We can do that? Shareholders reject CEO’s $50m payday

Sascha: [00:00:02] From Equity Mates Media. Welcome to The Dive. I'm your host, Sascha Kelly. Have you have asked for a pay rise and been knocked back? I have. But now I don't feel so alone because recently two of the world's richest men also had theirs knocked back. When I asked, I just made a meeting with my boss. I talked about how much I'd grown, all the achievements I'd made, what responsibilities I wanted to take on. We chatted about the direction of the company, and I made my case for a pay rise for 3%. 

Audio clip: [00:00:31] Show me the money. 

Sascha: [00:00:33] And he said it wasn't appropriate to ask for a pay rise right now because were making cuts. Look, I was disappointed, but I bought a bottle of wine, complained to my housemate, and I started looking for another job. I tell you what didn't happen. I didn't have the audacity to ask for $50 million. I didn't have to make my case to shareholders and I didn't have to watch as they all voted against me. That's exactly what happened to Jamie Dimon, the CEO of Investment Bank Jp morgan, and Pat Gelsinger, the CEO of Intel recently. And there's a trend where shareholders are now pushing back against management's sky high renumeration. It's Friday, the 20th of May. And today I want to know why do CEOs get paid so much and are shareholders right to question? Are they worth it? To do this, I'm joined by my colleague and the co-founder of Equity Mates, Alec, Renehan. Alec, welcome. 

Alec: [00:01:30] Thanks, Sascha. Good to be here. 

Sascha: [00:01:32] So you're telling me that this week hasn't been a good week for millionaire CEOs? So tell me what happened. What does a bad week look like when you're earning millions? Because honestly, I'm struggling to imagine it. 

Alec: [00:01:46] Well, Sascha, the new story this week is about two companies, Jp morgan and Intel. But there's a bigger story going on here that we want to unpack today. But let's start with these two companies and what's happened this week. And let's start with Jp morgan. 

Audio clip: [00:02:00] But some news back on Wall Street today, the. 

Alec: [00:02:02] World's largest investment bank was preparing a 201 million US dollar compensation package for six of their top executives, headlined by a $50 million pay packet for CEO Jamie Dimon. But on Tuesday, only 31% of shareholders voted in favour of the plan. 

Audio clip: [00:02:20] And that vote isn't binding and Diamond isn't likely to give the money back. 

Alec: [00:02:25] While the vote was non-binding, meaning the bank's board can ignore the results, they did say that they will, quote, take into account the outcome of the vote when considering future executive compensation arrangements. And they should, because shareholders are the owners of the company and elect to the company's board. So if shareholders are rejecting something, the board should take notice. It is the first time JPMorgan's board has lost this vote since it was introduced in 2009. And if you think a $50 million pay packet for a CEO is big, let me introduce you to the second CEO pay story of the week, Intel. And there $179 million proposed pay packet for CEO Pat Gelsinger. 

Audio clip: [00:03:12] Intel shareholders have voted against the company's compensation plan for its top executives. That's according to new regulatory filing. 

Alec: [00:03:18] Similar to JPMorgan. Intel held a vote on this proposed $179 million pay packet, and just 34% of the shareholders voted in favour. 

Audio clip: [00:03:28] But it does signal that Intel investors are closely watching the performance of the company's CEO. 

Sascha: [00:03:32] 50,000,179 million. It sounds like I need some negotiating tips, to be honest. Before I ask you, is a CEO worth it? I've got a more simple question. Is this solid cash? 

Alec: [00:03:46] It would be nice, Sascha, but no, the majority of it is in stock in the company of Jamie Diamond's $50 million proposed pay packet. It was going to be $1.5 million as a salary and the remainder as stock and stock options. Similarly for Intel's $179 million pay packet, just $1 million. 

Sascha: [00:04:07] I love how you say just $1 million. It's still a lot of zero. I mean, it's one banana. Michael what could it cost? 

Alec: [00:04:14] $10, just $1 million. Sascha is salary another $1.75 million is a cash bonus. And then there was $140 million in stock and $30 million in stock options. 

Sascha: [00:04:29] I think the more important question is why is so much of this salary in stock and not as a cash payment? 

