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John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend Sam Clement. Sam, say hello.
Sam Clement (00:36):
Hello John. How are you doing?
John Norris (00:37):
Sam, I’m doing fantastically. And you know who else is doing fantastically?
Sam Clement (00:41):
Who’s that?
John Norris (00:42):
A lot of CEOs of large corporations around this country. We’ve already heard some bruhaha about Elon Musk moving headquarters of his companies away from Delaware because they opposed a what, a $70 billion pay packet for the Musk man. However, moving forward I would imagine leading into the election, we are going to hear more and more about this as the perceived rich are getting richer and everyone else is being left behind.
Sam Clement (01:12):
I think that’s a slam dunk saying we’re going to hear more about it because it’s an easy story, and it sells really well. You just see a number and you’re like, that’s a lot of money. There’s no way anyone deserves to make that amount of money. So it’s a very easy political topic. So you see that every four years – those easy political topics and so we’re going to see it again.
John Norris (01:32):
Now, this is where I think we might see some generational differences, even if you and I might not disagree as much as other members of our generation would. The thing is when you see a number like what Elon was asking for, or even if you see the numbers that people at publicly traded banks or elsewhere, the numbers that they’re making, I get it, are pretty gaudy looking.
Sam Clement (01:55):
Some shocking numbers at first.
John Norris (01:57):
A lot of it, what the public doesn’t understand, is an incentive base pay and what have you.. options or restricted shares and what have you. So it’s not guaranteed that these individuals are get all this. However, the bar is set pretty low for a lot of these performance metrics and it seems a little, dare I say, maybe fair might not be the right word, but it seems unbecoming or something that people who had nothing to do with setting up the company that have just kind of risen through the ranks, haven’t had their capital at risk… Failure wasn’t an option at any point along the way because the company had already succeeded, and yet here they are, they’ve risen to a position of power where they are can work for a year, 18 months and be set for the remainder of their life, regardless of how well they do.
Meanwhile, there are a lot of Americans that are struggling to put food on the table and I understand why people are saying: Enough is enough. And I understand why maybe the class warfare that we’re going to see more and more in our country. I understand why it’s popular with a lot of people. However, does that necessarily make it right?
Sam Clement (03:16):
No, it doesn’t make it right. And again, you said it’s going to sell well with a lot of people because it’s an easy thing to sell.
John Norris (03:22):
It’s a real easy thing to sell.
Sam Clement (03:23):
It’s one of the easier “they’re doing something wrong in business” stories to tell. It’s like, look how much money this person’s going to make. And the Elon package is unique with 1) how big it is, but often you’ll see people pushing back on 10 to 20 to $30 million salaries a year,
John Norris (03:41):
Which is still a King’s ransom.
Sam Clement (03:42):
It is. But what’s funny to me is the lack of pushback on athlete salaries that are sometimes double that. Luka Doncic is going to be making 70 million a year, but no problem there as long as…
John Norris (03:55):
You’re a Mavs fan, anyhow!
Sam Clement (03:56):
Anyhow. So as long as he brings a ring home, I pay him whatever he wants,
John Norris (03:59):
Triple doubles
Sam Clement (04:00):
Every night. That’s right. But at the end of the day, I think my biggest problem with this is, it may sound wrong, but before getting into the details of if they’ve built company value to justify it, it’s nobody else’s, right except the company and the board to decide what’s appropriate. I don’t think a government has any place in setting this and if you are really that upset by it, don’t shop at a company that is paying their, if you really want to get into the weeds, but just it feels icky and dangerous precedence to me to start making that an issue outside the company. What people are wanting to pay the CEO. And if you’re paying them too much and the company’s not adding value and not growing then the board and the shareholders are going to be mad about wasted money and that is their right and it’s nobody else’s right to be upset.
John Norris (04:51):
Unfortunately, the way that a lot of things are set up, you’re absolutely right and that’s ideal and the way things should be. However, most really large companies, you get outside of private equity and you get outside of mom and pop or business owner, all that stuff. When you get out of that, when you take a look at really some of the larger companies that trade in the S&P 500, Russell 1000 or just really on any exchange in the United States, what you’ll see is a lot of the ownership of these companies aren’t in individual shareholders. They’re in exchange traded funds, mutual funds, and a lot of these things are voted by a proxy service or just something along those lines.
