Saturday, August 15, 2009

Executive Pay Cuts


Executive Compensation is a touchy subject. Some believe executives should be compensated in relation to share price. Others feel that an executive should derive their satisfaction from the growth of their business and not from pulling down a massive salary. Buffett for one is a huge proponent of this approach. He pays himself a comparably paltry $100K salary per year and several of the businesses owned by Berkshire have CEOs who share this same compensation package.



If CEOs should make a few million dollars a year or a few thousand dollars a year is not something I'll debate here. I will however suggest that if a company you own has a highly paid CEO, and the company has shown weak performance over the last year you may want to consider selling it.

Studies have been performed that show that if an employee is given a pay raise that the afterglow of this increase can be found in that employee's work ethic for approximately 3 months after the raise. However, if the employee is forced to take a pay cut the effects of this action can cause a decrease in that individuals moral and work ethic for years after the cut. With the current economic climate several top CEOs are being asked by their boards to take substantial salary cuts. If you agree with me that it is critical to have the best management working as hard as possible at your company then these businesses are to be avoided.

Finding Companies That May Cut Executive Compensation

Boards don't go out of their way to advertise their intent to cut an executive's salary, but if you want to guess where pay cuts are likely to appear you need only look at the top 10 paid executives in the US and then cross reference that with the change in their company's stock price over the last year. Where stock prices have decreased and compensation is at record highs you will find likely targets for cuts to compensation. Here are a few examples:































CompanyCEO1yr
Compensation
Change in share
Price over 1yr
NBREugene Isenberg$79,333,07949% reduction in share price
HESJohn Hess$159,566,94050% reduction in share price
UPL
Michael Watford
$116,929,39237% reduction in share price


As you can clearly see, the stock prices have plumetted in these businesses but it has not stopped these execs from pulling in record pay. Here are a few executives who's salary cannot help but be the topic of investor meetings and board discussions.


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