If High CEO Pay Troubles You, It's a Sign You're a Terrible Investor
Here’s a hypothetical for readers. If you had $10,000 to invest in one company, only for your investment to turn into $300,000, what would your reaction be? The question answers itself.
Any investor yearns for a 30x return, but they’re unlikely. More realistically, they’re somewhat of a miracle.
Everyone once again wants a 30x return, but what makes them miraculous from an investing standpoint is that while there are 30x investment opportunities staring us in the face right now, they’re almost certainly not in plain sight. Readers can be near certain that they never heard of said company; that, or the odds of said company enjoying 30x returns in the future reads as too silly for words in the present.
Stating what should be obvious, tomorrow’s 30x’s return company doesn’t look like one now. Furthermore, it will have numerous, sick-inducing stumbles on the way to 30x. Thinking about Amazon as but one example, owners of the company’s shares in the early 2000s were ridiculed for owning them. Amazon owners since 2000 have endured the wildest of wild rides that included all manner of conclusive reports (and subsequent corrections) indicating the company’s future prospects were dimming. Get it?
Which brings us to the late Jack Welch. His death on March 1 brought about all manner of tributes. With good reason. Welch was brilliant to those who knew him. Remarkably so.
And he made GE shareholders a lot of money. 30 times their money. Or nearly that much. An investor in GE when Welch took over as CEO in 1980 saw the company’s market cap soar from $14 billion all the way to $410 billion when he retired as CEO in 2001.
Welch rather interestingly, at least for the purposes of this piece, retired a billionaire. Or nearly so. Most of his wealth was seemingly in GE shares.
About this, Welch was one of the highest paid CEOs in the world when he oversaw GE, if not the highest. About his pay, does anyone seriously think GE shareholders were bothered? This question answers itself too.
If we’re honest, most GE investors would have been happy if Welch walked away from the company worth billions, as opposed to a billion. Even if it meant their 30x return was reduced to 25x. 25x returns, like 30x returns, are a miracle. Investors will pay dearly to get those kinds of winners. Welch was vastly underpaid in consideration of the wealth he created for investors.
Which is the norm for miracle workers. Nick Saban earns around $11 million per year as Alabama head coach, but the dollar value of his impact on the school is many, many multiples of his salary. Same with Dabo Swinney at Clemson, same with Michael Jordan with the Chicago Bulls, Tom Brady while with the New England Patriots. They were all miracles to varying degrees. Lots of schools had the resources to hire an unhappy and somewhat dented Saban away from the listing Miami Dolphins, but Alabama took what was then a bit of a risk. Swinney was Clemson’s wide receivers’ coach promoted to interim head coach. Jordan was the #3 pick in the 1984 NBA draft after Hakeem Olaujuwon and Sam Bowie. Brady lasted until the 6th round of the 2000 draft, after quarterbacks like Spurgeon Wynn and Giovanni Carmazzi. Those who elevate us to stratospheric heights aren’t always seen as initially capable of doing so.
Looked at in company form, some who should know better might be prone to say that Apple was obvious. Figure that a billionaire genius in Steve Jobs was returning to the company he founded with eyes on making it great again. Except that few bought the previously expressed narrative.
We know this because Apple was hurtling toward bankruptcy, but for a crucial, $150 million investment from Bill Gates that bought time for Jobs to right the ship. If you’d purchased Apple in the summer of 1997, imagine where you’d be today. Even with the return of Jobs, the company was priced to not achieve much. Again, the company was near bankrupt, but now its market cap is of the trillion dollar variety. Yet Jobs died worth of a measly $10 billion? Considering the company’s condition when he arrived, does anyone seriously think Apple shareholders would have been incensed if Jobs died worth $100 billion?
Thinking about this, one company that everyone expected would crush Apple’s much mocked foray into smartphones was Blackberry. Back in 2007, it was the undisputed king of smartphones; the technology company and brand that could seemingly do no wrong. At present, Blackberry’s market cap is $2.26 billion. Considering a once dominant company that Apple is over 400x the value of, readers might ask long-term Blackberry shareholders how readily they would “overpay” a great, visionary CEO well into the billions in return for Blackberry stock performing something, anything like Apple’s since 2007.
Crucial about Blackberry versus Apple is what that tells us about how difficult it is to find tomorrow’s high flyer. In particular, it’s a reminder that the present of commerce rarely predicts the future. If you’d purchased Blackberry’s greatness in 2007, think where you’d be today. What about GE? In 2000 it was the world’s most valuable company. Today? You get it?
About GE, it’s often been speculated that brilliant as Welch was, one of his major errors came in the picking of his successor, Jeffrey Immelt. One very successful investor communicated to yours truly that Welch actually picked Immelt to maintain his reputation for brilliance. Hard as he’d worked to build GE, the thought of it ascending to even greater heights perhaps disturbed him. It’s certainly an appealing notion, it’s said by all-too-many that it’s agony to see what you built in the hands of someone else, but it says here that picking the right CEO is a miracle. It’s so hard to know who will thrive once in that seat. If anyone doubts this, they might watch Alabama and Clemson in the aftermath of Saban and Swinney, the Patriots after Brady, and eventually Belechick. Welch didn’t purposely fail in picking his successor as much as it’s extraordinarily hard to know who will prosper while doing a job that nothing can really prepare you for.
Thinking about investing, rest assured that if you own the ten 10 companies with the ten highest paid CEOs over the next ten years, you’ll easily outperform the S&P 500. And it won’t even be close.
Which is just a reminder about the critics of CEO pay. They don’t hate it as much as they’re implicitly admitting they’ve never been lucky enough to own the companies overseen by the highest paid. If they were, they wouldn’t be critics.