How Important Are CEOs to a Company’s Stock?

Investors and investor activists have been railing against Chief Executive Officer (CEO) compensation for years. The CEO (with help from the Board of Directors) is the top dog when it comes to steering a company’s fortunes. So, it stands to reason that the person in charge should make a lot of money for his or her efforts—as long as they produce results.

Compensation is sometimes difficult to figure out, as it often comprises salary, bonuses, options, and “soft” dollars (perks).

And for some companies, the CEO package is dependent upon the business’ stock price; in others, it is linked to the financial performance of a company. Sometimes, it’s both.

What’s the right answer, you may ask? To me, it makes sense to base the CEO compensation package on both—with more weight given to the financial performance of a company.

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Each year, some journalist writes about CEO pay, and who makes the most money. For 2023, I found these numbers on an AFL/CIO website, which reported:

“In the past 10 years, typical CEO pay at S&P 500 companies increased by more than $4 million, to an average of $17.7 million in 2023. Meanwhile, the average U.S. worker saw a wage increase of $18,240 over the past decade, earning on average just $65,470 in 2023.”

Highest Paid CEOs

Source: https://aflcio.org/paywatch/highest-paid-ceos

However you look at these numbers, they do seem pretty rich, don’t they? Especially, when you consider that Warren Buffett, CEO of Berkshire Hathaway has accepted just $100,000 annually for more than 35 years (and he gives half of that back to pay for the personal business his employees conduct for him during business hours!).

Buffett has made his money from investing in his companies, as well as other businesses and stocks.

When you see compensation as listed above, it’s really no surprise that most Americans think CEOs make too much money.

A recent Bentley University-Gallup poll reported that 66% of folks in the U.S. gave a “failing grade for CEO pay.” You’ll note that this poll came along about the time Tesla’s Board of Directors was debating if Elon Musk was worth more than $40 billion a year. The answer is apparently “yes,” as shareholders voted him a $46 billion pay package. But granted, Musk is not the typical CEO.

Having said that, it is true that the average American is getting fed up with the huge gap between CEO and worker.

Equilar and The Associated Press conducted a recent analysis of CEO pay and concluded that “in 2022, CEOs made 185 times the median employee and that the average employee would need to work 196 years to earn what a CEO makes.” Yikes!

Some CEOs Are at Best Poor Performers, and at Worst, Liars and Cheats, to the Detriment of Their Companies

Now, one would think that making these eye-boggling sums of money each year would result in CEOs who have the company’s best interest in mind. But that’s not always the case. Sometimes, their actions are out and out fraud or wrongdoing. Other times, they may just not be the best person for the job.

Case in point: Last spring, we found out that Boeing’s CEO Dave Calhoun was given a pay package of $32.8 million in 2023. Hmm. Considering all the issues that Boeing has had in the past year, that may be a tad too much.

And in today’s headlines, Pavel Durov, the Russian-born entrepreneur who founded the Telegram messaging platform, was just charged by the French authorities with a wide range of crimes by his platform, including “being used for child sexual abuse material and drug trafficking.”

These shenanigans aren’t new. Here are a few you are probably familiar with:

Kenneth Lay and Jeffrey Skilling, Enron, were charged with “knowingly manipulating accounting rules and masking the enormous losses and liabilities of the company, leading to 46 counts of money laundering, bank fraud, insider trading, and conspiracy.” Their finagling led Enron to declare bankruptcy in 2001 and also helped to destroy Arthur Andersen, one of the largest audit firms in the world.

Skilling was convicted on 19 counts and sentenced to 24 years in prison, which was ultimately reduced to 14 years. Lay was convicted on six counts of fraud and faced up to 45 years in prison, but he died before sentencing, in 2006.

Bernard Ebbers, WorldCom, convinced his Board of Directors to lend him the money to cover his more than $400 million in margin calls on WorldCom stock after the stock deflated following the company’s quashed merger with Sprint.

He then fabricated accounting entries to prop up his stock, which was discovered by WorldCom’s internal auding department. The SEC got on board and the company eventually filed for bankruptcy. Ebbers was sentenced to 25 years in prison in 2006, was released after 13 years, and died shortly thereafter.

More recently, was the blowup of Elizabeth Anne Holmes and her Theranos blood-testing company. The stock was a momentum darling after she fraudulently claimed that “the company had revolutionized blood testing by developing methods that needed only very small volumes of blood, such as from a fingerprick.”

Journalists began investigating the company’s claims in 2015, revealing that investors and the public had been widely misled. In 2018, The SEC charged her and former Theranos chief operating officer (COO) Ramesh “Sunny” Balwani with “raising $700 million from investors through a fraud involving false or exaggerated claims about the accuracy of the company’s blood-testing technology.” She was fined $500,000 and banned from serving as an officer or director of a public company for 10 years. Following that, she and Balwani were indicted on federal fraud charges, resulting in an additional $452 million fine to both, and an 11-year and three-month sentence for her and an almost 13-year sentence for him at a federal prison.

Last spring, Sam Bankman-Fried, CEO of the now-bankrupt cryptocurrency exchange FTX, was convicted for his actions in engineering the “largest financial fraud (about $3 billion) in U.S. history.” He was sentenced to 25 years in prison.

So, you see, power and money often corrupt. And it is the shareholders, many times, that are left holding the empty bag.

What’s a Shareholder to Do?

Unfortunately, there’s not a lot you can do about outright fraud, since most of the time, the executives (other than the fraudsters) and the Board of Directors aren’t usually aware of the problems until it’s too late.

However, there are some sites that do rank CEOs:

CEO Rankings

Comparably

CEO World

Just be aware that the criteria often differ for the rankings, but it’s a start.

You should also keep up with your companies’ financial statements, perusing their quarterly and annual earnings reports, 10ks and annual reports to make sure the company is growing and profitable and expenses are in line with revenues and profits.

You can analyze CEO pay, based on financial performance of the company and even the ratio between CEO pay and the average employee’s pay (which companies have had to disclose since 2017).

And you can look at the performance of their stocks to see if the CEO is leading the company in the right direction for its investors.

Highest-Paid CEO Stock Performance

Here are 5-year stock performance charts for the companies whose CEOs are the highest paid, which I listed at the beginning of this article:

TPG Inc. (TPG)

Co-CEO since 2015; CEO since 2021

Carlyle Group (CG)

CEO since February 2023

Broadcom (AVGO)

CEO since 2006

Palo Alto Networks (PANW)

CEO since 2018

Coty Inc. (COTY)

CEO since 2020

Wheels Up Experience (UP)

CEO since September 2023

Blackstone (BX)

CEO since 2021

Charter Communications (CHTR)

CEO since December 2022

Royalty Pharma (RPRX)

CEO/Founder since 1996

Endeavor Group (EDR)

Co-Founder and CEO of companies that have since merged, 1995

As you can see stock performance—especially in this past year of a booming stock market—has been mixed. And you’ll note that a few of the companies have also recently changed CEOs, which should tell you something.

Of course, CEO pay is not the only criterion you should use to decide whether or not to invest in a company. But it is surely a measurement that I take into account when researching a viable investment.

Just something to think about!

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