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The Overpaid CEO

To be fair to the CEO social class, their occupations cannot be filled by people from the street. Most CEOs require a higher education to prepare them for this career. In their junior years, most CEOs have spent many 70+ hours a week to ensure their projects actually work out; without this sacrifice, they don’t rise to higher positions. While working on these projects, most CEOs have gained experience and insights for which many line workers have little appreciation. CEOs have had to make many hard decisions, some of them unpopular. Hopefully they have learned from these decisions before they rose to the big chair. CEOs have had to learn various communication skills — from dealing with media to handling many interruptions throughout the day to deal with many concerns. And a CEO’s world is about sorting out many vested interests, analyzing information, and making adaptations to plans. There is indeed a certain mettle to being a CEO most people don’t have.

But does this mean they are worth $1,000,000 a year (or more)?

About a decade ago, I was investing in blue-chip, dividend-paying Canadian companies. One of the companies had been a solid blue-chip performer in Canadian business for several decades. I bought in at $15 a share and I was getting a dividend significantly better than bank interest.

The only problem with this company was that its two core business units had reached their market potential: there wasn’t much room to grow here. While profits were still healthy, if the company stayed in this position, share value would hover around $15 a share for another decade. Such stagnation puts pressure on public companies to make changes to increase share value.

So the board of directors hired a new CEO to grow this well-functioning company. We investors were assured that our stock was going to higher places under the new leadership.

In the next two years, the CEO purchased two new business units that were not related to the two core business units. The company was “diversifying to grow.” Each new acquisition was touted as the company moving in a better direction.

Then my quarterly dividend was cut in half. Next quarter was no dividend. Stock price dropped to $8, but we investors were reassured that it would take some time for the four business units to learn to work together.

The stock continued to drop. Eventually the company was put into receivership. My monthly brokerage statement listed the value of my shares in this well-regarded Canadian public company as “Deemed Worthless.”

After this business failure, news reports stated that the CEO had bought the new business units based on erroneous accounting practices of the sellers. The price for the new units was much too high, and the two core businesses could not carry the new debt.

This CEO was paid $3.5 million dollars a year? At this salary, we should expect that he would know how to read accounting statements and know when some funny accounting is happening — and have the fortitude to step away from a bad deal.

And after running this company into the ground in three years, this CEO could have afforded to retire to a very comfortable life.

CEOs do have special talents. But their salaries suggest that they are infallible. They are clearly not!

Published on 2012

Taxes for the Rich

BP Macondo & Cognitive Dissonance