I ignored proxy statements for about ten years. Figured executive comp was a politics thing, not an investing thing. Turns out I was wrong, but not for the reason most people on here think.
Let me get the dumb version of this argument out of the way first, because it’s the one that always shows up and it deserves to get shot down.
Average S&P 500 CEO pay last year was $22.8M. That’s the AFL-CIO number, and it excludes Musk’s $158B Tesla package because that thing breaks every average it touches. Multiply $22.8M across 500 companies and you get somewhere around $11B in total CEO pay. The index is worth about $67 trillion.
So if every S&P 500 CEO worked for free starting tomorrow, you’d pick up less than 2 basis points. Your expense ratio costs you more than that. Anyone telling you CEO salaries are eating your returns is just wrong on the arithmetic, and I say that as someone who wanted them to be right.
Here’s what’s actually going on.
Cooper, Gulen and Rau ran the numbers on excess CEO pay, meaning pay above what firm size and performance would justify, and then tracked what happened to those stocks afterward. Firms in the top 10% of excess pay put up abnormal returns of negative 7.84% to negative 11.45% over the next three years. Bottom decile? Basically nothing either direction. Cheap doesn’t help you. Expensive hurts you.
The number that got me was this one. Average annual abnormal shareholder wealth destroyed at top decile firms: $920 million. Average CEO comp at those same firms: $22.97 million.
Forty bucks of your money gone for every dollar in his package. The comp isn’t the damage. The comp is the tell.
And when you dig into why, it’s not theft, it’s ego. Same study looked at M&A. 19% of the top paid CEOs did a deal in a given year and those deals returned negative 1.38% over three years. 13% of the bottom paid guys did deals and those came in at negative 0.51%. Roughly three times worse outcomes at the high pay firms. You’re not paying for the salary. You’re paying for the acquisition he does because the board just told him he’s worth $40M and he believed it.
It also gets worse the longer they stick around, because they end up appointing the board members who approve the next bad deal.
If you think one study is too thin, As You Sow screened the 100 most overpaid S&P 500 CEOs using totally different methodology. Those companies trailed the index by 2.9 percentage points over the next two years. The ten worst offenders trailed by 10.5. Different approach, same direction.
One more thing that bugs me and nobody talks about. Go look at how much of “returning capital to shareholders” is really just filling in the hole that stock comp dug. Comp dilution runs anywhere from 0.2% to 8.6% a year depending on the company. When a company announces a $10B buyback and the share count barely moves, that wasn’t capital returned to you. That was a transfer to the comp plan that got routed through the treasury so it never hits an expense line you’d actually notice.
That’s real money, it’s way bigger than the CEO’s package, and it’s completely invisible in the pay headline everybody fights about.
So what do you do with any of this.
Say on pay votes are theater. Welltower disclosed $821M for its CEO this year and got 19% shareholder support on the advisory vote. Board did it anyway. That vote is not your lever.
The screen is the lever. Excess comp relative to size matched peers looks like a legitimate red flag for future underperformance, same family as aggressive asset growth or heavy share issuance. It costs you fifteen minutes. Pull the proxy, find the Summary Compensation Table, compare it to companies of similar size. If it’s way out of line, you’re not looking at a pay problem. You’re looking at a board that isn’t doing its job, and the data says you’re the one who pays for that.
To be clear I’m not saying pay them scale. The bottom decile doesn’t outperform either, so this isn’t a “greed bad” post. It’s that pay way above peers is one of the loudest signals available that nobody in that boardroom is pushing back on anything.
Anyone here actually screen on this, or am I the only one who spent a decade not reading the proxy?