A Vanguard really doesn’t have a lot of skin in the game or dog in the hunt, whatever tired cliché you want to use to sit there and say, Jon Doe is making too much money at $30 million when the company is not performing all that well. Understanding when you take a look at someone like the CEO of a Wells Fargo or at Brian Moynihan at Bank of America, they could be making 30 million, 40, 50 million a year. That’s an absurd amount of money to pay a banker, particularly one that didn’t put their own capital on the line to start their career. That’s an absurd amount by just about every metric, but with the exception of a percentage of overall sales. And if these companies can generate the return numbers that investors want, particularly the institutional investors, you’re almost never going to see a pushback on CEO pay packets because the owners of the companies themselves are passive and maybe disassociated from the common employee, if you will.
Sam Clement (06:38):
Yeah, and you’re exactly right in that a lot of this is this incentive or it’s not like a base salary for the large majority of them. I mean, Tim Cook runs a $3 trillion company and his base salary has been 3 million for eight years now. It hasn’t moved. Three million’s a lot of money, but when you’re running a $3 trillion company doesn’t sound like a lot.
John Norris (06:59):
I mean 3 million divided by what Apple generates some revenue every year is
Sam Clement (07:04):
It’s a rounding error.
John Norris (07:05):
It’s a rounding error. That’s what a lot of these companies have. They do have incentive pay, but the media doesn’t really break that out terribly well.
Sam Clement (07:13):
No, you see one number.
John Norris (07:14):
You see one number, you see the entire pay packet, which may or may not come into fruition because of how the company performs. However, it does sort of beg the question from a generational perspective. My generation, gen X, I think would largely say, I don’t like it. I wish I was making that much money. These people were making too much money without taking personal risk in a lot of situations. However, I don’t want the government mandating what companies can pay. Coming up with some sort of formula by some bureaucrat out there that is more jealous than anything else… envious or whatever you want to say, whatever adjective. And as a result, they determine arbitrarily, what’s fair and what’s not fair. And the thing is, once you do that for the major companies, it’s a slippery slope until you get down to the guy that it’s operating three car washes and making $400,000 a year, which might, even with that number would be a significantly higher percentage of overall company revenue than whatever Tim Cook is making.
Sam Clement (08:24):
Yeah, it’s funny you point out the bureaucracy of it, and if you really think companies should not be paying their CEOs this much, who should be deciding that? And the people that would push back would probably say the government somehow. And these are people who can’t spend…. I mean, they’ve
John Norris (08:45):
They’ve run up 34 trillion in debt.
Sam Clement (08:47):
Yeah, we’re running several hundred billion dollar deficits in a quarter in a month almost. And so to think that that’s a better solution for understanding where companies should be spending their money and incentivizing people is just opening the floodgates to a much worse problem.
John Norris (09:03):
I think it’s a much worse problem. But Sam, I know you’re a little bit different than maybe from what I read about a lot of Gen Z. Are your feelings, do you think, shared by the majority of your generation?
Sam Clement (09:15):
Probably not. I feel like the pendulum may be shifting a little closer towards me, but I think at the end of the day, young people in general take that face value number that they’re seeing in, oh my gosh, there’s no way someone should make $70 billion like Elon Musk we are seeing or so-and-so should make 30 million a year. That’s just too much money no matter what you’re doing and not getting into the details of it. And I think that’s the problem that I would see with the people in my generation that are pushing back on these pay packages and not really understanding it.
John Norris (09:46):
Well. I mean you bring up a very good point about how come we’re pushing back on CEOs but not necessarily against Luca or baseball players?
Otani or even some of the bigger Hollywood stars that are making an astronomical sum regardless of…
Sam Clement (10:08):
For even less value!
John Norris (10:10):
For even less value… an even higher percentage of a movie’s gross. And it doesn’t matter if it’s a box office flop or bomb or hit, these people still get paid the same way that these store athletes get paid regardless of their performance. They’ve inked a long-term contract and so they get paid no matter what. Wouldn’t you say that that would be a little bit more unfair than perhaps some CEO that has a performance based contract that may or may not end up making whatever the media says that they’re going to.
Sam Clement (10:44):
Yes, a hundred percent. Going back to the Elon’s package, this was all incentive based. They hit all these triggers that people thought were impossible, literally impossible at the time they were agreed upon and took no pay, was basically committing to: I make money if this company does well and if this company does fantastically well, I will do fantastically well. And that’s what we’ve seen. And then to claw that back after the fact after hitting almost impossible targets and people said they were impossible at the time… that is really wrong to me. They were agreed upon and everyone thought they were fair, at the time, and then now they’re not fair because it actually worked out.
John Norris (11:25):
When I was growing up, obviously that’s been a pretty long time ago. I could make the argument that people admired people in business who succeeded and who got the big pay packets, and that was really sort of more aspirational for society in order to get there. And now it seems as though it’s almost more demonized than anything else. And it also seems as though perhaps the younger generations, picking on you guys for a bit, might not be as in sync or in tune with capitalism as maybe boomers and Gen Xers. And do you think that’s a fair statement or do you think that’s a complete over generalization?
