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CEO Compensation Needs a Second Look

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There’s a flap currently over Apple parking $74 billion overseas while waiting for U.S. corporate tax rates to improve. I guess if the rate lowers, Apple will apparently repatriate the money. Media pin brains are wasting ink and microphone time on this subject. Here’s the deal: businesses are always going to do two things — pay the least amount of taxes payable and use the cheapest labor possible. Why would they do anything else? The idea of business is maximize legal profits to distribute to shareowners. (No, I’m not suggesting $2 hourly labor in sweatboxes in the desert, but you get the idea of low-cost labor, yes?)

While it is unlikely that capitalism was originally designed to produce extraordinarily high salaries and bonuses for executives, that outcome is the result of economics more than anything else. Economics? Sure. If one owns the New York Yankees and wants a pitcher badly enough, he or she will pay the big bucks to get him. The idea is the same for CEOs, who have agents that are every bit as aggressive as sports reps. If Amalgamated Underwear wants Person X as CEO, X’s agent will negotiate a deal. The difference is that if the pitcher does not work out for the Yankees, he will probably be cut from the squad fairly quickly. The CEO may hang on longer. In either case, the star may often keep the bonus.

In the case of CEOs, the system often does not work well for shareholders. If anything needs fixing in our current rendition of capitalism, it’s overpaying for mediocre talent. I don’t mind the company CEO making money if he or she produces for the shareholders. What I mind is the CEO getting paid for lousy results. If companies cannot negotiate performance-based pay with a possible Person X, he or she should be dropped instantly. Company execs have way too much say over who serves on the board, compensation, bonuses and the like. A strong and independent board is the shareowner’s best friend. Without that board, rape and pillage of the shareholder is the order of the day. 

Think it’s not possible to have responsible, shareholder-friendly management? Consider Berkshire Hathaway. And that’s with a board stacked with FOWB (friends of Warren Buffett). In this case, the interests align, since Mr. Buffett and family members are the principal shareowners. At Berkshire, there is a great degree of transparency, and Mr. Buffett increases wealth when Berkshire stock rises in price. The compensation plans are fair for all executives, and yet, great execs still want to work for Berkshire companies (Fruit of the Loom, Burlington Northern Santa Fe, Benjamin Moore, Dairy Queen [I love Dilly Bars!] and Helzberg’s, to name just a few).

Have a wonderful week, and pay, but don’t overpay, your taxes, okay?