Alec: [00:04:37] So the key reason is to incentivise CEOs to work in the best interests of shareholders. And there's no better way to do that than to make the CEO a shareholder. So stock, if you're getting granted stock, it can have a vesting schedule. Pat Gelsinger has $140 million in stock, wouldn't have been given to him all on day one. It would be given in chunks. So over the next five or ten years. 

Sascha: [00:05:03] And that's what you mean by vesting schedule. It's going to come over that period of time. 

Alec: [00:05:07] That's right. Maybe it'll get spoon fed a little bit every month, you know, maybe a little bit every year. But basically what it ensures is the CEO sticks around for a while and thinks long term makes long term decisions because they're getting that stock over a longer period of time. And if they leave before they get all of that stock, they don't get the rest of it. So in theory, it makes them a long term shareholder. And then stock options also incentivise CEOs to focus on the share price in particular. Now, Sascha, let's imagine we have the Dive LLC, okay. And we have a $5 share price. You as CEO and host get stock options worth $20 a share. The way that stock options work, if our share price is below $20, those options that you've got a worthless that don't mean anything to you. But if you can get our share price above $20, then all of a sudden those options are worth something to you. So you, as CEO and host of the Dive LLC are incentivised to push our share price up. So those options that you have become worth something. So that's the theory. Stock and stock options are thought to align incentives between CEOs and shareholders. 

Sascha: [00:06:25] So by putting the value of the dive up, I can then swoop in and buy them at a bargain price. Once they're up around $30, I can come in and buy them at $20.

Alec: [00:06:34] That's it? Yeah. 

Sascha: [00:06:35] I think that's such a clever way to encourage loyalty. It makes a lot of sense to me. But also, if I was getting a $50 million pay packet, I mean, I'd be doing everything I could to stay with that company. That's also a really good incentive. And all these numbers are huge. But the distance between 50 million and 179 million is still a lot of millions. So what's the going rate for a CEO these days? 

Alec: [00:07:01] Yeah, it's a great question, Sascha. And I think it depends on the country and it depends on the industry. So let's let's have a bit of a game. Don't I have a guess what country has the highest CEO pay?

Sascha: [00:07:12] Look, it's got to be the U.S., right? 

Audio clip: [00:07:14] This year, the average CEO salary jumped 31% in the last year.

Alec: [00:07:17] To the U.S. of the 350 largest U.S. companies. The average pay, including stock and everything, $21.3 million in 2019. You compare that to the 100 top in the U.K. and they're about three and a bit million U.S. dollars in Australia. It's a bit less than 2 million U.S. dollars for our top 100 CEOs. 

Sascha: [00:07:41] Not too shabby. 

Alec: [00:07:42] It's not too shabby. But the U.S. is a step higher than everyone else. 

Sascha: [00:07:46] Yeah, absolutely.

Alec: [00:07:47] But, Sascha, if we're designing your dream career, you're going to be a CEO in the U.S.. I guess the next question is what industry you're going to be in? Do you want to have a guess at the highest paying industry for CEOs? 

Sascha: [00:07:58] Well, I'd assume it would be financial banking, maybe. 

Alec: [00:08:01] I assumed that as well. But our diligent research is here at Equity Mates have found that on average it's the technology industry. 

Audio clip: [00:08:09] Hello. I'm a mac. 

Alec: [00:08:11] The average CEO compensation over $26 million a year. Once you take into account stock and everything else. 

Sascha: [00:08:17] That's pretty good, pretty good pay. 

Alec: [00:08:20] Now, Sascha, we're fetishising CEOs with massive paycheques here, so we may as well lean into it. Do you have a guess at the highest paid CEO globally in 2021? 

Sascha: [00:08:32] I know you told me it was tech, but I reckon it's going to be a bank. 

Alec: [00:08:37] It's not a bank. It is an American tech CEO. But it's a surprising industry travel focussed. You wouldn't have thought last year was a particularly good one for travel. 

Audio clip: [00:08:47] Everything you need to choose the hotel that's right for you. 

Alec: [00:08:50] Paid a card from Expedia group takes the cake, takes the paycheque whatever they get to take $296 million pay packet in 2021.

