reason to pay an oil executive for that. On the other hand, if a CEO of an oil company has a very low cost structure for finding new oil fields, Buffett would like to pay him crazy for that. Because this is the job the CEO has been hired for. Thus, to give people checks for something they have no control over is crazy. It also works the other way round per Buffett. If tomorrow oil prices go down and the CEO still has lower finding costs, he would still continue to pay the guy like crazy.

So there you have it. CEOs are not god's gift to mankind and hence, should not be paid salaries that are unjustifiable. They should be judged on certain internal parameters and paid depending on whether their objectives have been met. Doing it any other way is akin to stealing from the pockets of shareholders we believe and this should be avoided at all costs.

How, according to you, a CEO's pay structure should be designed? Do share your comments with us or post your views on our Facebook page / Google+ page

01:33  Chart of the day
Today's chart of the day highlights how India is the only BRIC nation where interest rates have not come down since the peak of the previous asset bubble i.e. the 2004-07 period. All the other BRIC nations on the other hand have chosen to lower rates for their respective economies. The reluctance of Indian authorities is mainly on account of higher inflation that has refused to come down. And as long as the same remains at elevated levels, there could be no respite on the interest rate front we believe.

Source: LiveMint

Holding cash is actually not a very good idea as it earns next to nothing in terms of returns. This is fundamental truth about cash which is why legendary investor, Warren Buffet, does not like it. But does it mean that he would never hold cash? This is not entirely true. The thing is that Buffett looks at cash like any other asset class. To be very specific, he looks at cash like a derivative option. The only thing is that unlike other options, it does not have an expiration date and strike price. But the value of the underlying is the value of all other asset classes. So if the value of the option, in this case cash, is cheap vis-a-vis the value of other assets, then he would hold cash.

This means that if he thinks that the low returns on cash can be compensated by its ability to buy an asset in the future then he will hold cash. The important thing to note here is that he looks at the value of cash vis-a-vis its ability to buy an asset in the future. This means that he would hold only that amount of cash that is necessary to buy the asset he is targeting. Not hold his entire portfolio in cash. And this is what we feel is the crux of the whole thing. It is necessary to hold some part of your portfolio in cash if you are targeting a particular investment. If not, you would better off in deploying the whole of it in something that earns you better returns.

Time and again we have highlighted the fact that timing the markets is virtually impossible. Anyone who picks the bottom is more because of his luck than skill. And luck doesn't stay forever. Very soon one could face the harsh reality. In that case, how should one go about investing in the markets? While one can take a conservative approach and invest in mutual funds even then the investment is made lumpsum. And this involves taking a call at that point in time of where the markets will go.

We believe that the best way to go about investing in markets is through Systematic Investment Plans (SIPs). Through SIPs, one invests a pre-determined amount over fixed intervals of time. The greatest benefit of SIPs is that they average out your cost of purchase. They also eliminate emotional bias as one invests periodically irrespective of the market movements. Lastly, their returns are better as well. In fact, if one were to look at the past 5 year history it would be interesting to note that SIPs have outperformed Sensex. They have also yielded better yields than lumpsum unit purchases. It is true that they bring in a sense of discipline which generally lacks in investing. And it is this discipline that pays off over time.

Robert Rodriguez. You may not have heard this name. But in the US stock markets, he is very renowned figure, often referred to as the 'prophet'. Thus, it would be worth knowing his views on the markets. Let us tell you, this man has been bearish on US stocks since 2009. And despite the significant rally in stocks, he's getting even more negative. As per him, the US Fed's reckless policies are going to have dangerous consequences. He calls it 'cancer'.

Before the outbreak of the financial crisis, there were cancers developing in several parts of the credit market. And these were nothing but outcomes of rash monetary policies back during 2001 to 2003. The various rounds of quantitative easing (QE) are doing just that. The artificially low interest rates are forcing investors to make risky bets. The next crisis is likely to be bigger and even more disastrous.

Mr Rodriguez deems 2013 as a very critical year. We very much concur with the views of this gentleman. He is quite likely to be right about the next big crisis as well. Whenever it happens, it is going to be catastrophic not just for the US, but the entire world economy.

Not so long ago, IMF data showed that China's contribution to world's GDP growth during 2010-13 had been to the tune of 31%, up from just 8% in the 1980s. This was the precise reason why Marc Faber had stated that China's slowdown was a bigger threat than the Greece crisis, considering the latter is an insignificant economy.

Analysts from Barclays are of the view that China's growth would stabilize as the current growth downturn is 'as much structural in nature as cyclical' as China's policymakers seem to be reluctant to adopt a more aggressive policy response. In fact, Standard & Poors lowered China's growth estimate for the current year to 7.5% from 8% a few days ago. It attributed reasons such as the on-going euro crisis and a slower than expected recovery in the US for the same.