Sam Clement (12:07):
I think it’s fair, but I think it has more less to do with our generation and more to do with our age. I think that’s the difference as we age out of this. I don’t think it’ll continue to be our generation. I don’t think it’s unique to our generation. I think it’s unique to our age. That was the same with previous generations. At this age, largely not as much, but I mean we’ve seen different generations having a lot of same pushbacks on a lot of different issues. So I think that’s kind of where I stand on it. I think it’s a fault of youth rather than a fault of our generation more so. It’s probably a little bit of both, but I think it’s more the age than the generation.
John Norris (12:51):
I’m going to ask another very similar question. Did the educational system when you were coming along, did it preach the benefits of private enterprise at all? And how do you feel the trend is in general education, whether or not we’re getting away from teaching the benefits of private enterprise or whether or not we’re teaching something else?
Sam Clement (13:25):
When I was in school, I felt, I think I got a good education that did push us towards capitalism, incentivizing this aspirational goals that you were kind of talking about. But I feel like I almost got the last plane out of seeing, and I’m not sure, and I am not going to speak, I’m sure there’s still great schools across the country and you can’t paint with too broad of a brush, but it does seem like that has not been the same focal point. Again, painting with a broad brush.
John Norris (13:56):
And that is a broad brush. And you have to understand when I was coming along, we were still in with the Cold War and so we still had, for all intents and purposes across the entire country, we still had a common enemy and that enemy was the Soviet Union and their economic system was communism. So our whole educational, our whole societal sort of push or education was really sort of based on how our system was so much better than our enemies now without a more clearly defined enemy. I think that is how we have seen interest in things like socialism or democratic socialism, whatever those people call themselves. And even communism has come back, which were completely discredited when I was in high school or even in college.
And completely discredited and now they seem to be almost a cause to live or something along those lines where people don’t really know what they’re saying. They just think it seems great. And do you think that this ignorance is a problem in your generation? You’ve already mentioned you think it’s less generational and more age related. However, if people, by the time you’re 29, by the time they’re 29, if they don’t understand the difference between capitalism and a centrally planned economy, will they ever understand it?
Sam Clement (15:27):
That’s a good question and I think some people will, but you’re kind of coming up to that age or in a lot of senses I would say grow up a little. I do still think age is the primary factor of taking things at face value and how you interpret that base level of information. I think that’s largely a problem of youth, but I do think it is becoming a bigger concentration of people past that point where you can say you’re just young and naïve. I think that concentration feels like it’s getting bigger of people pushing back against this kind, what you mentioned, this communism versus capitalism. It seems like we’re starting to lose ground on that.
John Norris (16:17):
I would agree with you on that.
Now, shifting gears almost dramatically and going back to the CEO pay packets and how a lot of these people are paid using passive voices, and I apologize for that. Their pay packets are largely based on incentives, oftentimes based off of economic value added, not necessarily on the share price, but the economic value add to their decisions made for the company, all that type of stuff. And there are number calculations for it. If you really want to read about it, please by all means go search EVA and it’s going to be a dry read. Trust me on that. Why haven’t a lot of these companies and their CEOs done a better job of trying to explain the methodology behind their CEO and senior management’s seemingly absurd pay packets as opposed to just letting the media just pillaring them. And to me it’s just kind of like, what in the world are you doing? Why are you allowing yourselves to get a black eye when all this stuff is largely very formula based? And no, we’re not paying our CEO that much. We’re paying that person that much if they hit a five-year target of this, if this happens, if this happens, if this happens, and yeah, then they will be able to capitalize on that. Why haven’t we seen publicly traded companies take the offensive a little bit more in being defensive about what their pay structure is?
Sam Clement (17:45):
It’s a good question. I saw an article recently saying these were the top five CEOs of 2023, and I was like, okay, I’ll look at that. And one of them was a tech CEO who his listed income from last year was 185 million dollars. Wow. A lot of money.
John Norris (18:02):
That’s Aaron Judge type money.
Sam Clement (18:04):
Two things I read about. I actually go research how he made 185 million. It is an options package over the next five years with targets he has to hit and he has to stay there the entire five years and he has really no other income outside of that. So that’s already being disingenuous. But on that note, I have a short blip I want to read you. I think Jeff Bezos is the only person who has said this well and has pushed back against that.