Audio clip: [00:09:01] Expedia. 

Alec: [00:09:03] But look, Sascha, when we talk about CEO pay, the raw numbers sort of tell the story and that's what captures the headlines. But it's probably not the right metric to be looking at. Perhaps a more appropriate metric is the CEO to average worker pay, because that really tells us the story of the income inequality in a company or in a country or in an industry. So if we look at average CEO to average worker pay, do you want to have a guess where the ratio is the biggest? 

Sascha: [00:09:33] I'm still going to go with the U.S.. 

Alec: [00:09:35] And you're still correct. 

Audio clip: [00:09:36] Gap is widening in America. CEOs getting paid a whole lot more than their employees. 

Alec: [00:09:40] For every $1 the average U.S. worker makes, the average U.S. CEO makes $265. Next highest India, 229 to 1. The U.K. is also up there, 201 to 1. South Africa, surprisingly, was also up there, 182. One. The Netherlands 171 to 1. Now, we should say that those ratios were from a 2018 study, so a couple of years old, but really tell the story of, I guess, the income inequality and between CEOs and the average worker. 

Sascha: [00:10:15] So where does Australia sit in these rankings? 

Alec: [00:10:18] We've pulled out some of Australia's biggest listed companies, our biggest telco, Telstra. 57 to 1. Qantas. Our biggest airline. 126 to 1. Woolworths our biggest supermarket. 143 to 1. So that gives us an idea of the ratio in some particular companies. If we go overseas, have you heard about the online supermarket Ocado in the UK?

Sascha: [00:10:43] Yeah, I used it a couple of times when I was living there. And you start. 

Audio clip: [00:10:46] Your day with breakfast in bed. 

Alec: [00:10:49] Well, you contributed to Tim Steiner, the CEO of Ocado's whopping 2605 to 1 ratio for every $1 the average Ocado staff member makes. He makes 2605. And then if we go over to the US famously, one of the Disney family criticised Bob Iger, the former CEO of Disney, who was making over a thousand times the median salary of a Disney employee. But I think Sascha ratios are hard to conceptualise. Bob Iger. 1000 to 1. Like what does that mean? Let me put it this way. At 5:30 p.m. on Wednesday, the 6th of January 20, 2134, working hours into the calendar year, the CEOs of top British companies had earned the same amount their average worker would earn in the entire year. 

Sascha: [00:11:44] Those numbers are pretty shocking, right, Alec? Let's take a break here. But when we get back, let's talk about how these ratios happen, how they eventuate. These are the most coveted jobs in the world. And these companies are incredibly well run with activist shareholders. They're just always looking for the overspend where they can trim the fat, where they can encourage companies to knuckle down a little bit harder. So how are these CEOs getting such a massive pay packet? And is there an argument that they're worth it? But first, an ad break so we can afford our overpaid CEO breathlessly. 

Unidentified: [00:12:22] Welcome back to the dive.

Sascha: [00:12:23] Before the break, we spoke about the news of the week. CEOs, big salaries are getting knocked back. And I want to understand why they're getting such a big pay packet in the first place. But first, I, I think let's talk about who is knocking them back.

Alec: [00:12:39] So, Sascha, it's shareholders. Shareholders are the ones that get to vote on these proposals and a number of other proposals because they are the owners of the company. And it's pretty democratic in a way, but it's not totally democratic in a democracy. We live by one person, one vote. In the world of the share market, we live by one share, one vote. So the biggest shareholders, the Vanguards, the BlackRock's, the state streets of the world, they have a few more votes than you or I do. And we're talking about Jp morgan today. Let's look at their share register to explain what we mean here. Jp morgan have about 3 billion shares on issue. The three largest shareholders own the vast majority of those shares. Vanguard own about 250 million. And State Street and BlackRock both own about 140 million shares. So between these three big asset managers, they own about 18% of the company. So when a vote comes along, they have a lot more vote than we do. 

Sascha: [00:13:45] Yeah. So if you're winning over the managers at those three big companies, then you're already controlling such a large portion of that vote.

