Bob,
<<<Did you base the limits on any research or just casual observation?>>>
That's sort of a hard question to answer. It's something I've been doing for so long that trying to explain it is a bit like explaining why I apply the brakes at a certain point when approaching a stop sign. It's something I look at on every company, and the observation isn't casual. It's part of the research I do, but I've never tried to put check marks on a spread sheet. Maybe it's more that human nature is such that greed tends to feed on itself. Running a company is hard work and those with that kind of ability should be well paid. At the same time I think there is a line that gets crossed when greed kicks in. It tends to show up as both over compensation and excessive SG&A. SG&A starts to be a slush fund for expensive company cars, jets, expense accounts, junkets to exotic places, etc. I doubt any of the over paid executives would ever have come close to the level of riches many of them seem to think they deserve without the injection of cash into their businesses by the public.
I'll give a couple examples. DWSN, which I've never owned but look at fairly often because I like the company, and SEI which I made a fair amount of money on this year on short play. Both companies are in the same sector and have been around for years. DWSN has about as clean a balance sheet as you'll find and SEI is on the verge of bankruptcy. DWSN stays close to break even on free flow cash, is debt free and doesn't play any games with the numbers, even if it means reporting a loss. SEI burns an average of $60 million a year, is up to their eyebrows in debt, and up until recently was reporting wonderful EPS numbers. The ex-CEO of SEI took in $4 million last year in compensation. The CEO of DWSN took in $150K.
Those are probably extreme examples, but the pattern is there if you look for it. Since I tend to cherry pick rather than diversify, it doesn't break my heart to pass up a company as a potential investment on issues of compensation. It's just one of a long list of items I view as being a red flag.
IMO, a good officer of a public company should make enough money to live comfortably plus a little something to give the impression of success. The compensation should not be so high it becomes a major drain on the company's profitability, especially during down cycles. Stock and option grants should align the executives interests with those of shareholders, without excessive dilution. Since top executives are ultimately responsible for the success of a company, I think issues of compensation give a bird's eye view of how those executives treat their responsibility to shareholders.
There have been enough recent examples of how greed rots a perfectly good company from the top down that I feel there is some merit in putting some focus on compensation. When I hire someone to perform a service for me, I'm looking for someone who will do the best job, for the most competitive price. It basically amounts to the same thing when I buy stock. I become an owner of the company and I want someone working for me who will protect my assets and increase their value, at a competitive level of compensation. If I can find someone who will do a good job for $300K per year, I can't think of a good reason to pay someone else a million.
As usual, I expect there are lots of different opinions on the topic. FWIW, that's mine. |
