Can Massive Executive Pay Impact Shareholder Value?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Rising CEO pay at American public companies has been a contentious topic for many years. The average employee sees huge sums of money paid to top chiefs as a sign that perhaps their contributions are less valuable.

It's important for executives to get paid what their worth, but one has to question whether or not some of these payout packages actually affects a company's ability to focus on things like the long-term prospects of a company, among other things. 

The worker's perception

According to a recent Gallup poll, 70% of American workers are either "checked out" or "actively disengaged" from their work. There could be a myriad of factors that play into why this is happening. But one factor has to be that the amount of money chief executives get paid vs. the average worker has risen dramatically over the past twenty-five years. 

Source: The Economist

Recently, the most egregious example of bloated pay would come from McKesson's (NYSE: MCK) CEO John H. Hammergren. In 2012, Hammergren's total pay package including stock options totalled over $130 million. That amount is roughly 11% of McKesson's most recent annual operating revenue of $122 billion. It is true that the company has been able to book consistent revenue growth over the past decade that has doubled its size. But these outsized numbers have to hurt the morale of McKesson's employees who have also participated in its success. 

A view that's myopic

One of the biggest problems with huge CEO pay packages is that they are often rewarding past performance. It really gives a leader questionable incentive to forward-think what a company's future might be in ten years. A great example of this is Leslie Moonves, the head of CBS (NYSE: CBS). In 2012, Moonves was paid a total of $60.3 million. 

Source: Google Finance

CBS has had good numbers since it was spun off from Viacom in 2006. But the problem is that past performance does not reflect what's going to happen in the future. According to Deadline Hollywood, although CBS has the most viewership, it has the oldest demographic with a median age of 55.6. That viewership amount really inflates CBS's stats, since younger people increasingly watch content online, whether from YouTube, Netflix or other sites. It's clear that CBS's numbers aren't sustainable over time - which leads one to wonder why Moonves was so highly paid, given the precarious situation CBS is in. 

When a far-off place falls off...

Yum! Brands (NYSE: YUM) has been on fire the past few years, which has been really great for CEO David C Novak. He has made almost $200 million over the past few years, which has been a reward for the company's revenue growth. The problem? Novak's performance was probably closely tied to the bubble that has existed in China over the past ten years. 

Source: CKGSB Knowledge

What's unfortunate is that most don't realize that Yum!'s success is so closely tied to China's economic peculiarities. The company has done well expanding into China, building over 4,000 stores there to focus on that market. The problem is that China is in trouble. It's tried to transfer an ever-cheapening dollar into infrastructure it doesn't need to boost its economy. That's not working anymore: now college graduates cannot find jobs. It's no wonder Yum! is seeing such a drop in Chinese sales: the biggest customer, young middle-class Chinese, cannot afford to eat out. 

Are executives worth it?

The preceding examples are offered up to illustrate that just because a CEO is given huge pay packages by its board does not mean that this reflects shareholder value. Whether it's because you're being paid more than any other corporate chief, avoiding the future's reign on your business, or have benefited from a country's specific economic policies, it is possible to be overpaid.

When investors consider stocks, it's important to think about how much money is being given to the chief executive. That cash doesn't come out of thin air; it's provided from revenue for the company. And as we've seen, it's often a massively top-heavy amount of money.

Both CBS and Yum! have serious problems facing them in the future, which makes investing in them questionable. McKesson, on the other hand, is a company that will be able to continue to grow. This despite the fact their size would bring into question whether there is any opportunity because it isn't undervalued. Nevertheless, they do have a reasonable dividend payment of twenty cents per share on a consistent quarterly basis and are a safe bet. 

Always Think...

It's important to always think long-term - where will these guys be in a few decades? They probably won't be running their companies anymore. You can only hope that right now they're concerned about the roadmap for the business, and not just quarterly or annual performance. 


Daniel Cawrey has no position in any stocks mentioned. Follow Daniel on Twitter @danielcawrey. The Motley Fool recommends McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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