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CEO Pay Destroys Companies, Communities, Countries and Capitalism

NEW YORK (TheStreet) -- Shareholders at Cheniere Energy (LNG), Gamco Investors (GBL), Oracle (ORCL), Sandridge Energy (SD) and other firms with the highest paid chief executive officers might want to sell based on a study that shows that "CEOs' pay is negatively related to future stock returns for periods up to three years after sorting on pay."

However, many times the reason for the outsized pay package for a CEO is based on outsized performance by the stock price. In that case, the CEO might well deserve every penny (or every million). This article is part of a two-part series examining the issue of CEO compensation and its impact.

There are many who would agree with the study by Professor Michael Cooper from the University of Utah, Huseyin Gulen from Purdue University, and P. Raghavenda Rau with the University of Cambridge, and the University of California at Berkeley contend that excessive CEO compensation can damage or destroy companies, communities, countries, and the culture of capitalism. Much of what drives the stock price of a company has nothing to do with its management. How a sector is doing determines much of the share price level of a publicly traded company. That in itself should bring a CEO's compensation into question, reducing the emphasis on share price.

If the study is correct, stakeholders are the first to suffer, as excessive CEO compensation weakens companies.

Charif Souki, the CEO of Cheniere Energy, made nearly $142 million last year. That is nearly 14 times the average compensation of $10.5 million for a CEO of a member of the Standard & Poor's 500 Index. The average CEO makes 257 times the national average for a worker (almost $41,000). That means that Chrif Souki made 3463 times what the average worker did last year in America. At Cheniere Energy, the revenue per employee is almost $636,000.

If Cheniere Energy used some of Souki's 11-figure paycheck to hire more workers, it could ideally gain about $2.2 billion more in revenue. The company currently has annual sales of less than $270 million.

Obviously a company can't ramp revenue simply by adding employees. However, comparing the degree of above-average pay of a CEO with the revenue for employee figure, we can project an ideal revenue figure that serves as an indicator of how much earnings potential a company like Cheniere is leaving on the table.

CEO compensation can, in fact, be seen as a zero sum proposition. Every dollar that goes to the CEO for millions in pay or perks such as a private jet is one less that goes to sales personnel to sell more, to business development staff to develop more business, and to researchers to research more ways to sell more and develop more business. There are less funds available to hire consultants, buy more advertising to sell products, or buy advanced software programs to operate the company more efficiently and more effectively, as just some examples.  

The money that goes to CEOs inevitably shortchanges many other vital corporate functions. That misallocation of resources can only weaken a company, especially a smaller one with fewer resources, and dilute the stock performance over the long term.

Company

CEO Compensation*

Revenue Per Employee

Number of employees that could have been hired at the S&P average CEO pay of $10.5 million

Potential revenue lost** 

Cheniere Energy

$142 million*

$635,596

3430

$ 2.2 billion

Gameco Investors

$85 million

$2 million

1717

$3.4 billion

Oracle Corp.

$78.4 million

$313,730

1658

$520 million

Sandridge Energy

$71 million

$1 million

1467

$1.467 billion

Sources: ALF CIO Corporate Paywatch and financial websites; *CEO compensation and other figures are approximated; **lost revenue is calculated by taking the number of employees that could have been hired based on average S&P pay and then multiplying that times the average revenue per employee for that company.

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