Be it the high base effect, slowdown in the developed economies, or the cautious policy approach of the government, China's growth is expected to slowdown in medium term. Over the long run - from next decade onwards - Barclays expects growth to slow down to about 6%, while the same estimate for the ongoing decade ending 2020 is 8%. During the decade ended 2010, the nation's growth rate averaged at 10.4%.

Meanwhile, benchmark indices in equity market of india have been trading in the red right from the beginning today with the Sensex lower by around 70 points at the time of writing. Capital goods and metal stocks were facing the maximum brunt. Other Asian indices closed in the red today with Europe too trading weak currently.

04:55  Today's investment mantra
"As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes." - John Maynard Keynes
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11 Responses to "Are these CEOs cheating investors?"

Gangadharan Nair

Sep 29, 2012

I believe what this nation doing, permiting the people to draw a fat salary, is NOT just. The Government should not allow any CEO to draw such a fat salary at any cost. This money is NOT brought from their own home. It is the money illegally exploited from the Indian masses or public. More these people exploit the people more they get. This is not good it won't do any good to the nation. On the contrary it does a lot of damage to the nation. Already the rupee value has come down to 1/500 of its value in 1964. No CEO should be permitted to draw a salary more than the salary of our Indian President. Government of India should see that no employee or employer draws a salary more than that of our President. More over it is high time that a national labour policy and nation wage policy with GOLD STANDARD to be introduced in the country. Otherwise the nation will be paying a heavy penalty in the near future.



Sep 28, 2012

I believe that Navin Jindal is robbing the shareholders. It is illegal and most unethical on his part to decide his own salary. What has he done to pay himself that kind of salary. There appear to be many similarities between him and Gali Janardhan Reddy. It is high time that such CEOs shall be divested of their posts as their continuance is harmful to the companies they are heading. Investors be ware of such CEOs.

CEOs shall be paid only on merits and purely on the basis of their contribution to the companies they are heading and the to the stake holders, viz., shareholders, society, employees etc,



Sep 27, 2012




Sep 26, 2012

CEO's remuneration if decided by themselves, is like members of parliaments deciding their own salaries and allowances, with sky is the limit. It definitely appears that they are cheating, without giving much in return to the company.



Sep 26, 2012

What about Maran and his wife of SUN TV? Both together take home more than a billion Rupees. Give yourself a fabulous salaray, use that money to buy more stake and more voting power so that the minority share holders can be bull dozed. It is outright UNETHICAL. Why can't the regulators do some thing about and fix guidelines.
In the case of Jindal, his behaviour is more in line with that of a politician, what with his role in Coalgate. As a small investor, I think these people are simply shameless people.

Like (1)

Bimal Kundu

Sep 26, 2012

All CEOs should be paid a basic salary as per the company's
Pay structure and any additional pay should be strictly on
performance. How can Jindal gets 10 times pay of Tata steel
CEO, the best perfomer in the industry ????

Like (1)


Sep 26, 2012

Sine CEOs are brains behind the success of the company they represent, high salary for them is not unjustified. But it shoud be not more than 25 % of the average salary of am employee of the company. He may receive more bonus if the company performs well during a year.

Like (1)

sharad sharda

Sep 26, 2012

CEO's compensation package in all cases should be comprised of two things i.e. fixed part and another variable part. Fixed part of compensation should be minimum pay which CEO has to receive in any case irrespective of performance of the organisation in respect of turnover and/or net profit. Variable part of package should be related to one or more of the following attributes i.e. Net profit, sales/average realisation (if there is buyer's market), new products developed, new sales territories identified, new production facilities added, new customers added(in case of service industries), per unit margin and so on so forth.

Like (1)

PK Desai

Sep 26, 2012

I think majority of people believe that CEOs as well as Directors of companies are paid extravagantly compared to their worth to the company. But who is at fault? I am a late entrant to equity investment. However almost every communication I receive from various companies have a resolution about higher salary to be approved for the CEO/Director/MD/Chairman etc in the Annual Shareholders meeting. I always feel my BP rising on reading such proposals but I have never responded by not agreeing to such resolution in writing or attended any meeting to register my protest. I feel most of the retail shareholders do the same. So why complain?

Like (1)


Sep 26, 2012

In this country,right hand gives to the left hand is a very common episode as seen in every walk of life. Politicians like MP,s increase their salary and perks ,none is bothered. university teachers raised their pay and govt accepted it. Bureaucratese raised their pays scales to astronomical levels through pay commission common man could not do anything. Defence forces got their pay scales revised by resorting to mass hysteria none raised their voice. So it is not my country and we are there to fleece it as much as possible in the name of nation as if these IAS, Defence services are the people who are running this country otherwise by this time it would have vanished. So this is in our blood to get things done by mass movement.

Like (1)
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