Alec: [00:13:54] That's exactly right. And there's another important thing to note when we're talking about shareholder votes, and it's that these aren't compulsory and a lot of people just don't vote. We spoke about Jp morgan before. Let's go to the other company we're talking about this week, Intel. If we look at the vote that rejected their CEO's pay packet, that $179 million pay packet, I'm not going to stop saying that number. A lot of shareholders just didn't vote. So 1.78 billion shares voted against the pay packet, 921 million voted for the pay packet, but 577 million just did not vote at all. And so we have big institutions that have bigger voices because they own more shares and a lot of smaller investors like you and I. Sascha, we just don't vote a lot of the time. 

Sascha: [00:14:48] Yeah, let's get to that in a second. But first of all, you've brought up these two stories, Jp morgan and Intel, who we're talking about today. But this is all part of a larger trend, isn't it? Shareholders delivered a loud message yesterday. 

Alec: [00:15:00] That's right. Shareholders at AT&T, at Philips and at General Electric have all voted against increasing CEO pay and bonuses this year after poor financial results. And last year, in 2021, a record 16 American companies had the pay of their executives rejected by over half of their investors, by over 50% of the shareholders that voted. And that was up from ten in 2020 and seven in 2019. So it's a growing trend that we're seeing here. 

Sascha: [00:15:33] All right. This gets me to my ultimate question, the one I've been gearing up for since I first saw this article about Jamie Diamond's proposed $50 million pay packet. And that is how how do CEOs justify that level of pay? And perhaps more importantly, why do companies agree to pay that much? 

Alec: [00:15:53] Yeah, that's the right framing of this question, Sascha, because we often think about CEOs and companies being one and the same. But unless the CEO is the founder of the company with a meaningful ownership percentage and control of the board, then not the same. CEOs are generally hired professionals. The company is owned by shareholders, represented by the board. And just like we negotiate our salaries with our employers, the CEO negotiates their salary with their employer, the board. So it's not like the CEO just decides I'm going to pay myself $50 million this year. They have to negotiate it and the board has to agree to it.

Audio clip: [00:16:31] I'm chairman casting vote. 

Alec: [00:16:33] I win. So in some ways who cares how a CEO justifies what they get paid? They negotiate hard and they get what they can get. The bigger question is how do companies justify what they pay, what they agree to pay a CEO because they're accountable to the company's shareholders. They're accountable to you and I, to BlackRock, to Vanguard, to State Street, to all of the shareholders who expect money to be spent in a responsible way. Now, when we tried to answer that question, when we started our research, when we looked online, we often read that big CEO pay packets align incentives. But that's more an argument about how they're paid the stock and the stock options we spoke about before. It's not really a conversation about how much. They're paid whether you get paid 2 million, 20 million or 200 million. Your incentives are aligned. If you become a shareholder of the company. But what we want to understand and what we're trying to answer is the how much question. Why CEOs are getting the 200 million rather than the $2 million pay packet. And it seems there are two broad justifications. Number one, they're creating a lot of value. And number two, it's the market price for the best executives. So let's talk about number 1/1. 

Audio clip: [00:17:49] I said, look, shareholders have been rewarded and therefore the board is rewarded me. I have created a lot of wealth for people in the stock. 

Alec: [00:17:56] Simply the argument is that CEOs are worth it. The best CEOs generate multiples of their salaries and then some in value. Elon Musk at Tesla, Steve Jobs at Apple, Jeff Bezos at Amazon. Melanie Perkins at Canva. Patrick Collison at Stripe. Bryce Lasky at Equity Mates. These are the names we know, and there's a reason we know them. They've built incredible businesses.

Sascha: [00:18:17] Incredible. 

Alec: [00:18:20] But Sascha, there is a big thought here. Do you notice something about those names? 

Sascha: [00:18:24] Yeah, I did, actually. As you said them, they're all founders, aren't they? 

Alec: [00:18:28] They're all well, controversially, Alan, not quite a founder, but very early. It's rare that a hired executive CEO joins that list of revered names. Can you think of any. 

Sascha: [00:18:41] And the only one? And I think it's cheating because you've already mentioned him in this recording session, but would be Bob Iger at Disney. And that's because I've read his book and that's honestly it. 

