Too Much Money?

© Can Stock Photo Inc. / Milovidov

There is a certain recurring refrain that is heard from portions of the political spectrum: greedy corporate executives make too much money!

To some extent, we sympathize. As shareholders, we have an ownership stake in the companies we invest in. Their executives are our employees, and their paycheck comes out of money that belongs to shareholders. So it should come as no surprise that we have no tolerance for executives lining their pockets at the expense of the company.

Perspective is important, however. It’s easy to be outraged when you hear eight-figure salaries being thrown around. To pick a name out of a hat, according to the company’s SEC filings General Motors CEO Mary Barra took home $28.5 million in compensation last year. To many of us, that seems absolutely insane… but she heads a company that took in $152 billion in sales that year (S&P data). Doing a little math, she got paid a comparatively modest 0.018% of GM’s revenue.

There’s some debate over just how important an executive’s contributions really are. It strikes us as a reasonable proposition that the exertions of a skilled CEO could conceivably improve company revenue, and we suspect even the biggest corporate skeptic may grudgingly concede that a capable top executive could be worth two hundredths of a percent of company performance. In this case GM’s shareholders are hardly getting robbed.

It is true, as corporate detractors often point out, that the size of executive compensation packages has ballooned over the past 30 years. On the other hand, so has the size of the corporations those executives oversee. It sounds alarming to see CEOs getting paid $10 million where they used to only get paid $1 million—but we forget that, due to mergers and acquisitions, those $10 million CEOs may literally be doing the jobs of ten of those $1 million CEOs of yesteryear.

Simple folk like us will never spend $28.5 million in our whole lives, let alone in a single year. We have no idea what on earth you spend an eight figure paycheck on—the mind frankly boggles. At the same time, the sheer scope of the billions of dollars that a talented top executive may be responsible for is equally boggling.

We have a vested interest in making sure that the companies we invest in pay their people fairly. What’s “fair” for someone who manages a company worth tens or hundreds of billions of dollars may look absurd at a glance, but that doesn’t tell the whole story. We believe in researching the story ourselves to make sure we can be confident in the leadership of companies we seek to invest in.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Stock investing involves risk including loss of principal.