He said, “We’ve created $1.6 trillion of wealth for share owners. Who are they? Your chairs one. And my Amazon chairs have made me wealthy, but more than seven eights of that are owned by others universities, 401 Ks, and they’re Mary and Larry, and he shows the letter of this couple, Mary and Larry that paid for their kids’ wedding and tuition with Amazon stocks since they worked there for 20 plus years. And so that’s, I think, the shift that is also not told is the wealth creation for other people outside of this. Because Jeff Bezos is one who really did, he had his skin in the game. This was his company. He started it.
John Norris (19:08):
And he was failing it then 2001.
Sam Clement (19:11):
This very easily could have gone another direction.
John Norris (19:14):
It could have very easily been zero.
Sam Clement (19:15):
And seven eights of that went to other people.
John Norris (19:24):
He’s screwing everyone.
Sam Clement (19:24):
That’s 87.5% of it.
John Norris (19:26):
He’s making too much money. He’s screwing everyone. Right?
Sam Clement (19:32):
Okay, take that. They are old numbers from his 2020 letter, but if you created $1.6 trillion and 1.4 trillion of it goes to other people and you took the large majority of the risk, I’d say you’re getting screwed. So it’s a great letter and if anyone wants to read it was he did this annual shareholder letters and they were always great, but I believe this was his last one. He may have had one more, but the 2020 shareholder letter is fantastic.
John Norris (20:04):
Well, and that sort of begs the question then …. I always want to pick on bank CEOs because most of the big money-center banks that are around now, the bigger banks, their CEOs and chairman were not the people that started the company. They weren’t the people that raised the capital. They weren’t the ones that put their names on the line of credit, got penalized if they didn’t break escrow, all that stuff. Jamie and Diamond, Brian Moynihan, these people have inherited well-functioning corporations and they’ve profited it mightily. However, when you take a look really at sort of the longer term issue here, let’s say a Jamie Diamond is poised to make X millions of, but it’s all performance-based over a five year period. And if, because of the decisions the CEO’s office or executive management makes it, JP Morgan drives that stock price or the market value market capitalization of that stock up several hundred billion dollars, would it make sense to pay them an additional a hundred million?
Sam Clement (21:14):
If it was exclusively based on creating three 400 billion more for others? Sounds good to me.
John Norris (21:22):
Would there be some way that we could come up with a metric like baseball does: wins above replacement?
Sam Clement (21:28):
Wins above replacement.
John Norris (21:30):
How could we do that? And do you think the public would accept that?
Sam Clement (21:34):
No, I don’t think the public would accept it, but I think all this performance-based stuff, as long as you do it the right way and have the right risk guardrails, especially using banks again as an example, but if you can take the appropriate amount of risk and grow your bank by making good decisions and creating shareholder value for every other person, you should be incentivized to do that. So yeah, I’m all for it.
John Norris (21:57):
And the government should not have any say so in what you get picked.
Sam Clement (22:00):
How about they can have a say in it once they no longer run a hundred plus billion dollar deficit every couple weeks.
Balance the budget and then you can have a say,
John Norris (22:12):
Well, listen, I kind of like that. I love that. And so there you have it. Here we are talking about CEO pay packets and whether or not the general public really understand the calculations behind these and questioning whether or not corporate America has done a good job of explaining this and explaining the formulas and then just coming down to the grips that a high performing CEO makes a fraction of what the overall wealth being generated by that company actually is for the general public. And so it’s not just income that we need to be considering when we think about CEO pay. We also have to think about the wealth that those companies generate. Income is one thing, wealth is something else altogether. And so are you paying for just the income the company generates or are you paying for the balance sheet wealth that people that have IRAs, the people that participate in 401k plans or even defined benefit plans, we’re foundations, endowments, public pension plans, all these people benefit from having a CEO who knows what they’re doing and can generate not just high levels of profit, but high levels of wealth for the economy.
Sam Clement (23:23):
I love it.
John Norris (23:23):
Alright, I love it too. Alright guys, perhaps we didn’t meet everyone’s expectations with this. Perhaps some people didn’t like what we had to say here today regarding CEO pay. However, we always love to hear from you all regardless of how you feel. We always love to hear from you all. So if you have any comments or questions, please by all means, drop us a line. You can drop us a line at where you can leave us a review on the podcast outlet of your choice. Of course, if you’re always interested in reading more or hearing more about what we have to say or how we think, you can go to oakworth.com, take a look underneath the thought leadership tab and find links to all kinds of exciting information, including previous episodes of Trading Perspectives. This podcast links to our newsletter slash blog common Sense as well as links to our quarterly analysis and magazine, macro and markets and all the individual components are on there, as well as articles that our advisory services group generates from time to time. So with that being said, Sam, do you have anything else to add on this exciting topic?
That’s all I got. That’s all I’ve got today too. Y’all take care.