Alec: [00:18:50] Bob Iger is a great example. Jack Welch is another one. Lee Iacocca. Chrysler in the Eighties. Rex Tillerson at Exxon, maybe in Australia. Alan Joyce at Qantas. Like there are. Some say those that can make a very strong case that they justify their pay. They've created exponentially more value for shareholders. But the research suggests that the average CEO, a managerial type that hasn't founded the business, hasn't been a visionary, is quite overrated. According to the research. There are more important factors that determine the outcomes for these companies. And the classic example that people always point to when they challenge this idea is financial institutions during the GFC, because there was a lot of criticism about CEO pay, executive pay leading up to the GFC and the finance sector always defended their high pay on the basis of their abilities and their talent and the value that they created. But then the banks went bust, many of them collapsed and people started to look at those justifications in a new light. So CEOs being the key to success is the first argument we hear. But Sascha, let's move on to the second argument, which is this is what it costs to hire a great CEO, what the market is willing to pay. And if we want the best, we have to offer a competitive salary. The way it normally works is they have a compensation committee on the board and they benchmark their competitors. They group ten, 20, 50 companies, whatever it is. And they say, what are they paying the CEOs and where are way fitting enough. 

Audio clip: [00:20:25] Oh for x, y, z bank. Well that guys make an x. So we got to get that guy. We got to give our guy x. And so then it becomes just a self-fulfilling prophecy. 

Alec: [00:20:33] And so if a bunch of companies start paying more, then what you find is that other companies end up having to pay more as well. And that's sort of how CEO pay has got spiral out of control because people keep one upping each other to get the best. 

Sascha: [00:20:48] Spiralled out of control. Look, I'm going to say they were your words, not mine. 

Alec: [00:20:52] Yeah, well, I'm happy to. I'm happy to hear that section $179 million for one year, Elon Musk in 2020 got 6.5 billion in stock options. I think out of control is not an outrageous thing to say. But I think the important takeaway for us researching this episode and for people listening to this episode is whatever you think the right answer here is, whatever side of the argument you fall on, if you own shares in the company, you have a vote and you should make that voice heard.

Sascha: [00:21:23] But you said those numbers before, like you have to have millions of shares to make a dent in those votes, right? 

Alec: [00:21:29] Well, I mean, Sascha, we can make the same argument for the election that's coming up here in Australia or any democratic process. But I think the important thing is that retail shareholders make up a big percentage of companies registers. We talk about, you know, Vanguard having 8% of Jp morgan and BlackRock and State Street having 4% each but retail investors together, we outsize them. If we look at some of America's biggest companies, 39% of Tesla shareholders are retail investors, 30% of in videos, 27% of Amazons across the total stock market. It's estimated that 25% are retail investors. So if retail investors all say something the same way, collectively their votes can change outcomes even in these big companies. 

Sascha: [00:22:19] You know, if we have anything to do about it. Equity Mates that retail investor up is only going to get higher and higher. That's it. Look, I didn't think a story about executive pay could end on such an inspirational note, Alec, but here we are. Personally, I'm going to commit to voting on all of my shares compensation packages this year.

Alec: [00:22:38] That's a lot, Sascha.

Sascha: [00:22:40] That's a lot. Okay, maybe one or two. 

Alec: [00:22:42] Okay. Well, look, I haven't exercised my vote on any compensation package in my time as an investor either. So I'm going to join you in that commitment. Let's say at least two in 2022. 

Sascha: [00:22:54] It rhymes. It's perfect. I think we'll leave it there for today. Thank you so much for joining us for today's edition of The Dive. I do want to give a special shout out to Ali. She took my words to heart on Wednesday and she spammed half her contact lists with a link to listen to the show. So hi to Ali. Thanks for following my instructions. And if you've come here to listen as a result of her spamming you, then welcome. Be like Ali and maybe I'll give you a shout out too. If you're keen for us to reset your story, then don't be shy. Contact us at the dive at Equity Mates dot com or shoot us a message on social media. We're going to be back in your feed on Monday. In the meantime, thanks so much for joining me today, Alec. 

Alec: [00:23:34] Thanks, Sascha. 

Sascha: [00:23:35] Until next time